Startup Revenue Models: How to Make Money & Not Become a Statistic, with Dave Parker

All right, welcome everybody to this Founder Institute webinar. My name is Jonathan Grecian. I'm a co-founder and CEO of the Founder Institute, and we have a great topic today, a topic that is always relevant and should always be relevant. I think some startup founders and some startup investors lose sight of that, which leads to times of froth and times of a lot of issues in later-stage funding that we're seeing right now. But we're all here to talk about startup startup revenue models, okay? And this is a topic, this is something whenever I talk to an entrepreneur and they're like, oh, well, you know, Twitter started without a revenue model and Facebook started without a revenue model or anything like that, it always makes my eyes roll because that's basically like saying, okay, well, this person won the lottery so I can win the lottery too, right? So we're here today to talk about startup revenue models in a way that's realistic, in a way that really can help you build a business that is actually sustainable and maybe not totally reliant on venture capital, which is the type of business that you should strive to build. And today we have a great speaker who is here to talk about that and to talk about really the nitty-gritty and how to find a relevant revenue model for your business because— and I think— and I'll bring you on screen here now, Dave. I think you share my You share my sentiment that, you know, it really— it's— there's a lot of places where a founder can be creative, but on the revenue model is probably not where you want to be flexing that muscle, right?

Hopefully your idea is unique, but how you make money is never unique, for sure.

Perfect. Okay, so let me just give a quick, uh, a quick introduction to Dave. So, uh, I've known Dave for, for over a decade now, which makes me feel a little bit old. But Dave has been working for startups for a very long time, starting companies, building companies, coming in as a CEO, as a COO, I believe, as well, angel investing in companies. And now you're working with an amazing organization called the Fearless Fund, and also author of a book, which I have here, Trajectory Startup. You can learn more about this book at dkparker.com. But yeah, so that's my hopefully flattering introduction for you, Dave. But anything to fill in there for everybody?

Always good to see you, my friend. It's been too long, and it's good to cross paths and back from early Founder Institute days when it was run in Seattle, for sure.

Okay, awesome. Yeah, so Dave, I will— I'm going to hand things off to you. A couple quick notes for everybody, and it looks like we have a lot of activity in the chat here, which is amazing. This is a 100% live event. Okay, this is not prerecorded. So we want to make sure that these events are as interactive as possible. So Dave is going to go through a presentation right now. You should definitely pay attention to that presentation. But at any time, if you have any questions, throw your questions into the chat. And we have a team of people who will be in there and they'll be feeding the questions to me. And once Dave's done with the presentation, we'll just have a discussion and we'll be bringing up a lot of your questions. And I'm seeing here now we got a great international audience. Evelyn from Nevada, Ty from Dallas, Chris in Singapore. I think it's pretty late for you, Chris. So thank you for taking the time to join us. Wisconsin, Panama, UK, Zurich, New York, Madrid, Cleveland. Swarthmore, Pennsylvania. I went to— I'm a graduate of Villanova University, so I'm familiar with that area. Lagos, Buenos Aires. All right. Awesome. So amazing live international audience. Keep the activity going in there. Okay. In that chat, we are here. Throw any of the questions that you have into the chat for Dave. And once he's done with the presentation, we're just going to go through all of your questions and hopefully try to make this event as interactive and as helpful for you as possible.

Sure. Okay.

All right. So Dave, I am going to make you the featured speaker here, uh, and, uh, and I am going to hide myself and mute myself. And see you in a few. Yep. And I will, I will be back.

