The red flags and magic numbers that investors look for in startup's metrics(andrewchen.co)
andrewchen.co
The red flags and magic numbers that investors look for in startup's metrics
https://andrewchen.co/investor-metrics-deck/
69 comments
So the accounting practices that MSFT got in trouble for (as I recall, pulling and pushing sales into different quarters to smooth growth and suit projections) was the stock price taking care of itself?
Interesting as MSFT met or exceeded earnings forecast from the street for 41 out of the first 42 quarters. Makes you wonder
Can you provide a year for that?
1999-2002
• https://www.nytimes.com/1999/07/01/business/microsoft-s-acco...
• https://www.sec.gov/news/press/2002-80.htm
Thanks for posting that. Wish I had a reference to when Gates made that statement.
Reminds me of the recent article on IBM https://news.ycombinator.com/item?id=18327634
CEO focused on customers did well:
Gerstner came into IBM and got it turned around in three years. It was miraculous… Gerstner’s insight was he went around and talked to a whole bunch IBM customers...
CEO focused on investment numbers did bad:
>Palmisano failed miserably, and there is no greater example than his 2010 announcement of the company’s 2015 Roadmap, which was centered around a promise of delivering $20/share in profit by 2015
CEO focused on customers did well:
Gerstner came into IBM and got it turned around in three years. It was miraculous… Gerstner’s insight was he went around and talked to a whole bunch IBM customers...
CEO focused on investment numbers did bad:
>Palmisano failed miserably, and there is no greater example than his 2010 announcement of the company’s 2015 Roadmap, which was centered around a promise of delivering $20/share in profit by 2015
The article states:
>1) First, we seek to understand the existing state of customer growth – including growth loops, the quality of acquisition, engagement, churn, and monetization. 2) Then, to identify potential upside based learnings from within the company as well as across benchmarks from across industry.
Cold someone say what a "growth loop" is? And also what "upside based learnings" are?
>1) First, we seek to understand the existing state of customer growth – including growth loops, the quality of acquisition, engagement, churn, and monetization. 2) Then, to identify potential upside based learnings from within the company as well as across benchmarks from across industry.
Cold someone say what a "growth loop" is? And also what "upside based learnings" are?
I really like this article! Thanks for posting it
Does anybody have any insight on the things investors are looking for after the series C?
Disclaimer: I work at Reforge.
Also: It feels like I should be paying Reforge to work there.
The incredible depth of the material has helped me personally:
- articulate ideas in a common vocabulary that were difficult to explain prior
- identify loops within my own side projects which has led to explosive growth (even though the material is designed for larger companies)
- understand how to derive important metrics for many different types of companies
- connect with some of the most influential leaders in the growth space
Also: It feels like I should be paying Reforge to work there.
The incredible depth of the material has helped me personally:
- articulate ideas in a common vocabulary that were difficult to explain prior
- identify loops within my own side projects which has led to explosive growth (even though the material is designed for larger companies)
- understand how to derive important metrics for many different types of companies
- connect with some of the most influential leaders in the growth space
One way to fake a leading indicator is to increase headcount and cash burn rapidly. Those increases create a "hockey stick" graph. Just use that graph when pitching to investors.
You can also time it so that your ad spend doesn't hit until the next financial period, which makes it look like there is actual growth commensurate with the headcount increase and disproportionate (in a good way) to cash burn. After all, what kind of founder would increase headcount unless it was needed :)
Disclaimer: This works best when pitching a round after you have already got some early investors to help with the sales pitch to the next round of investors.
You can also time it so that your ad spend doesn't hit until the next financial period, which makes it look like there is actual growth commensurate with the headcount increase and disproportionate (in a good way) to cash burn. After all, what kind of founder would increase headcount unless it was needed :)
Disclaimer: This works best when pitching a round after you have already got some early investors to help with the sales pitch to the next round of investors.
Shouldn't any halfway decent investor discover this when performing due diligence? Or is there more stupid money out there than I realize?
I can't tell if you are being sarcastic or if this is intended as advice
Lots of what startups do is some kind of fraud. Whether you're defrauding investors like `resters idea or defrauding users like Reddit's early days (each employee had multiple accounts to make it seem more active than it was) the trick is just not to get caught.
