Some ideas that are too short for their own essays, part 2
See part one here.
Rather than setting a company's burn based on their growth rate (as would be suggested by the so-called "burn multiple"), companies should consider instead setting it according to the retention characteristics (gross & net) of their business. Companies with stickier products can tolerate higher burn in the early/mid years of growth, because they're building a more reliable annuity of cash flows on the back end, and therefore have much higher operating leverage. Conversely if you turn up the burn in a company with terrible retention just because it’s in hypergrowth, you are likely committing business suicide.
Adding to the prior bullet -- "burn multiple" is an incredibly crude metric that is almost entirely unsuitable for planning and managing a business. It's better to think of it as an investor heuristic rather than an operating metric. If you plan to manage by it, at least watch it monthly or quarterly, not annually.
Many founders are seeing the sorts of terms that investors are willing to pay to invest in their startups, not liking the numbers, and interpreting them as an indictment of their entrepreneurial acumen. Taking this personally in the current environment is really not helpful. Snowflake is worth barely more than half of what it was worth 3 years ago despite revenues now at 4x what they were at that time, but it would be a mistake to say "they've created no value over that timespan". Remember: Price is what you pay, value is what you get.
You can do everything right in an SMB software business (great product, great team, great culture) but if you screw up customer onboarding, your company will definitely go bankrupt.
The best reason to have "a good pulse on the market" is not to blindly follow trends, but rather to identify collective misjudgments, i.e. mispricings. A favorite "buy" signal is when everyone on #fintwit starts calling a company a "shitco."
LLMs use statistical techniques on huge text datasets to determine what the next word or phrase should be within some larger expression. Am I the only one here who is unclear on how exactly my own human language faculty is more sophisticated than this? The cow jumped over the ______, right?
People who work in financial markets use the word "uncertainty" exactly backwards. When valuations are low, people say that things are "highly uncertain". But in actuality what has happened since prices went from high to low is that you've gained certainty -- prices are certainly lower than before, and future returns are correspondingly higher! -- not lost it. Conversely, when prices are high, it would be silly to say that things are now "highly certain". Investors were highly certain in November 2021 that technology stocks would rise forever, but that certainty didn't prevent them from being completely 100% wrong. So really, "uncertainty" in this context just has to do with how certain they feel (i.e. overconfident or underconfident), not how certain they actually are.
The success of an investing firm in taking the right kinds of risks is inversely proportional to the amount of people in the room who can veto a deal. All of the strongest-returning investments we've made at Toba had at least one major risk factor that could be identified heading into investment committee. If we abided by a culture where numerous people each held a unilateral veto on the deal, we'd have never made a single great investment. You want an investment culture where risks can be identified and managed; not one where a single risk is disqualifying.
The question isn't how fast a company is growing this year or next year. It's how durably it's going to be growing 5 or 10 years from now.
"People default to benchmarks as an excuse to turn off their brain — 'What do the benchmarks say?'."
9, 10 and 11 🔥🔥🔥