Awesome. Well, welcome everybody. Thanks for joining me. And I'm actually in Seattle, Washington today, um, or just outside of Seattle, but have a chance to, uh, get a chance to work with founders globally, both from Founder Institute and all kinds of other programs. And I was just in Tunisia, so saw some folks from the Middle East and North Africa. So let me walk you through the presentation today is around how your startup makes money and how you don't become a statistic. So from a founder perspective, I'll give you a little bit about me, why startups fail and you shouldn't. And then I'm gonna walk you through the 14 revenue models used in tech and how you break down a business model into the pieces and components that really are the pieces that drive it. And then ultimately, what value— how you value the company based on those revenue models and what are the other factors. And we'll talk about, especially for pre-revenue companies, how you value a company. So as Jonathan mentioned, I'm a 5-time founder, sold 3 of those companies, closed 2. One was an epic crater, gargantuan proportion. So I raised $12 million and exited at $85 million. I worked for an organization called Startup Weekend, the nonprofit, until we sold that to Techstars, and then joined the Fearless Fund about a year ago. And we invest exclusively in women of color-founded companies. Companies. So about 30 companies in that portfolio split between early CPG companies and early technology companies. And then I authored a book, Trajectory Startup, which most of this content is actually in the book, and then work on the sell side of helping founders actually get personal checks instead of the corporate checks when you sell your company at the end. That's a little bit about me. I'll make sure that Jonathan and team has all these documents that you can find more at dkparker.com. There's actually a free excerpt for the 14 revenue models as well, so you're welcome to download that for free. All right, so first off, I want you to ignore the memes. I know today in the Twittersphere things are crazy about all things, you know, frothy markets, down markets, compressions and rounds. But I would encourage you as a founder to ignore the memes. And one of my favorites is You know, the idea doesn't matter, only execution matters. Except that actually assumes it's a good idea. So in venture, actually it all matters. So it's the market matters, the team matters, the idea does matter, especially if it's a bad idea, 'cause you can fail fast. You know, follow your passion. I feel like we've told a generation of that. Passion is critical, but not sufficient to the success of your startup. So I'm gonna give you some mechanics and numbers today. So a lot of this stuff is around from a fundraising perspective is all about math. So starting off with the thesis of actually it all matters. Let's start off with why startups fail. The first thing is that we build a product that companies don't or our customer doesn't want. This is the CB Insights data. It's been something that happens every 6 months. They actually— the data has been very consistent now over a decade that the number one reason that startups fail is they build a product nobody wanted. Yeah, we're convinced as startup founders, being a 5-time founder as well, all of my ideas are good. I love them all, but some of my ideas are actually worthwhile in spending time on. Of course, running out of the cash, having the wrong team, getting outcompeted, all of those things matter too. But know that first and foremost, are we building a product that customers want and can we get paid for it? So getting paid for it is a critical success factor in that. And we'll talk to Jonathan's point about the revenue models that is the non-revenue model, which is called new media. So yeah, you can be like that on Twitter, but, um, or Clubhouse, etc., but not if you're B2B, because that one only works in the 14 models for B2C. So some calculus here: a great team in a bad market is probably going to fail. An okay team in a great market could have a blockbuster return as an investment. A great product with no path to revenue will ultimately fail. right? Just because you've built a better product, it doesn't matter. It's a secret. An okay product with great monetization can still make great money, but may not produce a unicorn. But to get to a unicorn, you have to have a great product, solid monetization strategy, a great go-to-market and market size, and great execution. All of those things have to come together. So let's start off on the mechanics of how you make money and how you think about making money, because that's really an important component that you need to know from the investor perspective. So on that side, now I've switched to the dark side. I'm now on the investor side. So we tend to think about returns first, unit economics, which is how do you make money, and product last. As a product founder, we tend to think product first. Oh yeah, we need to get to unit economics. And then, oh yeah, how do I exit the company? It's easy for me to get a check into your company. It's hard for me to get a check out of your company. So the reason I think about returns now as well in that continuum is it's not just about the product. It's also about how you sell the product and how you make money. So let me break down the business model for you. There's 3 distinct parts of the business model, and I want to break them down into their cost structures and their, and their profit structures. The first off has, how do I create value? That's the product or service you're selling today. So if it's a, if it's a product company, if it's a services company, if it's a combination company, that is the first thing. It's about how do you create value for the customers. The second thing is, how do you deliver value? That's a mix of your pricing, your revenue model, and your marketing and sales. It's all about your go-to-market and the cost of selling the product. And then you'll see that what you have left is how do you capture value, which is top-line revenue, gross profit, and net profit— gross margin and net profit. So let's break it down in a little bit of detail. If I want to create a new company and create value, I have to have engineers to build a software product. They have to have people to help deliver the product. So the cost of building the product or the cost of delivering the service is the team, which includes engineering, design, hosting, maybe manufacturing. Maybe we're doing a combination of IoT plus software. But that cost of creating the product is your, your cost to build the product, or if you're doing a service, the cost of delivering that service, including the support and delivery. All of those things go on your spreadsheet as a cost associated with building and delivering the product. So that's all your cost structure. The next cost structure is the cost of delivering value, which is your revenue model, how you monetize. There's 14 of them, and I'll get to them here next. The pricing you use for your product— by the way, most of you are pricing it too low. The cost of customer acquisition, which is your marketing spend all the way through the sales process to get to the customer on board, which is marketing and sales. Your lifetime value, LTV, which is how much is that customer worth to me over the lifetime. And a note here that promotions and pricing are different. So if you do a freemium, as an example, that's a promotion. That's not actually a price component. These pieces are how you deliver value. So I have the cost associated with building the product. Now I have the cost associated with delivering the product, which are these components that sometimes are in my control, sometimes a little not in my control, but at least they're variables you can push on. And then what's left over is my top line revenue. My gross margin, and my net profit. So if you're doing something that's in commerce and I'm selling a virtual product or a physical product, I can take that transaction value and look at that transaction and say my total gross sales on that was $300, my cost of goods was $150, my gross profit was $150. Now that doesn't get me to my net profit because I have to look at my net profit later, but at least I can calculate my gross margin. So you'll notice here, this is what's left I have no variables and no levers to pull on this one. It's determining the cost of building it, determining the cost of selling it, and how do I price it and monetize it. So those are the three big buckets of the business model that are broken down for you in a way that you can go get to it. So product-market fit then becomes this idea of math. And you'll hear this on stage from venture capitalists. We'll know it when we see it. It's like it's pornography according to the Supreme Court ruling from years ago. Well, I don't know what product-market fit is. I don't know what traction is, but I'll know it when I see it. Can I break it down to you? It's simple math. So if, if the traffic on the