Of course, defrauding investors has a far higher likelihood of getting you into serious legal trouble than defrauding users. And with this one, even if you don't get caught, if it doesn't work out properly you are fucked.
But hey, if it does work, it'll make a great story to tell at your IPO celebration party over a glass of champagne.
Of course, defrauding investors has a far higher likelihood of getting you into serious legal trouble than defrauding users. And with this one, even if you don't get caught, if it doesn't work out properly you are fucked.
But hey, if it does work, it'll make a great story to tell at your IPO celebration party over a glass of champagne.
Curious... is this fraud? It's certainly duplicitous, but are laws being broken?
It certainly would be fraud [1] the question is, would it be illegal? Not all fraud is illegal, and not all illegal fraud is prosecuted as such (or at all). Even if it's not illegal, if the startup owner told the investor that they were growing rapidly and used these figures to show that, the investor could sue after the fact for civil fraud and the founder would have a hard time explaining why it shouldn't be. The only reason to grow headcount and increase burn rate to unsustainable levels and offset those expenses in the books right before an investor presentation would be to give the investor a misleading view of your company.
You'd be at the very least inviting a lawsuit... that is, if you got caught.
[1]
"Fraud involves misrepresenting facts for the specific purpose of gaining something that may not have been provided without the deception."
https://www.investopedia.com/terms/f/fraud.asp
You'd be at the very least inviting a lawsuit... that is, if you got caught.
[1]
"Fraud involves misrepresenting facts for the specific purpose of gaining something that may not have been provided without the deception."
https://www.investopedia.com/terms/f/fraud.asp
> Even if it's not illegal, if the startup owner told the investor that they were growing rapidly and used these figures to show that, the investor could sue after the fact for civil fraud and the founder would have a hard time explaining why it shouldn't be.
Civil fraud is illegal, so if it is not illegal, it is not civil fraud.
Civil fraud is illegal, so if it is not illegal, it is not civil fraud.
He was asking if Reddit was fraudulent.
It wasn't.
Please learn the meaning of such serious words before you start throwing them around.
It wasn't.
Please learn the meaning of such serious words before you start throwing them around.
White collar crime in America? That's rich
Makes me wonder how many projects on Kickstarter are some kind of fraud.
Cynical advice can be both.
And given how cut throat fund raising can be I can't blame the cynicism.
Sometimes you're after the same money someone with a much stronger pedigree than you is after. Their false metrics are "Stanford" or ~"involved in building a popular but now defunct protocol" that is no better indicator than working on something.
Sometimes you're after the same money someone with a much stronger pedigree than you is after. Their false metrics are "Stanford" or ~"involved in building a popular but now defunct protocol" that is no better indicator than working on something.
"Fake it til you make it"
[deleted]
Couldn’t agree more regarding his point on landing page optimization.
At TechLoaf, we experimented with a lot of different, elaborate, shiny landing pages that expounded on how amazing our newsletter was, etc...
And after falling flat on our face for months, we realized that an incredibly simple, borderline-mysterious landing page converted users far more effectively.
About 35% of all visitors to our site end up subscribing.
(For the curious, this is the landing page: https://techloaf.io)
At TechLoaf, we experimented with a lot of different, elaborate, shiny landing pages that expounded on how amazing our newsletter was, etc...
And after falling flat on our face for months, we realized that an incredibly simple, borderline-mysterious landing page converted users far more effectively.
About 35% of all visitors to our site end up subscribing.
(For the curious, this is the landing page: https://techloaf.io)
You should double-check it again every few years. User behavior around forced signups is not constant.
In the early 2000s at Rent.com we found that forcing an email address to get content gave us a great conversion rate, and fit our business model. But over time people came to be less and less willing to hand over email addresses, and more and more convinced that equivalent content was available elsewhere without the prospect of spam. Our conversion rate therefore slowly slid.
A decade later the conversion rate slid so much that Rent.com eventually abandoned its business model.
In the early 2000s at Rent.com we found that forcing an email address to get content gave us a great conversion rate, and fit our business model. But over time people came to be less and less willing to hand over email addresses, and more and more convinced that equivalent content was available elsewhere without the prospect of spam. Our conversion rate therefore slowly slid.
