[MUSIC] What about subscription businesses where people keep sending a check other than Saas? >> So we've seen some of these in Europe. I mean, the big one in Europe I think is a company called Graze. They sell you a snack on, I think, it's a weekly basis, it might be a monthly basis. And it's like nuts and fruits, I'm clearly not the target market. But there is a target market that wants to eat healthy. They don't want to eat lunch and they want to get a snack pack that comes in over the mail. >> And they don't want to go to their local grocery store to buy the snacks? >> Yeah, the trouble is, you gotta buy a boxful of nuts, and a boxful of raisins and a boxful of trail mix, and it's just not as convenient. And there is some merit to having convenience, right? I think people these days pay more for convenience than they do for actual value if the convenience is truly something they want. >> So when you look at a business like that, you've talked about some of the key metrics. You need to figure out what it costs you to get a customer, and then you need to figure out how quickly that customer pays back that cost. What kind of numbers do you look for to know you have something that's kind of clicking? >> So I would say the average bar is probably at least three months of customer sign up should pay back your customer acquisition cost. The really great businesses pay back their customer acquisition costs on the first order, which means, because it's a cash flow issue, right? because you take this money, you spend it on marketing, you then acquire a customer. If it takes you kind of three months before you kind of get the money back in the bank, so you can then go off and get another customer. Unless you have a war chest of capital, you've gotta make that customer pay back his customer acquisition cost, his positive contribution margin, so you can acquire the next customer. If you can do it on the first order, I mean that's fantastic. >> Yeah. >> The danger of the first order is, the first order might be the only order. So it has to be a first order, but then it has to be a series of on-going orders as well. And a lot of that stuff is dependent on how big that order is, how big the margin is, what the recurrence rate is really going to be. But I think generally, three to six months of customer acquisition payback, if you have a war chest behind you, it's reasonable, yeah. If you're a young company, it's not so reasonable, right, because if you have a small amount of money, you spend it and you've gotta wait three months, six months, before you get that money back. You can't really grow very fast because you're constrained by your capital. And to be fair, those kinds of business are really good to get investment for. Because you understand the mechanics and that's where capital can really unlock growth. You're not taking any real risk in the business apart from the growth. >> Yep, so for an entrepreneur who wants to start one of those kinds of businesses, if they can find a way to get enough margin on order number one so that they don't need capital. >> Mm-hm. >> And then that customer comes back, they can show that customer comes back as they begin to read the cohort data over time. Then how quickly should a business like that come and say, gee, maybe it's time for outside capital. >> Yeah, so I think there are two things. So the first is the industry rule of thumb, and a lot of these businesses are marketplace businesses, right, where they're attracting customers and coming in. I think a lot of marketplaces start with about 15% of margin, right, because they're acting literally as a middleman in many ways. They're getting people to come through the door and buy something and taking a commission. 15 is usually going to be too low, if you're in the 20s, you're a lot better. If you're doing anything above 20s, you're in spectacular territory. It's very hard to get above 25%, because that gives you the capital to be able to pay for the customer acquisition. Then the question is, how quickly can you scale? And this is where it's a little bit tricky again. What tends to work in small numbers, you;re spending 100 pounds a day on Google. May not work when you start spending 10,000 pounds a day on Google. >> So you have to dip deeper into the barrel. >> because you get decreasing returns, right? Along with you don't get economies of scale in advertising, you get your- >> Diseconomies. Diseconomies, it's just the nature of the business. You cream off the good customers, and then it's the bad customers that are coming in through the door. So what you really have to show to an investor, that this is a linear model. It's probably not going to be a non-linear model, because given the nature of it. It can be linear, so in other words you can keep getting cream, but in order to do that, the only way to prove this is to spend. The problem is, not many people have [CROSSTALK] yeah. So what you have to do then, and it's an exercise for the entrepreneur more than it is for the investor