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July 22, 2019, Mountain View, CA., USA
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Anu Hariharan - Nine Business Models and the Metrics Investors Want
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About speaker

Anu Hariharan
Continuity Partner at Y Combinator

I am a Partner at Y Combinator's Continuity Fund focused on growth stage investments. More recently at YC Continuity, I led investments in Boom, Instacart, Convoy, Brex, Gusto and Faire. I am also personally passionate about global technology investing and the convergence of great entrepreneurs between US, China and India and have invested in a personal capacity in a few companies including Jinri Toutiao. Previously, I was an investment partner at Andreessen Horowitz, where I focused on consumer internet growth investments, and worked actively with the management teams of a number of portfolio companies including Airbnb, Instacart, Medium, OfferUp and Udacity. Prior to Andreessen Horowitz, I was a Principal at The Boston Consulting Group's Private Equity practice in NYC where I led multiple growth equity due diligences in the consumer and fintech sector. I started my career as a senior engineer at Qualcomm and hold a MS in Electrical Engineering from Virginia Tech and MBA from The Wharton School

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About the talk

Topic: Business

YC Continuity Partner Anu Hariharan breaks down the important metrics we look for when we’re evaluating a startup’s business model and common mistakes to avoid when measuring them.


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Thank you all for having me and it's so awesome to see so many of you at 9 a.m. In the morning to discuss metrics. So let's hope we keep you engaged till the end of the session. So, how do we think about what metrics to track in Auto advisors find out which business model you fit in? You know, the most common thing people do is which industry or they are you in are you Health Care IU biotech or are you Enterprise but that's not really the best way to think of metrics. The best way to think of metrics is how do you plan to charge your users which is

the business model and which of these business models do you fit in so roughly that are 9 vs models. I mean, I would say 99% of you should fit into one of these categories. If you don't you probably building something that's incredibly hard, which is what we called moonshot. So let's walk you through for the rest of the presentation on each business model and what three or four metres you need to drag Beyond 324. Honestly at this stage is an Overkill. So these are the things that would matter. So what is an Enterprise business model. This is a company that sells software

or so. This is to a large Enterprise pretty simple there if you started to do that, so I would explain magic very few of you. Try to are planning to launch something from day one that sells to say Facebook. OK Google are apple or any of them. But if you are one of those companies examples are like Docker Docker Cloud V. I even in the YC put play that a very few that did that from day one. But if you're one of them that sells too large and the prices you would categorize yourself in this category. And the large Enterprises 10 to work in terms of

contracts. So your business model will come into three things which are the three metrics you track which is bookings. So if you're working with say Facebook that say Hey, you are going to help us hide X Engineers. We'd like to sign a hundred-thousand-dollar contract for next year. So that's why you would say what is my booking What's the total number of unique customers that have and what's Revenue the difference between booking and revenue is Facebook my sign a contract ahead of time will tell you at the start of the earth that it's hundred thousand foot Xiao the York. That doesn't mean

you recognize Revenue straightaway. You recognize Revenue only when you've delivered the service either you've placed all the higher first, but you said in your contract or if it's an animal contract you just divided monthly. So the common mistakes we see Founders do is confusing bookings and revenue, you know, they were Sign contract with them in Delaware anyting the subcontract hasn't even kicked in but they are already reporting it as Revenue. That's not true because you haven't said a word service. So that's what it's not for Avenue. And so you should hold yourself accountable for

that. Like the company's not generating Revenue II, no mistake, which is probably more relevant at the stage that you're in is, you know, Facebook my dad verbally told you I will come sit at a hundred K contact beautiful than 100K is not a big deal for a lot of you. It's a really big deal that's native booking North Avenue because it's a while that offer. So the other even if you even if they sign a letter-of-intent, it means nothing so you really have to have the contract written down sign for it to be bookings. And for Revenue only when you start celebrating yet. The second business