A decade later the conversion rate slid so much that Rent.com eventually abandoned its business model.
Great insight. Only caveat would be that our core product is the email newsletter (not sure if that was true of rent.com back in the day).
Our business model was to help people find apartments and also acquire evidence that we really had. We'd then ask the apartment owner for a finder's fee, and pass $100 to the renter.
To do this we needed to present the apartment owner with evidence that we really were the ones to find the renter. Which means that we needed all of the touch points. And we also needed to help renters find an apartment then tell us. (We had data indicating that only half of renters we placed actually came back to us to tell us so that we knew to tell the apartment owner to pay up.)
We needed the email both as a login to track and tie back to that user, and to send people apartment listings and convince them to report their lease to get the $100.
So emails weren't actually the core product. But they were very, very important.
To do this we needed to present the apartment owner with evidence that we really were the ones to find the renter. Which means that we needed all of the touch points. And we also needed to help renters find an apartment then tell us. (We had data indicating that only half of renters we placed actually came back to us to tell us so that we knew to tell the apartment owner to pay up.)
We needed the email both as a login to track and tie back to that user, and to send people apartment listings and convince them to report their lease to get the $100.
So emails weren't actually the core product. But they were very, very important.
By posting here your numbers are going to tank! Have to do your next report with HN referrals removed :)
Edit: I take that back. I went to the page after writing this and signed up. Well done.
Edit: I take that back. I went to the page after writing this and signed up. Well done.
Glad you dug it :)
And agreed, conversion numbers are highly dependent on how thoughtful our targeting is. We generally shoot for almost laughlibly small, but super targeted, outreach. Certainly factors into our unusually high conversion.
And agreed, conversion numbers are highly dependent on how thoughtful our targeting is. We generally shoot for almost laughlibly small, but super targeted, outreach. Certainly factors into our unusually high conversion.
Learned the exact same thing in a different industry.
We had a landing page that always won the AB test for over a year, but our lawyer wanted us to change the chart on the top.
We didn't know what to replace it with so I decided to test what will happen for a week if we removed it to better understand the value it provided.
It turned out that removing the chart increased email capture by 20% and we now have a bare bones landing page.
It isn't always the case, but often times less is more.
We had a landing page that always won the AB test for over a year, but our lawyer wanted us to change the chart on the top.
We didn't know what to replace it with so I decided to test what will happen for a week if we removed it to better understand the value it provided.
It turned out that removing the chart increased email capture by 20% and we now have a bare bones landing page.
It isn't always the case, but often times less is more.
I think this is probably dependent on where the traffic is coming from and to what extent they’ve been primed. I’d also be curious what percentage of subscribers clicked on preview or archive before subscribing.
100% is. We’ve mostly done super targeted, smaller scale marketing. When we have something get huge on Reddit, for example, conversion drops off because it’s a general crowd.
About 50% of visitors click either the “preview” or “archive” link
About 50% of visitors click either the “preview” or “archive” link
It is refreshing to see a page that is simple and straightforward these days.
Could you host or give a screenshot of your previous landing pages? This would make a good learning experience for us. Thanks!
I wish I had saved them — but, essentially, our early landing pages were feeds of content that were restricted after x stories at which point you were prompted to subscribe.
They were very similar to the CNN or NY Times home pages, but with less content visible and more (obnoxious) calls to subscribe to the email.
We also experimented with a minimalist landing page similar to the current one, but with screenshots of the email in the background. In hindsight, it was distracting and slightly confusing.
They were very similar to the CNN or NY Times home pages, but with less content visible and more (obnoxious) calls to subscribe to the email.
We also experimented with a minimalist landing page similar to the current one, but with screenshots of the email in the background. In hindsight, it was distracting and slightly confusing.
This is intersting. From a UX perspective, you're basically forcing the user into making a choice on the spot: to subscribe or not. You're in or you're out. It takes away the non-commital mind wandering, nudges those who are favorably on the fence to sign up ("why not; I might forget about this site so let's do it now") and weans out those who don't immediately see the value.
For this use-case, it's probably a good thing.
For this use-case, it's probably a good thing.