site, that my site is going up, or the traffic on downloads on the app store is going up, if my leads are increasing or my downloads are increasing, if my closing ratio is increasing, if my time to close is decreasing— so if I was 94 days, I'm now 62 days, my time to close is coming down— and if my annual contract value or my monthly recurring revenue is increasing Those 5 things are the miracle of compound interest. So know that product-market fit isn't a feeling, it's not a myth, it's not a unicorn, it's math. So know that the math to it really goes to those 5 things. Now there are some bonus features there too, is that if your referrals are increasing, that's a good sign. Your time on app or time on site is increasing, again, it's a good sign. LTV to CAC ratio should be improving. That's kind of a trailing indicator of product-market fit. And then your lifetime value should be increasing at greater than 12 months. But again, trailing indicator versus the 5 on the left, really your leading indicators are product-market fit, and it should be what you're driving to, to show that you have growth and revenue. So that's product-market fit. It's just math. All right. How do you monetize your startup? So I want to walk you through the 14 ways of doing it. This is not a calculation or calculus for valuation. This is just a heuristic. And it's one of many parts of how you value the company. We'll get to valuations here at the end really quickly. So first off, the data. So when I was with Founder Institute back in Seattle, one of the things somebody asked me for at one point was, hey, can I have your financial model? I actually went out and started looking at like how many financial templates would you need to cover 80% of the market. And I went to Crunchbase at the time and said, hey, can you give me a list of all the seed-funded companies over the last 18 months? Ends up being 2,654 companies. Because it took me so long to write the book and I was interim CEO a couple times and sold a couple companies. It took me 5 years to do it. So we ended up with a 5-year longitudinal study of these companies and we were able to look at which ones succeeded and which ones failed based on the revenue model component. So some big surprises in that series seed rounds have gone from series seed 1 and then off to an A round and a B round to series seed 1 through 10. And the other thing we looked at was the number of companies who failed And one of the things we did consistently going back and looking at each of those websites on the Wayback Machine was that 80-plus percent of them, about 86% of them, didn't have a call to action and didn't have any pricing or way to monetize on their site. You couldn't tell how they actually sold their product. If a customer did get there, there was no call to action. There was no sign up for a demo, get a white paper. There was nothing to do other than here's what we do, but no pricing. So then we took that data and we basically looked at every site and we mapped them out. You'll notice a couple of things here. The combination revenue models are very fast from seed funding to A funding. And then we tracked from A funding to B funding. And some of these are about kind of what you would expect, but combination models typically had services revenue plus subscription was the way they broke down. So early subscription revenue or early services revenue actually validated the product so that it was easier to go get funding. The other one you'll notice here is gaming. Gaming was about normal on the scale from C to A, but super fast from A to B, because if you had a hit on gaming, it was easy to raise that next round of funding. So these are the models. I'm going to walk you through what their unit economics are, how they work, where they work, and I'll give you a list at the end of all 14 that you can choose from. But Starting point here is fee-for-services. We all know that fee-for-service is not a scalable business that venture capitalists like, but it is a revenue model component for sure. Accenture is a good example of that. Stride is an education company. These, uh, fee-for-services businesses work for B2B and B2C. Your key metric here is your project revenue and your cost of delivering, which is usually your bill rate to the customer and your pay rate to the employee or contractor. That gives you your equivalent gross margin. So no, of course, services here are super hard to scale, but if you can prove it out with early revenue and customers will give you money for that and you can move to subscription later, totally a good place to start. Validation in the form of revenue is a great option. So that's number 1. Number 2 is product as a service. Slight variation on— I think of this one as like Southwest Airlines or IBM. They're selling a black box of a delivery of something that customer's going to get, but they're not breaking down the cost per meal, the cost for the pilot, the cost for the pilot, the cost for my Diet Coke, et cetera. So from a customer's perspective, I'm buying a package and a solution. From your perspective, you're managing a bunch of costs within that. And again, it's fixed price versus hourly rate. So they're very similar to services, slightly better margins, slightly better value. So some companies will make that shift from services companies to product companies as well. So that's number 2, product as a service. Commerce is number 3. Think Lululemon here, Wayfair, early days of Amazon before they were completely conglomerate. So this one works both B2B and B2C. Your key metrics here are your wholesale cost of goods sold, your average margin percentage, and your average basket. So if my average basket is $300, my cost of goods sold is $150, my gross margin is 50%, and then I need to know how many baskets per month am I going to do from my unit economics perspective. So this can be physical goods, can be virtual goods, um, can be something you manufacture or something you resell. And I know that this one can mature into a marketplace. So number 3 is commerce. Number 4 is subscription. There's subscriptions everywhere now. So subscription, Salesforce, Spotify are B2B and B2C examples. It works both B2B and B2C. My key metrics here are my average revenue per user. That could be in a form of monthly recurring revenue or annual recurring revenue or annual contract value. My conversion ratio, for example, how many trial to paid versions do I get? Less my churn, how many— what percentage of my customers are leaving me every month. So those are my key metrics for subscription. Typically, you're going to mature into tiered pricing models where each ideal customer profile has a different price that fits a sweet spot of what you're trying to make work for that pricing for that customer. These have great high multiples, right? The revenue here on subscription multiples are great. I'll walk you through multiples here at the end. Fifth one is metered services. So think here, Twilio, AWS. If you have an AWS bill and it went up this month, usually that means you made more money. Congratulations. This one is a B2B-only solution. Think cell phone days in the early days where you got charged per text or per minute. That was a negative customer experience. On this side, it's actually a positive customer experience. So here I'm tracking average revenue per user, very much like subscription. It looks like subscription, but you have a pay-as-you-go component that you crank it up. The more the customer uses, the more they pay. Subscription, it has churn. Keep in mind, this one has the highest multiple of all the revenue models, and I'll walk you through why that's important here in a bit. But this was probably the one that matured the most over the 6 years, 7 years that we've been trailing, watching this data. So metered services went from subscription to metered services. Number 6 is the transaction fee business or the rental business. Think here, Chegg or Stripe. Stripe doesn't actually book the top-line revenue. If you make a $1,000 credit card charge, they book the 3.5% fee. So they're in the fee business, so they have to do tons of volume because they're making super low margins. So the difference between commerce and transaction fee is commerce, I'm booking the $1,000 sale or the $300 sale I used earlier. With the transaction fee, I'm just booking the 3.5% transaction fee on that $300 sale. That's the difference. Rental works very much the same as the mechanics. So B2B and B2C here, average revenue per transaction, et cetera. So if you're doing transaction fee, You're just not booking the top line revenue. How does that work when you have two sides of it? It's called a marketplace. So if you're doing B2B2C, that's a marketplace almost always. So Alibaba, Uber, great examples of marketplaces here. My key metrics are my average transaction amount, the number of monthly transactions, and then my commission transaction percentage. So keep in mind, marketplaces are hard in the early days. I'll quote a day here from an early— you have to favor the seller. You need inventory in the marketplace to sell. If you don't have any inventory to sell, all of your cost of customer acquisition on buy side will be wasted because I have no inventory. So at maturity, they're in equilibrium. At launch, they favor the seller. So that's the key on a marketplace. Combinations are next. Think in terms of this one, Smartsheet is a good example. Smartsheet is a company based in Seattle. They do services and software. 