Comparablesis in the Data as a Service Industry

Comparables

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Public market investors are facing high inflation, low yields, and volatile markets. Even those who diligently followed the "gold standard" portfolio allocation of 60% stocks and 40% bonds suffered one of the worst years in recent history. In the search for yield, there are now countless options to choose from. An ease in regulatory restrictions, the growth of tech-enabled investment platforms, and even a growing number of accredited investors are all contributing to the rise of alternative investments. One such option is investing in art and other collectibles, like fine wine and luxury cars. But before you invest in these types of assets, it is important to understand the associated risks. Higher Taxes The highest tax rate on long-term capital gains is 20%. A married couple needs to earn over half a million dollars a year to be taxed at this rate, and most are taxed at 15% or less. In sharp contrast, the capital gains tax on the sale of a collectible, if it appreciates in value, is a whopping 28%. If you sell a collectible in less than one year, it will be taxed as ordinary income. In other words, your tax bill could easily be twice as high as it would be for private equity, venture capital, or other investments. Higher Fees Exacerbating the tax issue is the fact that fees associated with investing in collectibles can be significantly higher compared to other investments. Investors in collectibles have to pay for authentication, appraisals, storage, insurance, broker fees, shipping, and more. Collectible-investing platforms pass these costs onto investors. For instance, Masterworks is a leading art investing platform that charges a , as well as a 20% fee on any profits. 150 basis point annual fee Vinovest, the wine investing platform, charges an even more extreme on its starter plan. 285 basis point annual fee In comparison, Gridline is a leading alternative investments platform that charges a management fee of annually, depending on your assets under management. 50 to 100 basis points Let's illustrate the impact of those fees with a couple examples. Suppose you invested $100,000 in art. After one year, and the application of a 150 basis point fee, your investment is now $98,500. If the art appreciated in value by a strong 10%, your investment would be worth $108,350. After a 20% profit fee, you'd end up at $106,380. Finally, let's apply the 28% collectibles tax on your $7,880 gain, and you'd be left with $104,174. Or, suppose you invested $100,000 in wine. After a 250 basis point fee, your investment is worth $97,500. If the wine increased in value by 10%, your investment would be worth $107,250. If we apply the 28% collectibles tax on your $9,750 gain, you're left with $104,520. Now, suppose you invested $100,000 in private equity instead. After one year, and the application of a 100 basis point fee, your investment is now $99,000. If the private equity fund appreciated in value by the same 10%, your investment would be worth $108,900. Applying the 15% capital gains tax on your $9,900 gain, you'd be left with $107,415. That's a nearly 80% higher return than investing in art with the same appreciation rate, and more than 60% higher than investing in wine. As you can see, the fees and taxes associated with collectibles significantly reduce the amount of money you end up with. Lack of Information and Comparables A strong private market investment is built on a foundation of data and hard evidence. selection process Professional screening tools are needed to analyze performance to public market equivalents and compare a fund’s performance to a customized peer group of funds with similar investment styles. This kind of data-driven strategy is key to evaluating and selecting the right private market investments. But when it comes to collectibles, this analysis is not always possible. For example, how would you compare a Van Gogh to a Picasso? While businesses are valued based on quantifiable metrics like earnings and cash flow, collectibles are often valued based on hype and emotion. The Risk of Damage Speaking of Van Gogh, climate activists have recently attacked many of his paintings, including "Sunflowers" and "Peach Trees in Blossom." Dozens of other works of art have been recently damaged in acts of protest and vandalism. Collectibles like wine and whiskey are even more . In one case, a warehouse mishap resulted in the loss of around $700,000 worth of premium wine. susceptible to destruction In another case, a Manhattan wine merchant accidentally dropped a $500,000 bottle of 1787 Chateau Margaux. In comparison, you can't destroy a business by gluing your hand to it or accidentally dropping it on the ground. Takeaways At first glance, investing in wine or art may seem like an exciting way to diversify your portfolio and generate returns. But, as with any type of investing, it is important to understand the associated risks. With significantly higher fees, taxes, and a lack of information and comparables, the return on investment in art and other collectibles is often lower than expected. Additionally, there is always a risk of physical damage to the asset, or even counterfeit pieces entering the market.