Exactly. It’s also kind of jarring in a world where content is unlimited, free, and available on every channel. It piques some people’s curiosity to land on a site where it’s semi-restricted.
I run into the issue that I would much rather give away my money and time saving advice completely free, than charge money.
I started my website to help people, not make a petty few grand in profits or grow an email list.
However, I know this is bad capitalism. I just don't know if I want to restrict access.
I started my website to help people, not make a petty few grand in profits or grow an email list.
However, I know this is bad capitalism. I just don't know if I want to restrict access.
The email list is free though. You just have to take affirmative action to get it.
OP meant that this "restriction" piques interest instead of merely closing the tab on ten articles you skimmed the headlines of.
No need to charge for the emails or profit from them. But people will give you more attention if your writing is in their inbox.
OP meant that this "restriction" piques interest instead of merely closing the tab on ten articles you skimmed the headlines of.
No need to charge for the emails or profit from them. But people will give you more attention if your writing is in their inbox.
Exactly. And if somebody subscribes, you have the chance to reach (and thereby help) them many more times in the future than a fairweather fan who forgets you as quickly as their feeds refresh.
You don't have to restrict access behind an email to improve signup rates.
Have a simple landing page asking for an email address when someone first visits, but provide a way to bypass it if they don't want to give it out.
A simple direct ask up front is more effective than having lots of distractions on a page.
Have a simple landing page asking for an email address when someone first visits, but provide a way to bypass it if they don't want to give it out.
A simple direct ask up front is more effective than having lots of distractions on a page.
> Have a simple landing page asking for an email address when someone first visits, but provide a way to bypass it if they don't want to give it out.
That's exactly what is there. You can click View The Archive, if you don't want to give your email.
That's exactly what is there. You can click View The Archive, if you don't want to give your email.
I think it's basically a paywall mental model, but without the pay part.
I’d think revenue would have been important - I read the entire article expecting something in that (which is what would have been interesting).
Instead it’s just a variation of “how many email addresses do they have”
Instead it’s just a variation of “how many email addresses do they have”
The point of his presentation was how to identify real, sustainable growth before the point where it is self-evident that the company is a winner. To do that you have to go upstream of revenue.
Also, you can hack revenue in the short term by spending $1.20 to get $1.
Also, you can hack revenue in the short term by spending $1.20 to get $1.
You can't really focus on a broad spectrum of anything. Broad is broad, focus is narrow.
It's also ironic that many failed start-up founders end up on the investment side, I'd love to see more successful people in charge of who gets funded and who does not.
It's also ironic that many failed start-up founders end up on the investment side, I'd love to see more successful people in charge of who gets funded and who does not.
> It's also ironic that many failed start-up founders end up on the investment side, I'd love to see more successful people in charge of who gets funded and who does not.
Getting lucky doesn't teach you much and it's often hard to factor out how much of success was due to luck.
In sports there is a saying: great athletes make terrible coaches. Someone for whom a sport is as natural as breathing doesn't think about it, hasn't had to struggle, never spent months and years and days and nights and weekends and waking and dozing and sleeping and showering and eating and walking obsessing over it.
But the great coaches do. Because so many of them never made it as athletes.
Failure is a different kind of teacher from success.
Getting lucky doesn't teach you much and it's often hard to factor out how much of success was due to luck.
In sports there is a saying: great athletes make terrible coaches. Someone for whom a sport is as natural as breathing doesn't think about it, hasn't had to struggle, never spent months and years and days and nights and weekends and waking and dozing and sleeping and showering and eating and walking obsessing over it.
But the great coaches do. Because so many of them never made it as athletes.
Failure is a different kind of teacher from success.
> I'd love to see more successful people in charge of who gets funded and who does not.
On the other hand, a successful startup founder has seen one story. Let's say they went from founding to exit in 10 years. They know everything there is to know about their company, their market, and their specific journey. A lot of that is execution. Some of it is also luck (timing, uncontrolled variables like competitors screwing up or incumbents moving slowly or whatever.)
That focus is great for the success of a single company, but investing isn't like that. There isn't one story. What worked for Airbnb or Dropbox or Gusto might be what the company in front of you needs to do. It also might be the worst thing for them to focus on.