model assess which is probably where most of you fit in a specially if you're in B2B or unit servicing to other companies, you're all probably thinking of that tomorrow. It's a very prompt and model of these days. You know, you see a number Aldi sell right to start up segment iron plants and birds. They all started with sass model right from day one SAS is software-as-a-service in terms of its really subscription business. You taught something monthly for the software that you provide. So what are the four metric key metrics you would want to track. Well, if it's subscription by

definition that Avenue stomach during right, which means if you hopefully have built something that people really like they'll continue to use it and they pay you every month. So that's why your track Mr. Are at the highest level that is monthly recurring Revenue. How much are you making monthly? And what is the customers coming through it? ARR is an recurring Revenue because of this phase you're really growing fast. You may be growing 30% week-over-week of 40% week-over-week. So it's helpful to track your annual recurring Revenue as literally run. Right? So if

this month you made 30,000 and Amber are and if it's true lyrics rain, you should expect that you're an old recovering is 12 times that so it's just a good metric to use internally as well because it helps show that pays rather than just looking at Absolute the third thing you should pay attention to his chart. So when you launch they'll be a few users who are early adopters that use it but you really should be paying attention to it. They stop using it right and if you're a subscription business the chances are you probably make 5000 to $10,000 a month from two or

three customers or maybe even 10. So losing a customer means real impact on your revenue. And so this is why we we recommend Doing something called gross and Maruchan which is how they are the start of the month you expected your monthly recurring Revenue to be ten thousand, but one customer churn and David Payne 2010 Doctor gross ton 3000 by 10,000 so don't blend it because you're obviously acquiring new users and if you measure Blended you numbers to look great, right because you're growing a lot but you're not paying attention to users that you're losing and it's really

important to learn from users. You're losing which is why we asked you to measure the churn. PTAC this comes in a little later. Hopefully almost all of you are acquiring uses organically. I wouldn't recommend doing any paid acquisition of the stage. But if you do start doing some experiments where you say, hey, I'm going to do a little bit of paid marketing or advertising to get a few customers. Then you should measure what was the cost to get that user to paid mechanism so which is literally saying if I spend $10,000 on Facebook or any other channel that you used

and you got five customers from that channel, how much did you pay for? Common mistakes to really common mistakes in this happens again and again even side of like highlighting it which is a r r looks really stands for annual recurring recurring is the most important. But Revenue if you don't have a recurring business, which is you don't chat subscription, your customers are not committing to 12 months of payment. You don't have a recurring Revenue business. So internally, if you stop calling it a r r everyone thinks up its you know, it's repeat business. It's not because you

have to go back and acquire them each month or you have to have you know, you have to work with your customers to make sure they pay every month. So the most common mistake people instead of saying Animal Run rate. We had to leave Is is not that useful even to gave your business if you use a RB absolutely sure. You have a recurring Revenue. And the second mistake people make is when there would they would say. Oh, yeah, it's recurring Revenue, but actually the customer upcoming it to only one time payment or you know, you may

have done Consulting project and it's not really clear whether they're going to pay second month or third month, but they would still included as an alarm. You know, it's not make sure you're including only what's truly Reckoning by the customer said I'm signed up for a 12 month or six month and we'll plan and this is what I'm being. The third is subscription. This is probably more relevant for Kazuma businesses. So if you Dollar Shave Club Blue Apron athletech that a lot of companies especially subscription of the service is becoming so popular in consumer right

now. It's very similar to SAS, but it has a slight nuance. So similar to SAS because you have Emma. Which is recurring right you may have signed up on Netflix and Hulu subscription. It's wiggling its monthly recurring the two differences is instead of looking at a bar or any of that. We actually say measure your monthly growth and unichan not Dollar Tree on why is that because if you're selling two companies usually is a commission has more value, right? It's like they're paying 2005 thousand dollars so that if you lose a customer the impact on

revenue is a lot so you should really look at 3 Avenue turn if you look at Netflix everybody pays 7 or $10 per month. So it's about volume of customers which is why we say pay attention to growth because you need to make sure that the number of users using Netflix continues to increase and you measure unit chart not nothing because if you lost a customer who's paying $10, it's $10, but if you lost a thousand customers paying $10 each. Significant Right so which is why we say metric grows unichan was as if you're a side business selling two companies measure Revenue turn