25% of their revenue is services revenue. 75% of subscription revenue, but it compressed the sales cycle. So if they could do non-recurring engineering and setup for their customers, it compressed their sales cycle by 50%. So in this case, it's a good example of services lead followed by subscription. If the VCs tell you that it doesn't work, you can't do services, point them to Smartsheet and say, we're doing the same thing because it's compressing our sales cycle. Hardware and sensors are another good example. So think of Companies at scale have multiple revenue models, but at launch, you're probably going to have one. Gaming is next. So think King, Candy Crush here. If you're doing gaming, margins are amazing on virtual swords. They're terrific. It's B2C only. I'm gonna track my downloads, my percentage of people who play, and the average in-app purchases per customer. And typically, I'm gonna look at my 21-day predictors of success, how many people have downloaded it, who used it, who are still using it 21 days. So it's a hit-driven business like movies. If you're doing gaming, it's a great margin business. Advertising and search is here, number 10. Why is it at the end instead of the beginning? You have to have a million unique subscribers. So if you're doing advertising and search, that's awesome. The only question that matters is, how long will it take me to get to a million uniques per month? So know if that's your model. This model is a valid model, but it only works at scale. It doesn't work at launch. So know that that's the challenge with it. Number 11 is new media. Jonathan mentioned this one. We're gonna go viral. Congratulations. So Snapchat, Clubhouse, this one down at the bottom would say this is the only revenue model, is the non-revenue model. It actually is the deferred revenue model that converts for advertising. So typically this is the one that's gonna be advertising in the long range and you're focused on customer growth. I've got news for you if you're B2B, this one's B2C only. It doesn't work in B2B. LinkedIn went viral for just a little bit of time and Slack went viral for just a little bit of time. But in general, you have 3 levels to track new medium. Word of mouth. Hopefully anybody can get that. Network effect. Think in terms of WhatsApp. The app works better when I add my network to it. And the top one is a viral coefficient or K-factor. That means for every paid customer I get, I get greater than 2 additional paid customers. So it's just math. It's a viral coefficient or K-factor. If you want to look up the math, Google K-factor. Before a virus, no one knew what it was. After the virus, everyone knows what the K-factor is. Big data is next. PatientsLikeMe is a good example. Again, this is a B2B. It only works at scale because you have to have the data before you can sell the data. So now that, that's number 12, big data. 13 is lead generation. If you've been around Mint or Chime or All Star Directories, all those companies basically are better at marketing than the people that they sell the leads to. This is a great way to bootstrap a business. It's pretty nichey, but it is a unique revenue model. So it's listed in there as number 13. And last but not least, number 14 is licensing. So remember when Microsoft used to sell software licensing and they shifted to subscriptions 15, 20 years ago? The analysts were, you know, you know, thinking like, can we make the switch to subscription? And now the answer is subscriptions are everywhere. So licensing is 14 simply because there's not a lot of them left anymore. So know that what we're after with that one is it's still a valuable model, it just doesn't have the same value that subscriptions have. So here's your list of all 14. I would encourage you to take a minute and just figure out which one you're going to use. And then most of these, I'd say they're pretty common as far as the statistics go. They've got common conversion metrics. And in the book, you'll, you'll find a bunch of the details down to a revenue model by revenue model. All right. So why does it matter? So first off, it matters that the value is partially in how you're going to sell the product to the customer you want to sell to. But if you can choose which revenue model you can choose, I would encourage you to go with the ones that have the highest value. So in the early company valuations, we don't value a company based on the price-to-earnings ratio or PE ratio. We base it, base it based on price-to-sales ratio. So let's say you're doing a smart contracts company, you want to sell to DocuSign. So in that case, I could go to DocuSign and say, we have a similar revenue model to DocuSign. We sell on a subscription basis. And we have a product that's complementary to DocuSign so that DocuSign could actually buy us. So we would look at that company based on the valuation of price to sales, not price to earnings, because you typically don't have EBITDA in early stage of companies. So how do I look at them as the company who's likely to buy us? So here's a rank that we did for the table for the book. And you'll see here that services companies generally trade at 1.5 5 times, or 0.75 to 1.5 times revenues. So if Jonathan and I do a million-dollar consulting business, that business is going to be worth roughly a million dollars, which is awesome but not great. Now, at the same time, if we do a million-dollar subscription business, you'll see here that business is worth $8 to $12 million, and a million-dollar metered service business is worth about $24 million. Now, we've taken this data and moved it into an analysis of 280 publicly traded companies in tech globally. And even post-sell-off, you're seeing that companies that have metered services have bounced back quicker than some of the companies that had subscriptions, but the valuation differences are absolutely quite huge. So in the case here of new media versus old media, you'll see new media companies trade 23 times revenues, where an old media company is trading 3 times revenues. And the same thing is true here for advertising and search companies. They're trading 7 to 9 times. Now, I'm not saying to optimize around your exit, but where you can optimize around increase in value, I would definitely optimize for increase in value. All right. Other influences on valuations, because I get this a lot. Dave, what's my company worth? So the revenue model is part of it. The total addressable market you're going after is also part of it. If you're going after a big-ass market, your company will be more valuable. If you're going after a niche market or you're only concerned about Morocco or Northern Africa, the answer is it'll intrinsically be smaller because your total addressable market is smaller. We used to have what's called the rule of 40, kind of shifted to the rule of 50, which is are you growing at greater than 50% or a combination of 50% growth, 25% growth and 25% profit? So there's— and then am I finding a logical upmarket buyer to create competition? So those are influencers on your valuation. Growth, revenue model, total addressable market, likely upmarket buyers, and path to profitability all increase your value. Now, in market compression and all kinds of stuff going on right now, it'll actually help you sustain value, right, as well as hopefully increase value. So quick summary here, I did not say the method here allowed you to calculate the value of a pre-revenue company. If you want more data on that, I would point you to Dave Burkus' Dave's a mentor and friend. I actually wrote a blurb for the back of the book. And 20 years ago, he wrote the Berkus Method for how to value a pre-revenue company. Keep in mind, the data in that is biased to West Coast tech companies. So you have to discount appropriately based on your region. So the data that we're working on is still a work in progress and probably will never end. It's turned into kind of an interesting perspective on it. But keep in mind, as Jonathan and I started Hopefully your product is unique. Hopefully your marketing is amazing. How you make money is almost never unique. So what I want to caution you on is if you're doing a new startup and you're like, "And we're inventing a new revenue model," I would be like, "Oh my God, please don't." Like, just to be honest, if you create the 15th revenue model, I will write about it. But the risks of creating a new revenue model at the same time you're creating a new product is super hard. So know that how you make money is never unique. So with that, Jonathan, I'm going to open it back up to you for Q&A.

