The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:06:56 · Matteo Franceschetti, Harry Stebbings
[00:06:56] S0: The biggest learnings is always on fundraising, right? You see how much they're raising at what valuation, what multiples, what investors, that's one. The other biggest lesson is for other companies that are still consumer to see channels, what channels work for them, or what markets work for them. [00:07:14] S1: What do investors not understand about hardware that they should? You're advising me. I'm your buddy. I have a fund, and I want to invest in hardware. What do you like, dude, before you do it, you should know this. [00:07:26] S0: Probably the founders in the first year of the company, or in the first probably, let's say three months, they don't fully understand what the cost of producing that device will be. They don't understand the return rate. And so everything they tell you about BOM and COGS will probably be off by at least 50%. [00:07:42] S1: Does CAC go down over time? It really depends. [00:07:46] S0: And so that is another thing you want to assess, which is word-of-mouth. In our case, word-of-mouth keeps compounding. We are around 40% of our revenue, even at our size, which start being really big, is 40%. 40% of your revenue, you say, is word-of-mouth? Yep. What's your second biggest channel? Then you start getting into paid media. [00:08:05] S1: And that's just Meta? [00:08:06] S0: Yeah, then it becomes Meta, Google, TikTok, and all those channels. [00:08:10] S1: Can I ask, how do they compare? I'm a hopefully specialist at this point. No one that I speak to has managed to make TikTok work. Have you?
00:08:10 · Harry Stebbings, Matteo Franceschetti
[00:08:10] S1: Can I ask, how do they compare? I'm a hopefully specialist at this point. No one that I speak to has managed to make TikTok work. Have you? [00:08:19] S0: We did. Actually this year, in the past six months. How? It's usually a matter of amount of content that you can generate with TikTok influencers. [00:08:28] S1: So it's about getting a UGC program in place? Yep. Is there a big budget for you tied to it? [00:08:33] S0: The way we usually approach these channels is we start unlocking a small budget per week. We start looking at the CAC, and we've set a cap to the CAC, and then they can deploy as much as they can within that CAC. But then as they prove it, they can deploy more money. So, to me, they could deploy 100,000,000 if they're within CAC, the cap of the CAC. The important thing you need to do regularly, probably every six months, is an incrementality test. And so we might turn off TikTok in certain states in The US or in certain geos, and we start AB testing what is the growth rate or is the revenue rate. So we wanna see how much each channel is incremental, because we don't look at the from the platform. We have our own models now that determine the CAC of each channel. [00:09:20] S1: Sorry, can you tell me about that? You have your own models to determine the CAC from each channel. Why is that?
00:09:20 · Harry Stebbings, Matteo Franceschetti
[00:09:20] S1: Sorry, can you tell me about that? You have your own models to determine the CAC from each channel. Why is that? [00:09:25] S0: Well, because you cannot trust that there will be an excess of attribution from the same platform. We do the same with Meta. If you look at the CAC on Meta, it's probably 20% lower than what the true CAC is. The And only way you can do it is by doing these incrementality tests. And so, let's say you pick two geos that perform similarly. Let's say you pick Texas and, I don't know, California. That is not the right example, but me. [00:09:49] S1: Dude, you're speaking to a Brit. That'll totally work for this example. [00:09:51] S0: And so, then you turn off Texas, and you start seeing what is the delta in performance of that state versus the other, so how much revenue you lose. So if they were both growing 50% year over year, and you start turning off meta in one or the other, you can immediately calculate the value of meta for that state. Does every brand [00:10:12] S1: need to have their own models to accurately [00:10:15] S0: Oh, it's 100%, because otherwise they just fool themselves. [00:10:18] S1: When did you stop? Because it's one of those ones which you can't do from day one. [00:10:22] S0: No. And you will screw up multiple times. And the point is you need to keep doing it because as you add more channels, the incrementality of each channel will not be the same. [00:10:33] S1: How did you think about that channel addition? Because I see so many founders try and be everywhere to everyone. How do you think about I
