Points over "e": how to distinguish "unicorn" from "donkey"

Not all “unicorns” (techno-cards with an estimate of more than $ 1 billion) received this title deservedly. So says venture capitalist Abas Gupta. He offers a set of metrics that will help bring to light those companies that are over-rated and are not worthy of the proud title of “unicorn” (for them, he introduces the term “donkey”).

The basic law of growth

where:
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LTV - income received during the cooperation with the client; CAC - the cost of attracting customers.

Clients here are enterprises or end users of a product (service).

This law is subject to technology companies that sell something directly to their customers. It has been empirically proven that it is precisely this ratio that makes it possible to create a serious and sustainable business. It shows how efficiently a company spends its investments.

The smaller the resulting ratio, the more capital is needed to maintain the viability of the business and most importantly - for its growth. The higher the ratio, the more efficient the company. Accordingly, choosing where to invest a certain amount, an investor can simply estimate the growth rates of several companies and make a decision. After all, the same amount will be spent by companies with different efficiency.

To calculate the efficiency of a particular company, it is necessary to write the ratio in more detail: what is meant by the income received during the time of cooperation with the client (LTV) and by the cost of attracting a client (CAC)

where:

ARPU (Average Revenue Per User) is the average revenue received from one client;
Marketing Expense - marketing expenses;
New Customers - new customers;
Customer Lifetime - time of use.

Example 1

HelloFresh service , by subscription, delivering customers a set of products with recipes for cooking

• Experience shows that customers usually use these services for no more than 3 months and then switch to another. Thus, Customer Lifetime = 0.25 years.
• ARPU = $ 180 per month or $ 2160 per year.
• The company's IPO documentation states that Margin = 52%.
• CAC = $ 400

The result is:

LTV / CAC = 0.25 years x $ 2160 / year x 52% / $ 400 = 0.70 <3

The numbers speak for themselves. Of course, there are enough assumptions in the calculation, but the scheme is clear.

Therefore, most likely, in front of us is not a "unicorn", but a "donkey".

The main owner of HelloFresh is the German venture fund Rocket Internet . At the start of HelloFresh, the fund invested $ 18 million. To date, the company has attracted about $ 300 million of investments and, with 58 million euros in losses with 198 million turnover, plans to raise about $ 331 million in an IPO.

Why is HelloFresh so much money? Rocket Internet understands that the formation of customer habits is a matter of time and investment. Delivery of products with home recipes is a service, the essence and advantages of which need to be explained to customers.

Example 2

Evernote , note management software developer

• Customer Lifetime - at least 3 years.
• ARPU = $ 12.50
• Margin - a SaaS company without a support service should reach a margin of about 70–90%
• CAC - since the software is distributed on the “shareware” model, the CAC indicator is usually in the range of $ 1– $ 100. We set it equal to $ 20.

LTV / CAC = 3 years x $ 12.50 / year x 90% / $ 20 = 1.69

It's no secret that Evernote is not doing well. The company was even called the "dying unicorn." The main product of Evernote - a service for working with notes and file synchronization - has not changed much over the years of the company's life.

“Cloud storage products, like Dropbox, captured one part of Evernote’s potential audience, project management systems (like Asana or Podia) - the second, and the third went to instant messengers,” says Artyom Inyutin, a partner of the venture fund TMT Investments.

To confirm its valuation of $ 10 billion, Evernote should increase revenue by the end of 2015 by 226%, to $ 1.4 billion. Entering the stock exchange gives additional capital and opens up new opportunities for companies, but the company has already missed the best time for an IPO, investors said interviewed by Slon.

True eyes hurts

The main factors behind the low efficiency of the technical platform are the short time the product (service) is used, low prices, insufficient profit, high marketing costs, and a small influx of new customers.

But if you make calculations and bring "donkeys" to clean water so easy, why do investors continue to pump tech startaps with capital?

Abas Gupta believes that overconfidence, unjustified optimism and the fear of losing potential benefits interfere with investors.