because you have to convincingly be able to demonstrate this. What we found is people will take very high sums of money in very concentrated amounts of time, and show if they're spending 100 pounds a day they're going to spend 1,000 pounds but just for one hour. So they're not going to waste their time. And by then they can extrapolate and say look- >> If I spent a hundred- >> But if I spent a thousand in an hour, everything held or held pretty close. If I then spent it for 12 hours because I had the capital built. I obviously can't do that because I am a small company, but look the numbers kind of hold up so this will scale linearly. And I may get diminishing returns, but I won't get diminishing returns today, I'll get them maybe a year or two from now. Then you can kind of get people over the line, but that's the hard part. So then the minute you can show that that is definitively true. And with all, by the way, with venture financing there is no definitively true. >> [LAUGH] >> There's a hypothesis- >> Yeah, right. >> And you need someone to believe, right? If every single person, including the great firms, if every single person said yes to everything, the world would be a different place. Even the Airbnbs of the world get turned down by very good firms. So you need someone to believe that there is a hypothesis and it holds up at scale. And to some degree, the ones that work really well in marketplaces are increasing returns. The marketplace itself becomes more valuable and becomes more of an engine to attract both the customers as well as the suppliers, and the machine just works. And Uber and Airbnb, etc., are kind of examples of that. But you won't be able to prove that unless you have the money to be able to spend to get both sides. >> Yeah, what about pay in advance models where it's a B2B kind of sale. Do you do any of that kind of stuff? >> Yeah, we do and we try and encourage our entrepreneurs to think this way and it's really hard going. >> [LAUGH] >> So, yeah, I have one, it's a churn management software company. So it's an enterprise software company that helps you figure out which of your customers are going to churn, does it very accurately, it's like 95% accurate. It basically uses your social network to figure out if you have three, four, five friends who've churned off a service, you're very likely to churn. Friends tend to behave the same way, it's statistically true. So they've been talking to customers and I tell them go off and A, tell the customers to even use my software you've gotta pay me 50, 100, $200,000 worth of professional services. I won't even install the software for you unless you pay me upfront. This is, by the way, great for cash flow, right? Because you get this money up front and then you charge your customers for the service. It takes a little bit of conviction, a little bit of courage, to go to a customer and say, my software is so good. Just to be able to have the right to use it, you're going to have to pay me. And entrepreneurs are shy at asking for it. But the ones who don't, who are not shy, so again, we have a couple of companies who are not shy, this is what it's going to cost you. You want to get my product- >> You want to get your churn down? >> My product is excellent. Yeah, and what I'll do is I'll give you a refund. In 30 days, if my stuff doesn't work, I'll send you a check right back. I will refund you all your money. But it takes a high, and this is what I mean by selling, right? So your product has to work at that point. And you have to have a lot of courage to go in the door. But you can make it very low-risk, to no-risk, for the customers, especially, if it works. But asking for that upfront check, we find people are, they're shy. They don't like asking for money. >> So how do we get over that psychological barrier? >> You've gotta do it once or twice. And you do it once or twice- >> And find it works. >> Yeah, so the same entrepreneur I've been saying, I've been saying this for like eight months now, they just asked for, I think they're talking to a large sports company. They produce shows and put them online, it's one of the major leagues in the US. And they asked for a $200,000 check and the customer balked. And just again, it's a business, $200,000 to use me. They have a big churn problem for this one, they broadcast shows online. But the guy's willing to pay 25, now 25's probably not the right number. >> It's the beginning of a conversation, right? >> Exactly, so I think now that they've realized by asking, you don't get shown the door. You have a conversation saying maybe this isn't the price for me, let's talk. And you'll a happy medium, but if you can get that cash up front, it's huge from a working capital perspective. You don't need financing at that point. >> Yeah. >> You build your business based on your customers. Very difficult to do mostly because the model's not seen. >> Hussein, one of the very interesting companies in your portfolio was Deliveroo. Would you tell a bit of that story? [MUSIC]