very similar like the last time but just make sure if you're spending paid marketing measure the cost associated with acquiring dozers. Don't do it on a blended bases. So when you are at the stage, you will attempt to grow in spikes. So this month you make it up 80% next Monday would grow 10% next month. You make another 90% right? That's natural because you're learning you're exaggerating and you're trying to figure out you know, what really resonates with a user. So what's really important is to make sure that since launch since the month you started acquiring users you

measure compounded monthly groceries so which is the current month / the first month and year degrees that growth rate proportionately for the number of months since launch what Founders often do as mistake is they would just do the average so they would do 90% this month plus 10% second month plus 80% what happens with averages? It makes you a good look good because you had some spikes. You want to be true to yourself? Because this one be problems when you are two or three people team, you know, but hopefully you always kale and will

start hitting 10 people team. And then when you said goals someone will be very happy that it's 50% growth rate, but that's because you're my friend girl drawing. The next is transactional businesses. This is probably more than you knew in the sense that's happened in the last 8 to 10 years. And again, you see that with stripe PayPal coinbase Brax a lot of fintech companies, especially fall in this category. What is a transactional company, which is you filled in the safe and take over payments pays you probably process a lot of payments while you're right. Let's take stripe, for

example the power of the payments for more startups. And so every startups payment volume goes to stripe that the transactional business but striped Alex a fee for the transaction. So if you are a type of business that processes someone else payments volume, then you should put yourself in the transactional bucket. So the girls transaction volume is the tpv or the total payments volume that flows to the black pants with stripe had 30 customers that you are staying and all 30 customers were processing is a hundred million and tpd but it all went through stripe. That's

TV, but that's not revenue revenue is what goes to your bank account. So that's your cut which is why it's called next to the portion of transaction volume that you make so Skype would say, hey, I charge 2 and 1/2 for send for the payment volume that flows through my platform the two and a half percent is the net revenue that they take if you want the transactional business, it's very common that you'll have lots of customers, right? So within a gyro for lunch you could even have thousand to thousand customers then they important metrics to track is use Dead Redemption

because you want to make sure that six months after they're using you or 12 months after they started using you. Hopefully, they're still using you why because you are probably Unless you've gone out of the under the god of business. There should be no reason they're not using apothem. How are they doing business? Like imagine if someone stopped using Sprite? Well, are they out of business or who is processing their payments? So that's why it's really important to measure your cohorts retention on a monthly basis. If you're a transaction business and pay back is very similar to what you

know in all cases the same thing just measured from P channels. But again I said, hopefully none of you were doing paid marketing. So what is the common mistake here confusing gross transaction volume to net revenue. As I said, like if you are processing hundred million in transaction volume, that's not naturally. That's not the cash that it's your bank percent of the hundred million Hampshire bank. That's a much smaller number so you should really make sure what you call Revenue vs. Transaction volume and I've often seen Founders here sometime come up with like oh, but I process

the volume. Smita Avenue no xcuses is literally the cat shoe making the bank and then use that attention is a cohort metric. It's not one number. It's not like oh I detain 30% of my users. That means nothing to us, right even for you. It should not because if it's if you're popping payments, you should say well 40% of my customers have used it consistently for the 12 months since they joined us. Well, that's a better match right next to this market place. Again. This is more symbol. It looks like transaction, but it's different. It's typically used by

consumers. Company, so Airbnb eBay are all good examples of marketplace. What's the marketplace? You have to cite? So an Airbnb you have host? And yes. Yes go to the platform select the room booked at the hostess happy that the marketplace. So what are the three or four metrics that matter here DMV, right. So when the guest book the room, you know, the whole Smith's $800 per night and so the $100 per night say they say to two nights. It's $200. $200 DMV that Airbnb Kendrick, but that's not natural because

