The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:22:47 · Luca Ferrari, Harry Stebbings
[00:22:47] S0: you find seller response to your pricing analysis? So we we don't really convince anybody to sell. These people are always adults, generally highly competent, intelligent professionals who have their own clear view of value. What we try to do is be quick and decisive in determining our price. We try to make an offer that's not a bluff, it's an actual very good offer and close to the maximum we are reasonably willing to offer. If they don't like it, we we walk away. But historically, we have never lost a process. Meaning, every single time there was willingness to sell and we had a chance to bid, because sometimes you don't get to know about the opportunity and you only hear about it after the deal is done. Every single time, to my knowledge, our offer ended up being the highest. One reason could be we're terrible negotiators. Another reason is because of our model and being so operationally involved and trying to improve the product, the operations, the marketing, the monetization, everything so deeply. It's a lot of work. You don't scale it as quickly as buying just from a financial point of view would, but you can unlock more efficiencies. And therefore, you can offer a better price. [00:23:57] S1: I'm I'm a venture investor for my sins. I quite enjoy financial engineering. When you think about, like, the the weight of capital, how do you finance the acquisitions? Is it on, like, raised capital? Now, obviously, you've raised. Is it on debt capital that then you have very low cost of capital on? How do you think about efficient use of cash for acquisitions?
00:23:57 · Harry Stebbings, Luca Ferrari
[00:23:57] S1: I'm I'm a venture investor for my sins. I quite enjoy financial engineering. When you think about, like, the the weight of capital, how do you finance the acquisitions? Is it on, like, raised capital? Now, obviously, you've raised. Is it on debt capital that then you have very low cost of capital on? How do you think about efficient use of cash for acquisitions? [00:24:14] S0: So that certainly is pretty, you know, common playbook. Equity for sure, most of it has been retained earnings. We have raised, I think, a remarkably little equity relative to our financials and our valuation. But really up until Evernote included, which is a year ago, I can... On first approximation, I can say that all what we have done, we have done through our own earnings and debt. Prior to Evernote, we had raised a little bit of equity, but it was almost immaterial in the grand scheme of things. Now, more recently, we have raised more equity, roughly $200,000,000 over the past ten months. But again, I think most of it is our own cash flows and and debt. [00:24:54] S1: When you think about the deals that you've done, have you mispriced any? And in the ones that you mispriced or misjudged, what did you not see that you should have seen or would like to have seen?
00:24:54 · Harry Stebbings, Luca Ferrari
[00:24:54] S1: When you think about the deals that you've done, have you mispriced any? And in the ones that you mispriced or misjudged, what did you not see that you should have seen or would like to have seen? [00:25:04] S0: There hasn't been a single one we have priced correctly. Thankfully, we have made mistakes in both directions. So sometimes things went better than we thought and sometimes they they went less well. Probably the most significant problem or or error we've made in the... Particularly from the the downside negative point of view has been to project future rates of user acquisition too optimistically. Of all the important KPIs in determining the success of a product, I would say rate of user acquisition is the hardest to project accurately by a huge margin. It's happened multiple times. At least once we were way too optimistic with that and the ultimately, the returns from the acquisition turned out to be much, much worse than we had anticipated. [00:25:49] S1: Why is rate of user acquisition so tough? I'm sorry to ask, but they tend they tend to be quite baked assets. You've got historical data. You've got very baked customer acquisition channels. Why is it so variable and volatile to predict?
00:25:49 · Harry Stebbings, Luca Ferrari
[00:25:49] S1: Why is rate of user acquisition so tough? I'm sorry to ask, but they tend they tend to be quite baked assets. You've got historical data. You've got very baked customer acquisition channels. Why is it so variable and volatile to predict? [00:26:02] S0: I think it depends on a few factors. One is it depends on more drivers than other key inputs to the success of a product. And these drivers tend to be outside of your control more than drivers that are behind other key factors. Basically, if it's an equation, you have more variables and you control them less. And so your ability to then force the future the direction you want it to go is lower. When you make a mistake there, you generally you don't have a an opportunity to to fix it. Whereas in other cases, maybe you thought something... You could you could achieve something and you thought it would be easier. It turns out to be harder, but you can go the extra mile, allocate a few more resources, somehow you get there. But if the rate at which you're acquiring users isn't where it needs to be, often there isn't much you can do. I mean, can spend more in advertising, but you're gonna lose money. Otherwise, you would be spending it already. Right? So the problem is you can't find ways of acquiring users efficiently and that has to be the end of it. Do you [00:27:04] S1: find scale network effects? And what I mean by that is given the portfolio of products, there's cross promotion, referrals, the ability to increase one's distribution.
00:27:04 · Harry Stebbings, Luca Ferrari
[00:27:04] S1: find scale network effects? And what I mean by that is given the portfolio of products, there's cross promotion, referrals, the ability to increase one's distribution. [00:27:14] S0: Not a factor. Maybe it's because we we we have failed to leverage it, but no no value coming from that. [00:27:20] S1: In the one that worked out really well, what were the lessons from that? We spoke about kind of the challenge of predicting user acquisition. In the one that went to the upside, what was the lesson from that? [00:27:30] S0: Yeah. There there are some small tactical lessons. The bigger lesson is acknowledging the incredibly high level of unpredictability of some of this and bake in appropriate safeguards, particularly a sufficiently large margin of safety. So that when you are wrong, long as you're not massively wrong, it doesn't destroy you. Maybe you won't be happy with that investment, but it doesn't destroy you entirely, and you can move on to live to fight another day as they say. [00:27:56] S1: How do you build margins of safety? Is that in diversification of product lines? Is that in pricing?
00:27:56 · Harry Stebbings, Luca Ferrari
[00:27:56] S1: How do you build margins of safety? Is that in diversification of product lines? Is that in pricing? [00:28:01] S0: Well, that helps. Yeah. Probably wanna do it both on the individual, let's say, capital allocations, for example, an acquisition, but the same concepts would work if you allocate capital in r and d marketing because, know, that's... That that is still cash. It's no less real than if you buy a company. So you probably want to bake in a good margin safety as you do that. And then, naturally, if you have a broader portfolio of initiatives, whether it's multiple products like we do or, you know, multiple r and d projects, then you're further projected. Statistics are are on your side. But risk assessment and mitigation is a fairly complex topic. I think it... We could talk about it for hours. [00:28:37] S1: What do you know about risk and risk mitigation today that you wish you'd known ten years ago?