So having a wide range of experiences to pull from—whether that is working at companies in various industries, advising founders at different stages and/or around different issues (hiring, product strategy, technical architecture, etc.)—and thinking through a wide range of problem might be a better background for investing.
VCs don't dive deep on a single company and devote everything to it. They have to be more flexible. Their "founder/market fit" isn't one market, it's a meta-level above that.
None of this is to discount the experience or expertise or value of successful founders (that would be absurd) but just to say that it may not be the case that the most successful founders would be the best VCs. It may actually be the opposite!
For parallels, the best players in many sports are horrible coaches, owners, general managers, etc. The "smartest" people in academia are rarely the best teachers. They are different skillsets. The important thing is to match the skillset of the individual with the role. "Successful company founder" sounds like it would be close, since that's what you want—more successful company founders—but what you actually need is a bit different.
On the other hand, a successful startup founder has seen one story. Let's say they went from founding to exit in 10 years. They know everything there is to know about their company, their market, and their specific journey. A lot of that is execution. Some of it is also luck (timing, uncontrolled variables like competitors screwing up or incumbents moving slowly or whatever.)
That focus is great for the success of a single company, but investing isn't like that. There isn't one story. What worked for Airbnb or Dropbox or Gusto might be what the company in front of you needs to do. It also might be the worst thing for them to focus on.
So having a wide range of experiences to pull from—whether that is working at companies in various industries, advising founders at different stages and/or around different issues (hiring, product strategy, technical architecture, etc.)—and thinking through a wide range of problem might be a better background for investing.
VCs don't dive deep on a single company and devote everything to it. They have to be more flexible. Their "founder/market fit" isn't one market, it's a meta-level above that.
None of this is to discount the experience or expertise or value of successful founders (that would be absurd) but just to say that it may not be the case that the most successful founders would be the best VCs. It may actually be the opposite!
For parallels, the best players in many sports are horrible coaches, owners, general managers, etc. The "smartest" people in academia are rarely the best teachers. They are different skillsets. The important thing is to match the skillset of the individual with the role. "Successful company founder" sounds like it would be close, since that's what you want—more successful company founders—but what you actually need is a bit different.
Outside of the angel ecosystem, there's likely a reason for that: being a successful founder is more profitable than being a VC, so people whose startups took off have every incentive to keep managing them, while successful startup founders who exited aren't exactly in need of money or further success. There's also a bunch of bullshit that goes with the VC world (managing LPs, constantly searching for dealflow, taking board seats on the companies that are failing or going sideways) that you don't have in the angel world.
It's also much harder to be a successful VC than it is to be a successful founder, so if you're at all successful there isn't much reason to switch sides unless you're just interested in corporate finance or something. Being a VC is like running a restaurant in NYC, where you're literally competing against people who are fine with losing money, and in some cases are even purposely trying to lose money.
>It's also much harder to be a successful VC than it is to be a successful founder
How?
Investing in 10 companies where 1 wins seems much easier than building 10 companies where 1 wins.
How?
Investing in 10 companies where 1 wins seems much easier than building 10 companies where 1 wins.
Rob Wiltbank (Williamatte Uni) has a bunch of investment research that basically says what you did. He goes so far as to say you must invest in at least ten to get one home run.
> and in some cases are even purposely trying to lose money.
Just to clarify, what exactly do you mean by this? VCs or startups trying to lose money? For what purpose?
Just to clarify, what exactly do you mean by this? VCs or startups trying to lose money? For what purpose?
> VCs or startups trying to lose money? For what purpose?
VCs trying to lose money on either an individual investment, or else on their entire portfolio. Some reasons why this happens:
- New VC funds engaging in 'logo shopping', where they invest in later staging companies everyone knows about so that they can put the logo on their webpage and establish credibility, even if they know the investment probably isn't going to be profitable at the valuation where they invested.
- VCs are often misaligned with their LPs. E.g. the VCs are taking 2% management fees on a massive fund, and know it will be ten years before anyone knows their returns so they don't have much incentive to try to be good at their job.
- Special situations. E.g. let's say Saudi Arabia is happy to invest in things like Bitcoin mining or Uber even if they think those investments will lose 10% of their value, because the only thing they really care about is hedging their risk of having their bank accounts frozen by the U.S. government.