everybody doesn't make the full $200 Airbnb probably makes 12% of that. Right? So 12% off that $200 is what you would classify as natural. Two other metrics again similar to the other Mortals that we talked about you want to track here is compounded monthly gross weight if you see this is a more important metric so I can see my businesses right because volume of consumers matter and therefore it's really important to track your monthly growth rate in a compounded way. So you can keep yourself honest pull your groin and similarly when it comes to Consumer business as you should pay

attention attention to use a retention not necessarily dollar detention because of volume of users matter. So here you would say what percentage of customers came back to Airbnb or Airbnb retained you have 6 months or 12 months from now now in airbnb's case how often do people travel Is anyone want to take a guess? Was that once a year very good. So how should they track? When should they be happy? When should they be sad? Once again, yes, so if you imagine when everybody was going through by seat and

they could see their card repetition once-a-year. How are you going to know you're doing a good building a good business that to wait 12 months. Play wait 12 months to check with your customers are coming back. No, so this is what you have to get creative and the way to get creative is reflect on your user Behavior. So if you're going to book something hopefully someone was drowning his not booking the day before that probably they stop doing research six months before and so Airbnb study. And so is what they would track is if you as users came back to at least search for

City Auto booking 6 months so you can eat in this stage of your startup. What's most important is to really be truthful and honest about have you want that uses to behave and come up with those retention metrics to measure if your business is really healthy. And are you seeing what you want to see from your users? So what's a common mistake here? This was especially acute for Airbnb because they didn't pay anything for demand-side. Right? They had a brilliant value proposition. They were really good design are a very good storytellers demand didn't pay anything, but they have to pay to

acquire host because guess what no one was ready to let their homes to strangers so they had to work hard which was you know, I had to put in an advertising it on event. So they have to spend few dollars on acquiring hose pretty much very early on. So the number one mistake for understand to do here is you know, you're acquiring a bunch of users organically and some users to paid and you'll blend everything you say I acquired hundred users this month until my CAC was 12, but what had happened was if you truly measured who you acquired some paid advertising Channel, it could be as high as

70 until you have to ask yourself. Is it sustainable? Is it is are you really seeing the other why I in? So if you are in an unusual situation, like Airbnb bear your business frequencies, not very high because people use once a year and you have to pay to acquire host. It's really important to pay attention to where your money is going and whether you're getting a good Auto I from that e-commerce e-commerce is you are literally you have certain Goods to sell your selling them online. People are ordering it Warby Parker bonobos memebox, a lot of them, you know, that's what we

would characterize as e-commerce, which is you make the products of source the products, but ultimately, it's your brand and someone's coming to the brand. What is it? So here again at the consumer business you track monthly Revenue notice does NoDa cutting no subscription. It's just Revenue because people might buy a part of this Monday mildliner next month right month leave out of you because it's going to be my business again, very important to track a compounded monthly growth rate for Ecommerce. Even from day one. It's important to track your gross margin

because you ate a make the good all your sourcing it and branding it under your name. So it's important to understand what it takes. What is your cost to get the good so that you're making some profit on a product basis and it's more important for you, It's because you it's not a recurring business, right? So you have to make sure that you're able to make money on a PayPal transaction braces. So which is why gross margin is important to track paid CAC very similar to all the other examples. common mistake gross profit for e-commerce Is

not accounting for all costs now Amazon does a great job of this and people often say, oh yeah, they have very thin margins but actually eats net margin of all cops. And so it says high-volume net margin X high-volume is a pretty good ebitda business would you can use to find out for future Investments? So the common mistake busy here is an e-commerce as people would say. Oh say I bought you a clip and we know the cost of the Clippers $10. They wouldn't include shipping cost. They wouldn't include custom processing cuz they were Payment Processing cost all that is important

because if you don't include those cuz you're probably passing it wrong. And so it's so important that your pricing it's wrong pretty much from first transaction. Advertising we see far fewer companies in the advertising space these days. But if you happen to be in that space then you know, the common companies that are analogues for you or snap Jack Twitter Reddit. They all have you know, he would social network that come to their site for different reasons, but the primary monetization mortal as advertisers advertise their and the companies make money from