That was awesome, Dave. Can you guys see me now?

Yep, you're good. Okay.

Oh, I hid myself of you. I've already making myself old using Zoom. So let's— a couple of things here, and there's amazing questions coming in. Keep the questions coming. I had a couple of questions, and I have a feeling we may want bring your deck back up also, Dave, just from some of the questions that I'm seeing here. So one of the things, and I had this a lot, a lot of people were asking, okay, if you choose one, right? Now I know a couple of these are combo, and you also talked about, which I think is interesting, how a lot of these revenue models can kind of lead to another revenue model, right? I think the fee-for-service and productized is Service is probably the most obvious one. And we see a lot of consultancies kind of become product or startups from that. But would you still, for any entrepreneur, any startup at the very early stages, say like, just pick one, try to make a go with that before you even think about another one? Or what kind of advice would you provide there?

Yeah, I would definitely lean into what your primary revenue model is first, Jonathan, and I would go test it and see if it works. And then that's why I go with primary and secondary versus choose one and two. At scale, you can have multiple revenue models. Uber today has multiple revenue models, but at launch, they had a very focused marketplace model that was focused on inventory first and buyers second. Right? So, and then you'll have people say, oh, we're gonna do a multi-sided marketplace. And my answer is usually, oh my God, no. Like start with a single marketplace. That's fricking tough enough. Before you try to do— So I think from a founder perspective, there's what I am at launch and there's what I am at scale. And in our heads as founders, we tend to be like, I'm manifesting my own destiny. I'm going to live in the future. And I'm like, I just want you to survive long enough to not die in this sequence over here before you get over there. So that's the important thing about pick one today.

Right. And by the way, I've gotten— we're talking about metrics here a little bit, which has been a lot of what you talked about. And by the way, that's what I love about Dave, guys. Is that he just takes this stuff, remove all the hype, right? Product-market fit is math. A lot of this stuff is just math. And one of the metrics that at least I use is when you— the more people in attendance ask, do I get a copy of these slides? Do I get a copy of these slides? Generally correlates with the quality of the slides and the quality of the presentation. So just some metrics to share there with you and to answer the many people that have asked, we've been trying to keep up in the chat. Yes, we'll be sending out these slides. He covered a lot of information. Go back to actually on the multiples because we had a question here actually from Simmons, and Simmons asked the question, is there a list of the most profitable revenue model to the least for strategic purposes? So I don't know if necessarily this is the most profitable.

I do. I actually do have— I don't know this profitable, it's based on market cap. So the family office I worked for, we did the Mathematica chart that you guys saw at the start of it, and they asked a really interesting question that I had never asked because I'm not a public company guy until I'm doing the family office. They're like, Have you looked at the profitability of these companies and how they market cap? And sure enough, they follow this model in reverse, in descending order. So metered services companies, disproportionately high. You have to discount a few for like, oh, when Bitcoin and blockchain companies were super high. So take Groupon. So when I started this dataset, Groupon was super hot. They ultimately became lead gen and commerce. Groupon trades for 0.49 trailing 12 revenues. DocuSign today, even after the sell-off in DocuSign from its high of $325-ish to where it is today at $70, still trades at 21 times trailing 12 revenues. So if you were to make— so we literally joked about, should we make an ETF that just invests in metered services and highly tuned subscription businesses? I think the answer is Well, if you looked at my portfolio, the answer would be yes. That is an answer.

Now, this is the investor point of view, just to point out, right? Just in getting started, right? So at least this is what investors will look at. So super valuable for you to understand that. But as far as just getting started, I mean, some of the— for early stage, idea stage, pre-seed, seed, I mean, a lot of this stuff is just going— like subscription is usually one of the fastest paths. Right.

Totally.

And but as you had mentioned too, this new media versus old or advertising is a path that a lot of people think that they're going to pursue. But at least in my opinion, a lot of times it's just laziness. It's just like you don't have a revenue stream, so you just say, oh yeah, we'll figure out later.

We're going to guess it's going to be advertising. We're going to go viral.

Yeah.

All right. Yeah. No, it's— and again, it's just math. Right? So that like we had one company in my portfolio, the last venture fund I was with, that were like, we're gonna shift to the big data model from subscription. I'm like, that's awesome. What are you gonna do for the 18 months where you don't have any revenue because you don't have data to sell? Right? And they were like, oh yeah, we hadn't thought about that. So again, this just points out some of these work at launch, some of them only work at scale. Almost all circumstances say, you know, like marketplaces. The critical success factor marketplace is how do I get market momentum in my critical mass? Where with advertising, how do I get to a million subs? So we have about 4 companies that are in the marketplace businesses. I have friends who are like, Dave hates marketplaces. I don't hate them. They're just intrinsically hard because I have to have a marketing funnel on the sell side and a marketing funnel on the buy side and I have to ratchet them up. Right?

Right.

And now if it works, I have competitive— competitive advantage, but how much do I have to spend to get there? Is it $3 million or $10 million to get to critical mass? So there's models that you can test early and give you really proof points. And then there's models that will, you know, it's the Rattan Death March, right? Because it's incredibly hard to get there.

Right. And I think even we see this a lot, the services to the productized service, you know, for a lot of struggling entrepreneurs, because look, you're not going to raise money until you have metrics to prove that you're onto something. So the services to a productized service model is actually, at least realistically speaking for a lot of entrepreneurs, one of the most realistic and best paths that you can take. And I think you mentioned like Moz or used to be called SEOmoz, right? A lot of those, those are great businesses and they started not by raising a ton of money on speculative projections, but by delivering a value to a customer and then figure figuring out how to build a product to do it at scale.

Yep. And then they actually sold off their services business, which most of the time is difficult for them to do, Jonathan, because at 35% to 50% gross margin, which by the way is the average for a services business, is it's hard to extract that revenue and go just product only. Should you? Based on these multiples, my answer is of course you should. But I think as founders, when again, when I did my first startup, I didn't have any perspective on this data. Now this is, I have strong opinions, lightly held and informed by data. That's kind of the way I approach it today versus the way I approached it with my first startup, for sure. Right.

The other thing, the last thing I'll say about the slide, and then I'll get back to some of the questions here from the audience, is this is also, I would say right now, because of, you know, there's a little bit of a bloodbath going on right now in later stage VC.

Okay.

Now, later stage VC is highly speculative in a lot of cases, and it's banking on the ones that have the highest numbers here. So would you recommend, or yeah, just what are your thoughts on that? It's with the cycle that we seem to be going in right now, investors are going to be much more attracted to things where they can actually see metrics and they can see money and see a path to getting revenue quickly, whereas things like new media, And some of these, the metered services and things like that, do require a lot of funding to actually get to that point where you can pull that revenue model off.

