Slug: business-model-wall-street
Title: A business model that kicks ass, according to Wall Street
Category: Il n'y a que la maille qui m'aille
Tags: business
Date: 2018-09-05
Summary: What makes a company's actual value according to investors
Lang: en
Status: draft

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When you consider creating a business with the will to ensure the
sustainability of a project and being able to eventually live off it as your
main goals, you start asking questions you would not have asked in the first
place, such as that of the _business model_, or more clearly phrased : _how to
make big money out of it ?_ Unless you were born in a rich family or a recent
lottery winner, that usually comes with the question : how to convince
investors ?

... which I can not answer yet, but there is another one that comes to mind
then : what makes an investor get interested in one company and not another ?
Which brings yet another quest... kidding, this is finally the one I will
talk about in this article.

I will achieve this by exposing the view of one of the most recognized investors
in the high-tech field, Bill Gurley, general partner in one of the most
important venture-capital companies in the Silicon Valley ; a company that made
the headlines a little more than a year ago by
[getting the head of Uber's CEO][benchmark-uber].

(Don't run off just yet, anti-capitalist friends, it's interesting to know the
enemy !)

[In an article he posted a couple of years ago on his blog][10x-club], Bill
Gurley listed 10 criterias he applies when choosing his investments, and that,
according to him, make all the difference between the next Google and the 250th
company that mixes artificial intelligence and blockchain technologies within
a disruptive innovation modal that will allow their customers a vast choice
of green B2C services with a marginally superior ROI with regards to
the competition.

Those 10 criterias are not devoid of common sense ; he even mocks some of his
fellow investors for focusing exclusively on short-term figures with no consideration
for the long-term truth that can hide behind them ... not exactly an unheard-of
criticism !

# A sustainable competitive advantage

It's one of the most important criterias. If you come up with a web search
algorithm that returns highly pertinent results when you need to go through
30 links in your competitors' search results before hitting a valid result, you
end up in that category. If anyone can do just the same as you as soon as
tomorrow morning, competition will be tough.

# The presence of network effects

A network effect is the effect a customer has on the value of a product or
service for other clients, just by using it. That effect can occur either
between clients of the same kind or betweem different kinds of clients.

It will seem clearer with two basic exemples. If you subscribe to a social
network and find you are by yourself, you might get annoyed rather quickly
(except if you love talking of yourself to yourself) ; having one of your
friends subscribe will make the experience a bit nicer ... and it will get ever
better when more friends subscribe. A typical exemple of the cross-side network
effect is that of a credit card ; owning a credit card you cannot use is any
shop is rather annoying ... the more shops allow you to use that card, the more
interesting it gets to own that card. It also goes the other way around : the
more people own that card, the bigger the incentive for shops to subscribe to
the service that allows using that card.

All in all it is a nice feedback effect, which means the more customers you
have, ... the more customers you will have.

# Visibility and predictibility of future income

A company whose income perspectives are guaranteed, stable and predictable has
a natural attractive potential to investors. If the whole success relies on
a buy-once product which has no follow-up, the company's future seems
compromised.

As a general rule, income that relies on subscription is much more
interesting in the long term than income that relies on one-time payment ; which
is the reason why lots of software editors have switched to subscription models.

# Customer lock-in and high-switching costs

It comes as a logical next step to the previous point ; ensuring that customers
remain forcibly faithful obviously gives a company a huge advantage on another
one that lets their customers easily switch to competitors.


# Gross margin level

Gross margin is expressed as a percentage of the income that after the cost
of goods sold has been removed. Its computation varies from sector to sector,
but it's usually drawn from the additions of all costs that account for the
production and distribution of a product or service : potential purchases,
administrative costs, ...

The higher it is, the greater the margin for maneuvering, and the more
important the potential net profits.



# Marginal profitability


# Customer concentration

A company whose income depends on a handful of big customers is obviously very
sensible to their future decisions, and also depends on their financial health.

# Dependency on a major partner

# Organic demand

# Growth


[benchmark-uber]; https://techcrunch.com/2017/08/10/benchmark-sues-former-uber-ceo-travis-kalanick/
[10x-club]: http://abovethecrowd.com/2011/05/24/all-revenue-is-not-created-equal-the-keys-to-the-10x-revenue-club/
