business-model-wall-street-en.md 5.3 KB
Slug: business-model-wall-street Title: A business model that kicks ass, according to Wall Street Category: Il n'y a que la maille qui m'aille Tags: business Date: 2018-09-05 Summary: What makes a company's actual value according to investors Lang: en Status: draft
When you consider creating a business with the will to ensure the sustainability of a project and being able to eventually live off it as your main goals, you start asking questions you would not have asked in the first place, such as that of the business model, or more clearly phrased : how to make big money out of it ? Unless you were born in a rich family or a recent lottery winner, that usually comes with the question : how to convince investors ?
... which I can not answer yet, but there is another one that comes to mind then : what makes an investor get interested in one company and not another ? Which brings yet another quest... kidding, this is finally the one I will talk about in this article.
I will achieve this by exposing the view of one of the most recognized investors in the high-tech field, Bill Gurley, general partner in one of the most important venture-capital companies in the Silicon Valley ; a company that made the headlines a little more than a year ago by [getting the head of Uber's CEO][benchmark-uber].
(Don't run off just yet, anti-capitalist friends, it's interesting to know the enemy !)
In an article he posted a couple of years ago on his blog, Bill Gurley listed 10 criterias he applies when choosing his investments, and that, according to him, make all the difference between the next Google and the 250th company that mixes artificial intelligence and blockchain technologies within a disruptive innovation modal that will allow their customers a vast choice of green B2C services with a marginally superior ROI with regards to the competition.
Those 10 criterias are not devoid of common sense ; he even mocks some of his fellow investors for focusing exclusively on short-term figures with no consideration for the long-term truth that can hide behind them ... not exactly an unheard-of criticism !
A sustainable competitive advantage
It's one of the most important criterias. If you come up with a web search algorithm that returns highly pertinent results when you need to go through 30 links in your competitors' search results before hitting a valid result, you end up in that category. If anyone can do just the same as you as soon as tomorrow morning, competition will be tough.
The presence of network effects
A network effect is the effect a customer has on the value of a product or service for other clients, just by using it. That effect can occur either between clients of the same kind or betweem different kinds of clients.
It will seem clearer with two basic exemples. If you subscribe to a social network and find you are by yourself, you might get annoyed rather quickly (except if you love talking of yourself to yourself) ; having one of your friends subscribe will make the experience a bit nicer ... and it will get ever better when more friends subscribe. A typical exemple of the cross-side network effect is that of a credit card ; owning a credit card you cannot use is any shop is rather annoying ... the more shops allow you to use that card, the more interesting it gets to own that card. It also goes the other way around : the more people own that card, the bigger the incentive for shops to subscribe to the service that allows using that card.
All in all it is a nice feedback effect, which means the more customers you have, ... the more customers you will have.
Visibility and predictibility of future income
A company whose income perspectives are guaranteed, stable and predictable has a natural attractive potential to investors. If the whole success relies on a buy-once product which has no follow-up, the company's future seems compromised.
As a general rule, income that relies on subscription is much more interesting in the long term than income that relies on one-time payment ; which is the reason why lots of software editors have switched to subscription models.
Customer lock-in and high-switching costs
It comes as a logical next step to the previous point ; ensuring that customers remain forcibly faithful obviously gives a company a huge advantage on another one that lets their customers easily switch to competitors.
Gross margin level
Gross margin is expressed as a percentage of the income that after the cost of goods sold has been removed. Its computation varies from sector to sector, but it's usually drawn from the additions of all costs that account for the production and distribution of a product or service : potential purchases, administrative costs, ...
The higher it is, the greater the margin for maneuvering, and the more important the potential net profits.
Marginal profitability
Customer concentration
A company whose income depends on a handful of big customers is obviously very sensible to their future decisions, and also depends on their financial health.
Dependency on a major partner
Organic demand
Growth
[benchmark-uber]; https://techcrunch.com/2017/08/10/benchmark-sues-former-uber-ceo-travis-kalanick/