Yeah. Yeah. And I would tell you the same thing we told our portfolio companies is where you have clear visibility in your ROI. So in marketing, we think about it as ROAS, or return on advertising spend. So if you're doing B2B, it's kind of return on marketing spend, but I think about it in days. If I'm spending $1,000 this month, how does it take me? 92 days to get my cash back or 47 days or 32 days? So if I have clear visibility, the answer is keep spending. If you don't have clear visibility, the answer is you've got a shitload of testing to do. So I want to know that because as a founder of your company, you're the chief allocation officer. I'm allocating cash, resources, and people and time. Now I'm thinking about it, I want to have visibility to how much runway do I have from a cash perspective? Where do I have clear return on investments, right? Where we're like, oh, we're swinging for the fences, Dave, you don't understand. I've been there, done that, got it, have a crater to show for it. Here's the deal. Key metrics are math-driven. The more you have data, the more investors are like, wow, that's interesting. The more you have hypothesis and speculation, the answer is I have a checkbook, consequently I have the power. So there's a power dynamic in venture. If you have data, you can offset that power dynamic. If you don't have data, The answer is I don't care how passionate you are. I'm glad you have to be passionate. Passion by itself is not sufficient. Passion and data is required.

Right. And I think generally speaking, I would sum up that the cycle that we're going into is just going to be much more focused on data, which is not a bad thing, by the way. There were a lot of questions. Maybe can we go to the slide where the— where you go through the product market fit? Right. Because this was not surprisingly a pretty popular topic. In all of the questions that we've been getting here, right? Product market fit equals math. And a lot of people were asking, and I'm just summarizing a lot of the questions that I saw here. So you have— it's not a feeling, right? You should be able to see it in the metrics. Now, this list that you have here on the left, so 1 through 5, what it— I mean, the vast majority of entrepreneurs that think they're on to product market fit are going to have some, you know, one or two. Yeah, yeah.

But I, but I feel good about it. The answer is that's awesome. But keep in mind, these 5 in total is the miracle of compound interest, right? So if I can sit down with you and say that's where it's an engine that's somewhat sustainable and it's, it's going to grow, you're off to the races. You have the pieces together. Like, you can— if you, if you spiked traffic for one month That's good. Now the question is, what did it cost you to do that? Is it sustainably going up? If I look at my leads, is my lead— so keep in mind, your time to close decreasing is a big deal, right? Average revenue per contract is a big deal. So like, I was meeting with a founder yesterday and like, we're charging this amount. I'm like, you need to triple that. And they're like, well, how do you know? And I'm like, because nobody's pushing back. If anything, your customers are telling you, oh my God, that price is too cheap. So price is one of the variables in your control. You can't change it every month, but you should be testing it systematically every quarter and looking at how quickly can I change my pricing. So the annual contract value— so these are the math that we use for our fund, right? We're like, if I can sit down with you and see the math before you see the math, I'm going to get a great deal because I'm going to give you a check, right? You need to see it as the founder, right? But I'm just taking some of the clutter away of vanity metrics, right? So site traffic by itself is a vanity metric unless it's converting for leads, right? So you have to take away the vanity side of this and just get down to the math. But I can track this on a monthly basis. I have some friends in venture, they're like, every company has its unique thing. I'm like, maybe, but these are totally prescriptive. Like while you wait for your miracle unicorn metric, just fucking track these because it'll help you. Right.

Because generally speaking, no matter what business, it's like, okay, a lot of people are coming to the site, but what percentage of those are you converting to somebody that could potentially pay you or could create revenue, right? And then what percentage are you closing them? And then how much time does it take to close? Yeah. So it all kind of is prescriptive here. And then we had a question also from Ayesha. I hope I'm pronouncing that correctly. Is asking, you know, so you mentioned here LTV to CAC and for anybody in the audience that doesn't know, that's lifetime value and customer acquisition costs. Yeah, pretty, pretty much most people in startups will refer to this as, you know, your unit economics, right? How much does it cost for you to acquire a customer? And then how much is that customer worth to you for the lifetime of them being a customer, right? So any benchmarks that you can provide there is what I actually was asking. And, you know, if you need to break that down, which you probably will, into Some of the major verticals. Yeah.

Yeah. Well, I think first you think about it as B2B versus B2C. So on a B2B side, typically you're gonna look for an LTV to CAC ratio of 5. So let's, let's call it— so give you an example of one of the companies I ran was Codefellows. Codefellows was a code training school. We would have students for up to 20 weeks. It was a $20,000 full boat thing. On average, their lifetime value was $16,600. My cost of customer acquisition was $1,580. So I had a CAC to LTV ratio of 11, which for B2B is amazing, right? If it's amazing, it also means you need to spend more on CAC, right? So your marketing spend needs to go up. So there's some heuristics on the— so that's a B2C business. We've got consumers that come take the class. So if you have an LTV to CAC ratio of 10 on a B2C business, you need to be spending more on your marketing side to get that LTV to CAC ratio somewhere in the 6, 7 range. If you have an LTV to CAC ratio on B2B, which, because typically your cost of customer acquisition is higher and your retail price point lifetime value is higher, you should be around 4 to 5. If you get above 6 and above 5, I would spend more on CAC and get my— increase my marketing to get my LTV to CAC ratio back down. Because there's also— you can get to a point where you don't spend enough. So know that that's the B2B and B2C heuristics on that. So the big thing, the catch here is most of us as founders are like, we're making our lifetime value in 3 years. Then the answer is no, make it 12 months. Cause otherwise you're going to overspend because you just don't know. And then as you have real data from your customers, if you get 13 months and 18 months out, you use 13 and 18 months, but don't guess it's 6 years because it's better for you. It's actually not better for you. That's just a dumb guess. Right? You need to get your ratios correct.

Got it. There are a couple questions too. You mentioned most of you are pricing your products too low. Yes, that was a common question I've seen in here. Can you elaborate on that?

Sure. So a whole workshop on pricing for sure. So the statistics, when we looked at the book, so, um, I went back and read 100 books a year for 2 years before I finished the book, Jonathan. So it's one of those weird—

because I wanted to use that— was that during COVID or was this pre-COVID?

