Forecasting Out

In the business of financing technology businesses, one of the most tricky areas is how you treat the forecasts in the pitch decks.  Typically, you are taking a very limited, usually heavily biased, data set and using it to provide a baseline for forecasting a much longer trajectory.  If you are familiar with probability, you’ll know that while this is possible, the result will have a very low confidence level.  Therefore, you need to discount these forecast very, very heavily.

I was reminded of this when I read the Bloomberg New Energy Finance press release on Electric Vehicle sales forecasts.  The headline is that Electric Vehicles will Accelerate to 54% of New Car Sales by 2040.  I a sure there’s sound methodology behind this work, and the resulting graph looks great:

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Now, please consider that Tesla Roadster, the first street-legal, serially produced EV with a viable range was introduced in 2008. When you are taking a 1% market share figure and growing it to 54% over 25 years, a tiny variance in that slope can end up with a vastly different figure.

As a VC, you come across enough forecasts to intuitively discount the out years.  This is not really a science but more of a sense.  However, it can make a massive difference in the eventual exit size and how much capital the business may end up consuming.

Bezos Day 1 Letter

bezosIf you are a founder, please read Jeff Bezos’s letter to Amazon shareholders.  He does a great job of distilling why it’s so difficult to build a great company.

What he describes as a Day 2 company would include the majority of businesses around us, including many market leaders.  He describes Day 2 as sometimes taking decades – extreme slow motion.

It is very, very difficult to stay in Day 1 mode.  I am not even sure Amazon’s succeeding there, as it’s also tough to tell.

However, customer obsession is one way you can try to stay in Day 1 mode, and avoiding proxies and celebratory narratives will help you along the way. However, it won’t help you feel good.

Entrepreneurship rarely feels good.

Online Retail Turning a Corner

E-commerce concept image

We have a love-hate relationship with online retail companies.  My partner Evren is the founding investor at Trendyol, Turkey’s online fashion champion.  We have backed Vivense, the leading online seller of furniture that is growing rapidly with healthy metrics.  Trendyol is now one of the biggest Turkish tech success stories and Vivense has become the leader in its focus area of hard furniture.

Our experience, laced with blood, sweat, and tears, has shown us how difficult it is to build a sustainable and healthy online retail business, and we have also passed on a very large number of online retail startups.

Recently, I am sensing a change in how the world views online retail. In the recent months, we have seen some major moves in the sector:

  • Emerging Markets conglomerates are investing into retail e-commerce.
  • Amazon has made a rare market-entry driven acquisition in MENA.
  • The leading local e-tailer in India, Flipcart, has raised a massive new round is rumored to be contemplating buying its largest local competitor, Snapdeal.
  • Walmart paid $3b for, which, at the time, was little more than a large repository of know-how and ambition.
  • Unilever acquired DSC for $1b, showing the potential in smart vertical integration in certain e-commerce niches.
  • It finally looks like Birchbox is profitable (read: perhaps sustainable), providing new hope for subscription models.
  • Trendyol is now nicely profitable, without compromising from its rapid growth.
  • Leaders like Amazon (generalist) and Zalando (fashion specialist) are trading at all-time highs.

I think these headlines are a sign that strong execution, operational excellence, and adequate funding are coming together in select pockets to show that retail e-commerce can work.


simpleWe get approached by ~1200 companies per year and spend some time with about 400 of them.  One of the key filters for us to identify opportunities we may be interested in is how quickly we can grasp the basics of the business’s economics; i.e. how value gets created.

In most cases, the best way to observe this is the income statement.  That is why it’ s important to show some granularity primary line items in the income statement. Viewing the income statement across a meaningful time span, you can start connecting the dots and get a feel of how the business creates value.

However, in some cases, we look at income statements in which the value chain is not obvious.  We view this as a bit of a red flag.  We try to work with the founders to dig and understand the value drivers, but experience shows that if a founder is having difficulty explaining the fundamental economics and the way value is created within a few lines on her business plan, it’s likely that their model is flawed, or worse, they don’t fully understand it themselves.

Warren Buffett warns that a business you invest in should be simple and understandable.  We agree.


Startup Selection Bias

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It is not sexy to write about the $40m acquisition of an 8-year old company with $4m EBITDA. The headline about Snap’s 60+ P/S ratio gets more attention.

The entrepreneurial mythology is full of epic stories, such as those of Apple, Google, Facebook and Amazon.  Yet, the reality is much more boring, as represented in this chart. The selection bias around what you hear about is a trap in the entrepreneurial journey.

We frequently find ourselves in valuation discussions with founders where we think the asking price for the round is expensive.  What keeps us grounded is the data represented in the chart above.  Mind you that the exit sizes in Europe, and especially, Emerging Markets are lower than the global figures.

As an entrepreneur, you would be well-advised to keep in mind that your exit will likely be smaller than what you read about.

Mobile User Characteristics


Mobile first emerged as a favorite buzzword, as penetration and traffic patterns have made mobile optimization and native apps must-haves for almost all consumer-facing businesses. However, mobile comes with its unique characteristics when it comes to customer behavior.

Here’s a quick take on these distinct characteristics:

  1. Limited Real Estate. With no search gateway like Google, you are constantly reminding your user to ask herself whether she’d like to keep your app on her mobile or uninstall.
  2. Low tolerance. The product performance expectations are very high for responsiveness and accuracy. If you disappoint, you lose users.
  3. No returns. When a mobile user clicks away from an app, there is no back button, so it’s usually an exit, not a detour.
  4. Low attention & multitasking. App usage is usually an activity that accompanies another one, such as commuting, waiting for a meal, or sitting in a meeting.
  5. Targeted usage. When a user fires up your app, she usually has a specific thing she is looking for. Social apps are an exception to this.
  6. Shorter sessions. The engagement time of mobile users is about half that of web users.

Numbers, not Percentages

“The company has been growing by 120% YoY.”

We see similar statements in announcements, press releases and pitch decks everyday. The moment I see percentages, I start thinking about what the company is trying to hide. Most often, it is the fact that it is still tiny.

I can understand this when it’s a general announcement.  You want to get the public’s attention amd impressive numbers (even if they are just percentages) rend to achieve that goal.  For B2B ventures, you may not want to remind your clients that you are still very small, so you try to direct attention to growth rate rather than size.

However, when you are talking to investors, I hoghly recommend disclosing absolute numbers early on. Of course, momentum is important. But, so is size and scope. At least expressed as an order of magnitude.