- Cases where an investor puts money into a startup and takes a board seat with the goal of purposely killing it so that one of their larger portfolio companies can purchase the assets in a fire sale.
- Cases where a VC comes up with some scheme to try to shift LP money from their newest fund into a startup from their previous fund to artificially inflate their returns.
None of these are necessarily common individually, but collectively things like this are common enough to distort valuations across the board and make it so that looking at what other people invest in and at what valuations isn't a great way to make decisions.
edit: Consider also that if you look at the statistics about how the vast majority of VC funds lose money, these all come from before the 10x growth in early staging funds that we've seen over the last 10 years.
As a startup founder you only need to start one of the best 1,000 or so startups of the year to do really well. But as an investor you need to invest in one of the 5 or 10 best startups of the year in order to make a ton of money for your fund. And the best startups often (but not always) have a ton of people trying to get into the deal. So if a startup could get 25 term sheets and only 1 in 25 of those investors are crooked, then the other 24 investors have to then decide whether they're going to gamble that this investment pays off anyway even though it's priced at way over what is economically rational. It's maybe a little more nuanced than that, but that's the basic idea.
VCs trying to lose money on either an individual investment, or else on their entire portfolio. Some reasons why this happens:
- New VC funds engaging in 'logo shopping', where they invest in later staging companies everyone knows about so that they can put the logo on their webpage and establish credibility, even if they know the investment probably isn't going to be profitable at the valuation where they invested.
- VCs are often misaligned with their LPs. E.g. the VCs are taking 2% management fees on a massive fund, and know it will be ten years before anyone knows their returns so they don't have much incentive to try to be good at their job.
- Special situations. E.g. let's say Saudi Arabia is happy to invest in things like Bitcoin mining or Uber even if they think those investments will lose 10% of their value, because the only thing they really care about is hedging their risk of having their bank accounts frozen by the U.S. government.
- Cases where an investor puts money into a startup and takes a board seat with the goal of purposely killing it so that one of their larger portfolio companies can purchase the assets in a fire sale.
- Cases where a VC comes up with some scheme to try to shift LP money from their newest fund into a startup from their previous fund to artificially inflate their returns.
None of these are necessarily common individually, but collectively things like this are common enough to distort valuations across the board and make it so that looking at what other people invest in and at what valuations isn't a great way to make decisions.
edit: Consider also that if you look at the statistics about how the vast majority of VC funds lose money, these all come from before the 10x growth in early staging funds that we've seen over the last 10 years.
As a startup founder you only need to start one of the best 1,000 or so startups of the year to do really well. But as an investor you need to invest in one of the 5 or 10 best startups of the year in order to make a ton of money for your fund. And the best startups often (but not always) have a ton of people trying to get into the deal. So if a startup could get 25 term sheets and only 1 in 25 of those investors are crooked, then the other 24 investors have to then decide whether they're going to gamble that this investment pays off anyway even though it's priced at way over what is economically rational. It's maybe a little more nuanced than that, but that's the basic idea.
Many tier-1 VCs... Benchmark, Sequoia, Accel, take 3% management fees.
Fascinating, I hadn't considered a lot of these. I appreciate the reply.
My favorite nitpick along those lines, frequently seen on contractors trucks, is something like "We specialize in all kinds of repairs".
No you don't! They're no shame in being a generalist, but by definition it makes you NOT a specialist.
No you don't! They're no shame in being a generalist, but by definition it makes you NOT a specialist.
I know what you mean, but you could also interpret that differently.
Maybe they specialize in repairs as opposed to new construction?
Also, they could have meant "all kinds" as a figure of speech (not "every kind" but "various kinds").
Maybe they specialize in repairs as opposed to new construction?
Also, they could have meant "all kinds" as a figure of speech (not "every kind" but "various kinds").
Theres a reason most great coaches or managers were terrible players. Some are naturally born great and others have an eye for greatness
Investing in MSFT during his reign was a spectacular investment.
A CEO of another company told me he adjusted the accounting to give the metrics that Wall Street was looking for. The stock tanked (the company has since disappeared). Apparently, investors are not so easily fooled.