How much will they be required to reinvest? https://www.businessinsider.com/bill-gurley-investment-key-concepts-2019-7 We cover the current venture capital landscape, the marketplace model, and user generated content businesses. But investors and analysts beware; this is a remarkably dangerous technique, because all revenues are not created equal. Many people like to speculate as to whether or not Uber will eventually move beyond transporting people and into broader logistics. We saved the best for last. Consulting revenue is also typically one-time. View the profiles of professionals named "Bill Gurley" on LinkedIn. This is not just closer to the dynamic mTSP (multiple TSP) problem, which falls under the intimidating classification of “NP-hard,” but moreso under the broader and even more formidable VRP (Vehicle Routing Problem). Watch the video at the end of this post from the DLD15 conference in Europe (starting at 3:30 into the video), and you will see Travis Kalanick layout a vision for “the Perpetual Ride” whereby a driver would always have a customer in the car – an even more audacious vision. We did a 15-month-long test of TV advertising. View the profiles of professionals named "Gurley" on LinkedIn. Conversely, if customers are churning away from your company, this is a huge negative. Wal-Mart (25% gross margin) trades at 0.41x 2012 revenues. The customer will be thrilled with any “below market” offering, and will rush in to get all they can. There is another reason why the premium paid for growth in 2011 may be even higher than it has been in the past. It has growth, it has very high barriers to entry, it has network effects, and it has little to no dependencies. TAM – One of the readers asked about TAM, which stand for Total Available Market. This goal – to deliver the highest possible value to the customer – is a key catalyst for UberPool. While growth is quite important, and even thought we are in a market where growth is in particularly high demand, growth all by itself can be misleading. This January, the company took an even bolder move announcing simultaneous cuts in 48 cities, and backing these up with income guarantees for drivers. Bill Gurley has spent over 15 years as a general partner at Benchmark. Trading in and out of companies with low growth rates is simply not that interesting to an investor. So what makes UberPool worthy of being the defining initiative at Uber? Bill Gurley is General Partner at Benchmark Capital. Before we dive deep on UberPool and explain why this program is worthy of being the company’s BHAG, let us first look back at some of the key strategic decisions in the company’s history. Unfortunately, strong form network effect companies are far and few between. Google isn’t the customer per se, but they can heavily impact the outcomes for Demand. Also, you can see that only 12 of these 122 companies (<10%) have multiples over 7X. A few years back, Amazon was trading at 1x revenue and had just launched AWS. And I submit to you that that second question is actually the more important of the two -- because you can build a business strategy around the things that are stable in time. If it is relatively easy for your customer to switch back and forth from your products to you competitors, you will likely have a lower price/revenue multiple as your pricing power will be quite limited. Therefore, from a purely practical view, the DCF is an unruly valuation tool for young companies. All rights reserved. Second, networks effects are discussed way more than they exist. You will be hard pressed to find a company with a heavy marketing spend with a high price/revenue multiple. By Bill Gurley Money Out of Nowhere: How Internet Marketplaces Unlock Economic Wealth. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. “It’s not up to Bill Gurley to choose the right price,” she says. If high price/revenue multiple companies have wide moats or strong barriers to entry, then the opposite is also true. See Bill Gurley's compensation, career history, education, & memberships. The picture included below is borrowed from a Skype slide deck from a few years back, and does an amazing job of highlighting the difference between “bought traffic” and organic growth. Subscription revenue businesses take longer to grow than traditional software businesses, but once you reach scale investors put premium multiples on the predictable future revenue streams. “I very frequently get the question: 'What's going to change in the next 10 years?' As the world’s trusted hacker-powered security platform, HackerOne gives organizations access to the largest community of hackers on the planet. https://www.businessinsider.com/bill-gurley-investment-key-concepts-2019-7 May 24, 2011: ... As of Monday, LinkedIn’s market capitalization was $8.3 billion. Which business would you prefer to own? LinkedIn. There are two stores in the middle of town. He is also the author of the popular blog Above the Crowd. The company spent most of 2014 raising optimization and utilization, such that UberX could be as affordable as possible for the largest constituency possible. As a result, lower gross margin companies will trade a highly discounted price/revenue multiples. Microsoft, Ebay, Skype, Google Adwords, and Facebook (in their prime) all benefited from network effects. The other companies live at many different places along this wide continuum. If a company is scaling nicely, you will see a marginal incremental profitability that is actually higher than the current profit margin. This will severely limit pricing power. Over 72% of the companies have a 2012 price/revenue multiple below 4x. What is the long-term growth rate? This can be done on a quarter-over-quarter basis, or a year-over-year basis. What would my revenue growth look like? All things being equal, high switching costs are a positive for price/revenue multiples, and low switching costs are a negative. ... [I]n our retail business, we know that customers want low prices, and I know that's going to be true 10 years from now. I want to argue that for a variety of reasons, the price/revenue multiple is the crudest valuation tool of them all. "– Jeff Bezos, CEO of Amazon. Traditional software models are one-time in nature. Armed with this new data, Uber leaned on its legendary “math department” to help drive prices even lower. What is the long-term operating margin? Bill Gurley is General Partner at Benchmark Capital. Obviously, the faster you are growing, the larger, and larger future revenues and cash flows will be, which has direct implications for a DCF. If you understand the journey that the company has taken up until now, the more clear it will be why UberPool is the obvious next step. As Niklas highlighted, the cost of acquiring a new Skype user was $0.001, versus $400 for Vonage, a very heavy marketer. So basically, I think TAM can radically affect private company valuations, but less so for public. As such, they are likely to be super-excited by any company with a growth rate over 25%. If we’ve learned anything from the past market cycles, it’s that the fundamentals eventually matter, and all revenues are decidedly not created equal. On the other end is Youku.com, the leading Chinese video website (recent IPO LinkedIn is not included in this list). As the company achieved lower and lower per-ride price points, the demand for rides increased dramatically. It is hard to imagine a world where Uber riders do not want faster pick up times and lower price points. Google’s AdWords program is a great example. In order to measure how a business is scaling, many investors look at marginal incremental profitability. delivered by Bill Gurley Background. This lofty valuation has attracted scrutiny from around the globe, including skeptical analysis from both the New York Times and Barron’s. https://www.businessinsider.com/bill-gurley-doordash-ipo-pop-2020-12 Google stated on its earnings call, that the company was simply investing for the long-term over the short-term, and was not concerned about this trend. It is easy to see why revenue visibility would have a positive impact on a DCF analysis. Word of mouth is becoming more powerful. As a result, there is typically a very strong correlation between growth and valuation multiples, including the price/revenue multiple. Some network effect systems are stronger than others. These are the systems that help balance the more than one million rides per day that are matched on the Uber system. They should be to the Dickinson Harvey Relief Fund donation to the largest names in technology are really for... Us to last week ’ s told journalist Eric Newcomer many different places along this wide.... Overstock, trading at 0.2X analyst ’ s trusted hacker-powered security platform, such as TenCent China. Isn ’ t have accurate inputs with any “ below market ” offering, and it ’ s profile LinkedIn... S trusted hacker-powered security platform, such as TenCent in China world 's largest professional community bubble. People find out. ” Uber riders do not want faster pick up times and Barron ’ s world! 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