I finished it. It was one year pre-COVID and one year, the first year of COVID and I finished it during COVID So, but I knew there was a bunch of books I wanted to credit too, and there's about 87 books in the bibliography. So, and there's some great books to go deep on, right? If you want to go deep on— there's two big things that happened. One was a pricing section was the thing that was the hardest one to find, which was really bizarre. And then the data shows that most startup founders don't change their pricing almost at all in the first 3 years, which is kind of frightening. So, uh, so from a pricing perspective, you should be able to look at it. We, we live with the anxiety of, um, oh my God, if I price too high, no one's gonna buy it. You should price it high enough that everybody's— you're getting good solid pushback, and then you can give them a promotion and give them 90 days free or 30% off for the first year. So again, pricing promotions are different, right? So the other thing is, um, we know our product and we know what the baby product it was to when it was an advanced product. So I could If you said, "Hey, Dave, send me a picture of Brandon." Jonathan knows my fam. I could send him a picture when Brandon was 5. He was a super cute kid. Today, he's 29 and plays the guitar in a metal band. He's got gauges in his ears and he's all tatted up. Both of them would be true, but one of them would be accurate. So how do you change your pricing over time? As you add new features, does that become a new product? Do you need to price it up? But systematically, I would say I would do a pricing committee that looks at the market conditions every quarter and then ask the question of, should we address pricing or not, and do it systematically. Again, I'm not saying you shouldn't change it every quarter, but for the most part, most founders, because we know that we know the MVP this came from, we're gonna price it too low and we're gonna wait too long to price it back up. So if anything, I'd say that's a great opportunity, both monetization and pricing. There are levers in your control. So probably going to the tiered pricing, probably addressing specific ideal customer profiles for sure.

Yeah, we couldn't agree more. It's also just, it's a lot harder to increase price than to do— or sorry, it's, yeah, it's a lot harder to increase price than to decrease your price, right? Sure.

Also, especially if you have like, I'm setting expectations for next year that my price— I'd rather say, hey, Jonathan, it's $10,000, but I'll give you $3,000 off and set your expectation it's going to go up next year. Yeah.

And especially when you're just at the early stages and you're trying to get feedback, If you put up a price that's way too low and they're like, oh, hell yeah, we're in, right? You're not getting the feedback. If you put a price that's too high, they'll say, you know what, this is too high and this is why you don't do this, this, or that, right? It's just, it's a mechanism to just get the important feedback that you need. Even if maybe you lose a customer or two in the beginning, the feedback is just as important.

I'll give you another example. A founder came to me and they're like, I'm on this board and Coca-Cola, they gave Coca-Cola a price and Coca-Cola came back and said, hey, we know we're going to raise your price in year 2, can you give us a different price? So we increased the price 50%, made it a 2-year contract and gave them a 3rd year option to extend for another 25% on top of that. They took the 3-year price, right? And the founder was like, right? Because again, we're thinking of it from the founder perspective, not from Coca-Cola's perspective or our customer's perspective. If they're getting great value, yeah, you can charge for it.

Yeah, it's all relative. And if you're just eating ramen and doing that stuff, it's hard to see what the value that you're creating is really, really worth. So we had a couple questions. I'm gonna get to a few more questions. We gotta go about 10 more minutes here, then I wanna let Dave go. He's been gracious with his time. Just to put another note in here, check out dkparker.com, everybody. Did register to this event, we'll send you a link to the video. We'll send you a link to these slides as well. Certainly was a lot of information in these slides, and I definitely encourage everyone to go back and really break it down, pick the right revenue models. And I think what was really great about those slides too, for each revenue model is like, look, these are the key metrics that really should be guiding your business, right? These are the ones that are going to not only be attractive to investors, but really just show you, okay, am I on to something here? Is this something that can actually be sustainable? So let's see here. We have thoughts. Moses is actually asking thoughts on a subscription plus marketplace. Do you know of any good examples that use kind of a mix of both of those? And yeah, just any thoughts on that for Moses.

Yeah, it's definitely a trend on the combination side. So originally combinations were services plus subscriptions, like the example that I gave for Smartsheet. And then we're also seeing on the marketplace side, there's marketplace plus subscription for sellers. So the sellers get a different, a lower transaction fee. So the plus side is, is what you get. Again, Jonathan, you know me. So from a financial model perspective, it's like I have to put a number in a cell, right? I can't do hand-wavy stuff about it. I have to put a number in a cell, make a calculation and say, here's what I'm assessing. The nice thing about subscription revenue on top of that is giving me a base of revenue at a much higher multiple on a recurring forecastable basis. So if I have seasonality in my marketplace, right, I'm getting rid of the lumpiness and the seasonality by creating recurring revenue subscriptions. So if I think about a third of my revenue being subscription now, the value of that revenue is going to be 15 times where the value in the three— the 75% of the revenue is going to be about 3 times. So the value of that revenue in the mix is much more valuable from the market's perspective, from publicly traded comps. So again, the only reason I use publicly traded comps is for most cases, most of the startups aren't going to go public. You're going to sell to a publicly traded company. So there's a company that, you know, the CEO as well, Jonathan, he was one of our mentors in Seattle called Zipwhip. Zipwhip sold to Twilio. Another one of our founders from Founder Institute in Seattle started a company called Auth0. He sold to Okta. So in both those cases, I went back to both those guys and said, "Hey, it's not public how much revenue you were doing. It was publicly sold for $7.8 billion. Can I guess at the future 12 revenue of the company?" And both of them, they came back and I said, "Here's my guess on the revenue." Right? Because you could take Okta's revenue at the time or Twilio's revenue at the time and make a calculation based on that. And they both came back and said, you're plus or minus 10%, right? So the point is, is that now you have to be above $10, $15, $20 million in revenue before you can consider selling it at that point, right? So your concept isn't gonna sell for 20 times revenues, but if you have $10 million in revenue, it might sell for 20 times revenue. So the important thing is in the zero to one phase, go get to a million dollars in revenue. In the one to 10 phase, you're gonna have a whole different set of challenges. Right. But hopefully now you're scaling revenue. You're not inventing a new revenue model. You're just copying one and then following the playbook of people who've come before you to go try to copy that revenue model. Right.

