Thinking About Thinking

Single Unit Value Is More Important Than Growth

Posted in Growth Equity, Venture Capital by larrycheng on March 11, 2010

The pressure for revenue growth has hurt a lot of young companies.  It starts with an entrepreneur representing a growth story to an investor.  Then the investor represents the growth story to his firm to gain support for the investment.  And then the investment happens.  Then the company takes the investment, invests in sales and marketing, and the company grows.  Everyone is committed to growth, gets used to growth, and expects more growth in the future.

This is all well and good – if and only if – the single unit value is there, especially in mass market companies that service consumers or small/medium size businesses.  There are two aspects to single unit value: (1) single unit satisfaction and (2) single unit economics. 

Single Unit Satisfaction

The fundamental question is if you take a single customer, do they derive sufficient value from using your product or service? 

  • For a consumer social web service, maybe the key value measure is whether a user will tell two friends about it. 
  • For a SAAS company, the key value measure might be renewal. 
  • For a transactional company, the key value measure might be a repeat transaction rate. 

This is not intended to be rocket science.  Companies need to focus on a single customer, that is in their target market, and make sure they can deliver sufficient value to that customer to drive the right behaviors (referral, renewal, repeat usage).  It goes without saying, trying to build a great business on the backs of customers that don’t perceive sufficient value in your product or service is impossible. 

Single Unit Economics

The fundamental question now is if you now take that satisfied customer, can you make money based on your business model?  Companies need to fully burden the cost of servicing a single customer to understand single unit profitability.  This includes marketing, sales, cost of goods, capex, servicing, overhead, etc.  The question therein is whether that single satisfied customer is profitable given all that it costs to acquire and service them?

  • Many online video sites excelled at single unit satisfaction, but they got hammered on the economics because they didn’t generate enough ad revenue to cover  a single cost component such as bandwidth to deliver the videos. 
  • Some mass market companies that can cover sales and marketing costs, get caught up in the cost to service customers on the back-end.  The old local food delivery service, Kozmo.com had this issue. 
  • Infrastructure oriented companies, like wireless service providers, that have up front capex to deploy new customers, need to be crystal clear on lifetime value of customers – to cover capex.  Otherwise growth is in fact detrimental.
  • It goes without saying that if your selling your product for less than what it costs you – some of the early online retailers like MotherNature.com faced this.  You can’t make up negative gross margins with volume.

Sometimes the pressure for growth obscures the importance of single unit value.  In reality, there is no reason to invest for growth if the single unit value is not there.  It’s more prudent to wait, get customer satisfaction and economics nailed right, and then push for growth.  Pushing for growth prematurely at best will waste money unnecessarily, and at worst, will accelerate the demise of the company.  On the flip side, if the economics and value are there, rather than tiptoe forward on the growth plans, it’s prudent to invest aggressively for growth.  That’s when great companies are built, but it often requires patience in the early days. 

Volition Capital And Cue Ball Capital Lead Stylesight Financing

Posted in Founder-Owned Businesses, Growth Equity by larrycheng on March 4, 2010

We are very pleased to partner with Cue Ball Capital on a $10 million investment in Stylesight which was announced yesterday.  Stylesight is the leading style information service and SAAS platform for the global design ecosystem.  Thousands of retailers, brands and manufacturers are using the subscription service to be inspired by real-time design images from around the world and leverage that content into a web-based design process. 

Want to know what kind of black, above knee, modern black skirts women were wearing on the streets of Sao Paolo – yesterday?  Stylesight can tell you.  Want to take those high resolution images, zoom in on the stitching, and create a story board for the front end of your Spring lineup design process?  Stylesight can do that for you as well.  In millions of different derivations, Stylesight brings the world of design to your fingertips in real-time.  As their tag line goes: “Images that Inspire.  Tools to Get the Job Done.” 

What I love about Stylesight is when prospects see the product – there is such a huge “wow” factor.  I was at a launch party for their latest release – and the expressions of amazement on prospects faces tells it all.  The conversion rate to customer after seeing the demo is pretty staggering.  With customers that love the service and a wide open market, Stylesight is becoming the industry standard, which is why they the grew so aggressively through a terrible economy last year.  Stylesight’s ambition for global leadership are firmly in place, and we’re pleased to support them.   

We are also very pleased to partner with Cue Ball Capital for the first time.  It is a privilege to be working with Tony Tjan and Dick Harrington at Cue Ball.  I personally view Cue Ball as a rising star in the Boston venture capital scene.  They have a wealth of knowledge on recurring revenue, information services businesses – and the Cue Ball Collective is for real.  There was substantial interest from different financial parties for this round, but Cue Ball stood above the rest given their expertise, value and enthusiasm.

Stylesight also happens to be the type of company we love at Volition.  When we first came across Stylesight – it was and is a high growth, founder-owned, principally bootstrapped company with a strong recurring revenue base and a diversified, very satisfied customer base.   Given our investment, it is no longer a bootstrapped company, but we all expect that the capital and partnership will lead to a much larger end outcome for all involved. 

Exciting times for Stylesight, Cue Ball and Volition.  Onwards and upwards. 

The Money Behind The Money

Posted in Growth Equity, Venture Capital by larrycheng on February 25, 2010

Where does the money come from that private equity (venture capital, growth equity and buyout) firms invest?  It might indirectly come from you.  Key constituents include the likes of government employees, employees of large corporations, trade organizations (e.g. teachers) and wealthy families.  Here’s the quick synopsis:

Wealthy Families / Foundations. The original investors in venture capital firms were wealthy families.  The Phipps family was behind Bessemer.  The Rockefeller family was behind Venrock.  These wealthy families often invest out of vehicles like family offices or foundations.  From those roots, many wealthy families have played impactful roles in backing some of the best names in private equity.  As the asset class has became more known and attractive, the sources of capital grew to include more institutional sources.  But, behind every institution are regular people.

Endowments. One of the most aggressive investors in venture capital has historically been school endowments.  When you make that annual class gift to your college, if you designate it for the endowment, some of your gift just might be put into various venture capital and buyout firms.  Typically, universities are charged to protect your endowment gift, so they invest it, and use the returns generated from the investment to fund various school initiatives.  Major universities like Harvard, Yale, Stanford, MIT, etc. have been big proponents of investing some of that endowment principal into private equity firms.

Pension Funds. Another prominent investor in venture capital has been corporate and public pension plans.  Pension plans (of the defined benefit variety) are just another type of retirement plan used by state governments, labor/trade unions, and large corporations.  As you work at a company or state government and thereby accrue pension benefits, the company or organization funds a pension account based on actuarial models tied to its potential pension payout obligations.  A portion of these funds are often allocated to the private equity asset class.  Major states investing in this asset class include New York, New Jersey, California, Oregon, etc.  Major corporations like AT&T, General Motors, etc. have also been active investors.

Fund of Funds. Many foundations, endowments, and pension funds lack the capacity or resources to evaluate and monitor different private equity firms.  Hence, the fund of funds industry has sprung up to pool capital from these sources into funds and then invest on their behalf.  Unlike the other sources of capital, fund of funds have to raise their capital from third party sources, just like the firms that they invest in.

So, if you follow the money through, your child’s college financial aid package or your pension plan – might be tied to a couple engineers working on some project in Silicon Valley or tied to the big buyout you read about in the Wall Street Journal.