advertisers. So at this stage because you probably will never be on advising if you wanted that but I think business it's all about the users. And so when it comes to users that are really only three things that matter Daily active monthly active percent logged in so who are the users who use your app daily monthly active who use it monthly and then puts and logged in as actively logged in using a username and password the common mistake and I will give many examples of this not defining what actor me so there was a company I

think three or four years ago that reported a daily activity of symmetric and I remember asking them what is active and you know, I had some sense of like maybe for somebody who's had engaged whatever and this phone rant about those are the emails I sent. That's not active, you know active again, it goes back to the Airbnb example. You should Define what you want your users to behave like when using your app. So if you're building a news app, does it mean Reading counts as active? Does it mean commending counts as active? You should Define that's really well.

And so if you don't Define that you could be building something that has no sticking ass and probably you know, you're going to have users that I winding down pretty quick too and it's not worth it, right. So make sure you really Define what activist and hold yourself to that metric. The other one is Hardware. It's again very similar to eat, because at the end of the day that's selling a device. So if your Fitbit girl Pro Chamois, you know it say you're in the heart. Bucket as you can see, it's very sorry, but you look at monthly Revenue compounded monthly growth rate. You look at gross

margin really carefully. Hopefully you're making profit from day one and then papia. Okay. So those are the 9 business models and one last thing I'd leave you with before I open it up to questions is common mistakes. So common mistakes has you've heard this and you probably read this in so many blocks charge that look up into the right a brilliant. Well, but cumulative charts are always open to the right do not have any, that is no rationale in the world to have a competitive. So, I don't know a single company and scale that shows a cumulative chart. So do not

take a cooler to charge second thing I've seen is not labeling Y axis. Like I just said you were going to scale even if you hit files 7 users, you know, if your if you don't know what the y-axis label is and if the charts look like straight vertical bars, it means nothing towards changing by axis scale. This is something I never understood but quite a few of them do it, which is yuno x axis starts at 0 & Y axis starts at say 50. Those things don't really show Well, you're growing show your problems. By the way. No YC startup had a charge straight up into the right. No one it in the most

successful communist Invader. So I think the most important thing is to really be honest measure and fixings, right? It's okay to go down sometimes and also usually we say don't show only percentage charts. It's very important that whatever you're measuring that is gross revenue churn monthly growth theory about the absolute number and the percentage relative to the absolute number. We also have you no Dum detail post on Netflix while I was at a 16 Reserve included two links there if anyone wants to look at it, but at your stage only three or four metrics matter, if anything

you took from here, hopefully you fit into one of these 9 business models. You can start with two or three of these metrics for each other's ass models, and that itself would be a great head start for all of you. Thank you. Yep question. Could you almost took place that's looking to like accrual accounting? Is that a one-to-one matching right there? Yeah, so the question is can we mad bookings to accrual accounting? Right? Yeah, I think that's not I mean the purpose of tracking bookings with his revenue is not from an accounting Sandpoint. It's from how do you gauge your

business meaning Brookings this future Avenue, right? So all that's all you're saying is I have signed a contract $400,000. I am not ready to launch for them until two months from now, but you know that it's you two bookings because it's all signed and the customer has committed to working with you. So you say 800k and then but you're not starting to Delaware Subs that are 2 months from now, which means you can recognize Revenue. So it's only a measure to manage your business internally. So, you know that this is coming in the pipeline. This is why my teens are the sources

going to go but if I want to hit the goal of 200k by the end of the year, how should I eat and maybe you need to go find one more customer or accelerate launching a service which is most likely the case in the You know in the face that you are which is why am I waiting 2 months to launch this? What can I do to lunch tomorrow? Pratt community We can pick from a couple of different things clearly is 9 verticals in business model. Is there something that you are recommending for a community business to track early on before you

decide business model? I think that the question was really a what should we talk for community business. I put community business whether your business model out of his advertising are not in that category. So really what he should be tracking is Jeff Define who your activity is it is and what you want that you said to do so daily active users and monthly active and track V3 how they're doing. Wk1 music producer or when me know which one we should be

able to different business models overtime, right? What's most important is what is your short-term Focus? So if you shot them is like for the next year or two, which is about finding product Market fit in your transactional business than dr. Faria you want to start with Yes, absolutely. So the question was what should we talk to for investors at this stage? Honestly, the bed is only on two or three things, which is you at the founder. What unique Insight. Do you have that you're building this and can this be a big company? That's it. And so don't overcomplicate this.