00:10:33 · Harry Stebbings, Matteo Franceschetti
[00:10:33] S1: How did you think about that channel addition? Because I see so many founders try and be everywhere to everyone. How do you think about I [00:10:40] S0: disagree with that. So you need to go one channel at a time. I was even talking to a common friend recently who was asking me about that, and say, Okay, can I go in all these channels? How much money should I put? Should I start putting 100 ks in each of them? And I say, No, no. You go one by one. You start with Meta. It's probably the biggest and the one that you should prove the fastest. And you start with, based on the size of the company, a certain amount per week. You set the cap to the CAC that you want to achieve, and then from there, you start scaling only if you are within CAC. Because otherwise, you start throwing money out of the window. Your growth people, they will always want to faster, and so they will always want to spend more, and then you start losing control. And what happens? Then, let's say, by the end of the year, you realize you screw up, and so you start pulling back, and then the following year, you're not growing year over year because you're spending less. And so you need to be disciplined now if you want to be successful next year and keep growing year over year. [00:11:33] S1: It's really interesting about how you kind of gamify growth numbers, because you're right, you spend, you get 400% growth, you pull back hard, you Good get 70 luck fundraising when you're going from 400 to We
00:11:33 · Harry Stebbings, Matteo Franceschetti
[00:11:33] S1: It's really interesting about how you kind of gamify growth numbers, because you're right, you spend, you get 400% growth, you pull back hard, you Good get 70 luck fundraising when you're going from 400 to We [00:11:44] S0: could be growing 50% more if we wanted year over year this year just by spending more, but then next year you're in trouble because your CAC is upside down. [00:11:52] S1: Do we care about economics from day one? You said there about start with matter. Do we care about economics from day one in terms of optimization? Or actually is it like, hey, customers are engaging, they're liking product. If we're doing a one to one, you know, for every dollar we spend, we're getting a dollar back. Great, or should we be looking for optimal returns early? [00:12:12] S0: Well, in our case, we look at immediate payback period. This is actually something where Keith was really pushy, and he was correct since day one. So he wanted us to have an immediate payback period, and then we have what we call contribution margin, so what is the margin on day zero? Then we have a subscription, and the subscription will compound on top of that. But we want to have that contribution profit on day one to be really healthy. If we were compressing that, we could be growing 50% more, but then the business wouldn't be public ready or as healthy as [00:12:45] S1: it is today. What would you most like to do if economics were not a part of your business? It could
00:12:45 · Harry Stebbings, Matteo Franceschetti
[00:12:45] S1: it is today. What would you most like to do if economics were not a part of your business? It could [00:12:50] S0: be massively increase the quality of a certain point. It could be pour fuel on the fire on that like never before. Take economics aside. Well, you could reduce prices, and I think we will see an acceleration, or you could just deploy probably more into marketing, which is probably what I would prefer. I'm never a fan of compressing prices. You know what Andreessen says, that if you have a great product, people will pay for it. But at our stage as a company, even if we start fairly large, brand awareness is still probably the biggest bottleneck. You have [00:13:21] S1: a subscription business as well, which obviously really provides a lot of juice to your margins. Because you have an upfront cost in the thousands, it's a relatively expensive product [00:13:31] S0: for a lot [00:13:32] S1: of people, do you just inherently have very low churn rates on your subscription product because you have the buy in of multiple thousand dollars invested upfront? [00:13:39] S0: Yeah. It's world class. Our churn is the lowest of any company you can think of. [00:13:44] S1: What is the churn? [00:13:47] S0: It's in the single digit, low single digit yearly churn. Even if you compare it to other companies in the wearable space that are going public, we are better than them. [00:13:58] S1: Who could that be? [00:13:59] S0: Who could that be? I don't know, dude. [00:14:01] S1: That's absolutely hilarious. Yeah. [00:14:04] S0: But it's world class. It's like unseen.