100%. And Sam had a question here, and this probably relates to the multiple slide again, is, you know, is there any average time to maturity for these models? You know, or any thoughts you have on, I mean, definitely any of the models that rely on scale, right? Metered services, new media advertising, right? All ones that are going to rely on a massive amount of scale. So those are ones that will require maturity. And I think that that's what Sam is getting at here. A marketplace as well. Maybe, you know, you don't necessarily need scale to start making some revenue on a marketplace, but it is challenging because you have to build out both sides So you do have to build, get to that critical mass.

A lot of it depends on the average transaction amount too. So Pacaso is a marketplace. It got to an enterprise value of greater than a billion faster than any company ever because they're doing fractional ownership of luxury homes. So I mean, and that's Spencer Rykoff, who was the CEO of Zillow. So if your marketplace has super low transaction volume, that's a problem. If your marketplace is selling multimillion-dollar luxury homes, the answer is you get to market cap fast. So your variables here are my inputs have to do with pricing. They're kind of some of the same metrics, right? So if my average revenue is low, but my margins are high, that's okay, but not great. If my average revenue is going up and my margins are low, that's not great. So I want to be able to have one where I have some sort of sustainable margins over time as my pricing goes up. But if you're like, my first company, we grew from $0 to $42 million in sales in 4 years, but the margins were horribly low. So as much as the top line or what you would look at the gross GMV, gross merchandise value, oh my God, I hate those. All I care about is real revenue. I don't care about GMV at all. It's a vanity metric. So if you're making 1%, who cares? So you have to focus on the real metrics. And that's why I said GMV is a vanity metric for sure. So every time I have a founder with that, I'm like, stop talking about GMV, I don't care.

Okay. And then Omar's asking, and maybe this falls somewhat under what you might call a vanity metric or things that maybe you do or don't care about, but putting your investor hat on, how would you value— so you have the revenue, right? And there's multiples for that. How would things like IP, patents, trademarks, those types of things factor into some of those multiples in your opinion? Sure.

I mean, so we tend to think of a fast 4 and a slow 6. So we have 10 factors we look at in total. By the way, they happen to map to your 10 slides: problem, solution, market, go-to-market, you know, etc. So IP, it's interesting because it is a secret sauce that keeps other people out of your market at scale, but IP without scale doesn't really matter much to me. So because I could go to the tech transfer office at MIT or Georgia Tech or University of Washington and say, I want to buy tech transfer. And the answer is you have IP, but if you don't have go-to-market and a known customer, so mapping that IP to an ideal customer profile, that's the hard part. Right? So I need both of those things. So I'd refer you back to the early one that says, don't believe the memes, right? All this shit is important. You got to do them all and you have to do them all well to have an outsized return. So when we look at it, we're like, cool, that's defensible, but it's not in our fast four. My fast four, when we look at a company are— before I wrote the book, I would have told you it would have been team first and market second. I will tell you now it's market first and team second as a 1A and a 1B. And the reason is, is because even a great team in a crappy market is going to get a crappy result.

Yes.

But a marginal team in an amazing market could get you a blockbuster return. So as much as I care about teams and I would make it a 1B, market matters most to me. So market first, Team second, product third. Do the customers care about your product? Is it super sticky? And traction fourth. If you have those four things, I want to talk to you. If you have three of those four things, the answer is go get the fourth one and let's talk. Right? And then there's things like IP and financial model and go-to-market strategy, right? All of those things I care about, but I don't care about them if they don't meet the FAST FOUR. So our whole investment team, we score every deal on a FAST FOUR. If it doesn't get more than 12, we provide feedback to the founder and say, "Hey, you're light in this area. That's kind of what we require to take a look at the deal." And they're like, "Well, what about my—" And I'm like, "Don't care." Because what I've learned is if you don't have some sort of traction, and that doesn't have to be customers or revenue, it could be customer development interviews. If you've talked to 100 people and 72 said they'd buy it, tell me more. That's traction. And it's traction anybody on this call can go get. Before they spend a dollar on product. So today I would tell you I would rather spend $1,000 on advertising validating the idea or invalidating it before I would spend a dime on product. And people are like, well, isn't that disingenuous, Dave? I mean, you can drive people to a site that doesn't exist. It's an MVP. It still doesn't exist. So I mean, in your head it does. I'm just testing the advertising before I spend it on the other stuff.

Yep. Awesome. And then, yeah, I just— last question. So Cindy was asking, and this was too, it's like most times when people talk about what they look at, right? A lot of times, like, you'll just hear traction, traction, traction, traction, traction, right? But your list, you actually had it at number 4. Now, as you said, so a great market can pull a mediocre business up and make it insane, right? And there's no shortage. I mean, just look around, Google some of the the, you know, the most famous and most lauded entrepreneurs in the world, they're gonna have failed businesses too, right? It's not— the team is not always— can't pull a very, very challenging business where the market's just not ready, right? Or whatever. Like, even the best team in the world is not gonna be able to make that happen. What was number 3 on the list?

Just their product is number 3, and traction's number 4. I mean, we look at timing. Timing matters a ton. Timing usually is part of that is a little bit on the traction side. Do we think— we like nascent markets, markets that haven't happened yet. They're new and nascent. So when you see one, you're like, there's not a lot of proof points that your timing is right. We just have to believe your timing is right. So nascent markets are one of the things that we look at that says we like nascent markets because no one's ever succeeded there before. Now, if we're off in timing, we can be way off in timing because if you're too early, as you know, That's just way too expensive, right? And it can be fatal from the founder's perspective.

Right. Okay. Well, we have used a lot of your time. Thank you so much, Dave.

Good to see you, my friend. Anytime.

The feedback and the questions have been amazing. If anyone wants to follow Dave or check out his book, I highly recommend it. Just go to dkparker.com, as in—

what's your middle name, Dave? Well, it's actually William. It's actually K stands for Catherine, but yeah. And then I'll drop in my Twitter handle there as well. But yeah. So DK Parker is the family business, the LLC that we invest in companies and do that sort of stuff. So yeah. Thanks everybody.

It was a pleasure. Thanks so much, Dave. And everyone else, you will get a video and the presentation within the next 48 hours. Thanks everyone. Have a great day. Thanks again, Dave.