You have any suggestions. Org. Investors require you to track expenses in a settlement for all the talk about? Yeah, so great question about ex again. As I said, it's very easy to get caught up in what do investors want to see for the most important thing is, you know more about the business than anyone and it's about what should you track to make sure your business is healthy. So the two things is fonders. You should track very early on is born right because you're spending cash so you should always know don't run out of money so makes there's no excuse

for running out of money. So make sure you do LPN. I'll tell her he's so that your tracking your burn and you know, that that's enough money in the bank to at least operator company for another six to nine months to is the related to expenses. It's a gross margin, especially if you are in business categories that are e-commerce or consumer related then they do pay attention its importance of on display turns into Bruise margin, which is an important action bases. Am I making money or not? Because if not, you're not making money then it's a year. Do you have line of sight when? Make money

because if you don't then you should really question either. Is that a business to be built? But I suspect it's quite early right now. Which is why it's a focus on getting the users and how do you monetize? That's the first that Core Business that has a model kind of like ancestry.com where people signed off they get a report and they may want to come back and refer to it later. But there's no additional Bread menu for Original purchase. Would you do that? Someone can be Commerce business will be also monitor their

engagement to do both but I would record revenue is just that Avenue for that month because it was purchased only for that month and then you just figured I'd like how Airbnb did which is what's the behavior you expect to date. Do you expect them to come back once a year? If so, are they and what percentage of them are coming back? Yeah, I'll go to the site. 47 Market Place just like you being in that position Special Needs A supplier size. I position my mind would you rather?

Yeah, so great question. This is why I brought up the Airbnb host example, right. The only thing that I would say that's probably most important is to measure the paid acquisition cost of bringing that the play it in because it's you know in most marketplaces. It's actually really hard to get the demand side, which is the user's right and if you get enough business for the supply disappointment state I'm especially at this point again. If you were three years old and you're scared and you wouldn't like 20-30 millions and billions of your questions different at this point. It's

about how do I get both sides organically as far as possible if you have to spend on the supply side for a little bit, okay, but try experiments every now and then but then they're trying experiment most important thing to measure is what's your favorite position cost because hopefully it's not so much that you're born goes artifact so that those are the two that ring Facebook. Kudos. So what's your recommendation? Like when you break down to the smallest just go down to like two smaller teams of individuals in the

Enterprise. I am given an Enterprise businesses. You can't really sell to Facebook from day one. How should we focus about to go to market? Should we just go to small teams? You almost always start with small things autopilot right towing companies do so you can focus on Enterprise you usually start with a pilot, but the pilot could be something like it's a six-month pilot or it could be a three-month pilot in those cases. You don't report them as bookings are Avenue. You just say it's a pilot at the end of the pilot we visit whether we can get a contract and the face that you're in usually if

you have only one or two customers over the course of 12 to 24 months. That's okay because we ACV if it works out the contract or no contract with the really huge and that's expected. One more, but let me just say that that's the best customer acquisition. Especially at the stage because if you have built something that people really want you will get it without spending much, right? So at this stage, it's only zero ask you what scale does obviously room it's not necessarily

date of correct answer is not an absolute Jolla number the way you look at it is you compare your acquisition cost to the lifetime value of a customer. So if you had the customer for 1 year in Irving this case, for example, if everybody says yeah, you know, this customer books twice with me and if they do that every year I make $100 from them then you say I can you know, you should have a 5x Gap so you admit you're willing to spend $20 to acquire but at this stage the answer to 0

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