The Risks of Platforms For Investing in Commodities and Art

The 409a valuation refers to a set of processes and standards for determining the fair market value of a company's stock. The mandates that a company must have an independent, qualified appraiser determine the company's fair market value. In order for an appraisal to be accepted by the IRS, it must meet certain qualifications. While backsolve is a method is a valuation approach to determine the value of common shares. In this article, we will look at how this method of valuation is handled in a 409a valuation. Internal Revenue Code Understand backsolve method and 409a valuation The approach is in which an appraiser calculates the fair market value of organizations with complex capital structures where there have been no recent common stock transactions. The appraiser generates several potential value drivers and runs them through a series of calculations to provide an estimate of fair market value. backsolve method of valuation The uses the backsolve method simply because most companies have complex capital structures. The IRS qualification for using the backsolve method in 409a valuation is that the appraiser must have specialized knowledge in undertaking the valuation. 409a valuation Why is getting a 409a valuation important? The IRS uses 409a valuations to make sure that a company is issuing stock at the current fair market value. The value of a private company's common stock is not readily available since it is not listed on a public stock exchange. The IRS has issued rules and guidelines requiring a for determining FMV at the grant date. Using an independent third party to determine the fair market value of a company's common stock every 12 months is one way that the company can ensure that the IRS believes the stock's value is fair. "reasonable method" In non-fulfillment of their obligations, the company could be subject to severe penalties. However, it is important to note that the backsolve method is one way of valuation; it is not the only way. Companies may also utilize other methods such as discounted cash flow calculation. Therefore, getting 409a valuations is a great way to ensure that the company is compliant with IRS standards. Why do businesses need to backsolve methods to value equity compensation? The business valuation with the backsolve method can be useful for evaluating early-stage companies with less operating history. It can offer a reliable indication of the value of a company's common stock, even if the recent investments have been in preferred shares. The backsolve method makes it simple for directors to easily understand the fair market value of their company's when it comes to equity compensation. Here are two main reasons why backsolve method is used to value equity compensation: equity compensation The board can ensure that the company is issuing stock at fair market value. Provides a fair price for employees who participate in the stock compensation. Therefore, backsolve method is a great tool for valuing equity compensation for a company that has a complex capital structure. Advantages of backsolve method In a nutshell, backsolve method is a proven method for valuing companies with complex capital structures. The backsolve method of valuation presents a high degree of precision in determining the . The advantages of using this method of valuation are as follows: value of stocks The reliability of the backsolve approach is high since it uses recently completed transactions in order to create a fair market value estimation. This means that the backsolve method makes it easy to find comparables. It is easy to value equity compensation with the backsolve method as it only requires historical data and a few adjustments for the company's current circumstances. The backsolve method is also more robust than other methods of valuation. This method is beneficial for companies having complex capital structures because backsolve method does not require any equity transaction history. This makes it a more efficient option for valuing the stock of such companies. Thus, backsolve method of valuation is an effective and efficient way to ensure that the company is compliant with IRS standards. How does backsolve method work for the 409a valuation? The backsolve method has a number of rules designed to ensure it provides accurate results. The first step is to estimate the company's value based on a number of factors, including financial forecasts, management estimates of future earnings, recent sales, and the company's market capitalization. Next, you have to construct an option-based valuation equation for the company's equity. Estimates are based on a number of factors, including risk associated with the company and the potential time period to exit the market or known as liquidity. Following this, the latest transaction is used where the pricing data is assembled. This data must be appropriate and up-to-date and should not be older than one year. In addition, no changes may have occurred in the company since the last transaction that could have influenced the company's value. In the end, you need to use the backsolve technique to estimate the common relationship that is related to all the distinct securities (total equity value). Once the backsolve technique is used, a formula is generated that estimates the fair market value of a company's common stock at the date of grant. The resulting value can be then used to determine the cost of stock options if the company does not have a readily available share price. Common methods businesses use for 409a valuation Businesses should be aware that there are a variety of methods that are available for valuing equity compensation. In order to make a fair determination, organizations should utilize a method that provides accurate information with the least amount of errors. Following are the top 4 methods for 409a valuation: - The backsolve method has been around for a long time and is a highly reliable strategy for 409a valuation. It is one of the most widely used methods for 409a valuation and one of the most trusted. This method is ideal for companies that have a complex capital structure and need to validate and calculate the fair market value of equity. This method is highly accurate and easy to understand, which makes it a great option for valuing equity compensation. The Backsolve Method - This method is based on the concept of assets approach and has been the standard for calculating 409a valuations for many years. The principle behind this method is to determine the value of equity by identifying the net asset value to arrive at the . This method is utilized for companies with no revenue and is based on proven principles. The Cost to Recreate proper valuation - This method is used to determine the 409a valuation by assessing a company's equity as a result of evaluating the cash flows that will be generated in the future. This method is widely accepted and offers great value for its simplicity. It is known as more effective and reliable than the other methods of valuing equity compensation. The Discounted Cash Flow - This method is used to determine the 409a valuation of a company's stock by comparing it with other companies that are similar in size, location, industry, and overall economic and market conditions. This comparison will result in an accurate estimate of the fair market value for the company's stock. The Comparable Company Analysis Therefore, all the above-mentioned methods are great for determining the fair market value and complying with IRS regulations. Each method is proven and tested, and each has its own unique capabilities and limitations. It is up to the business to make the choice of which method to use. Allocating equity value with 409a valuation Companies that want to determine the value of equity under 409a regulations can use the backsolve method. The backsolve valuation method is an accurate and fair way to determine the FMV. Following are the basic steps for performing the backsolve method: - First, you have to determine the simple capital structure of the company, which is the sum of cash, retained earnings, and preferred stock. This includes the capital structure of common shares and a stock option pool to provide a proper 409a valuation. It is essential to conduct a thorough review of the company's capital structure to ensure that it is accurate. The next step is to form a water analysis of the company, which will be used for determining the fair market value of common shares. Capital Structure - The waterfall analysis is the major component of a backsolve analysis. It is used to break down the levels of payouts in case it is acquired or liquidated. Waterfall analysis is an effective tool in financial modeling because it breaks down the amount every shareholder would receive in the event of a sale, exit, or when using the backsolve method. It must be understood that waterfalls are built upon a contingency basis because of the uncertainty and risks that are associated with the future. Waterfall Analysis - The BSOP model is a fundamental tool that can be used for allocating equity value. This model is extremely accurate because it considers each type of equity class as a stock option to determine the value. This allows for accurate calculations and the correct allocation of equity value. Black Scholes Option Pricing Model (BSOP) - After calculating the BSOP and other factors, the implied equity value has been calculated. This is the final step, and this value is used to evaluate and allocate equity. Implied Equity Value Therefore, the backsolve method is a reliable and accurate means of calculating 409a valuation. It is a fairly simple approach for determining the fair market value of equity. It is well-suited for companies that have a complex capital structure or that are looking to determine the value of stock options in an accurate manner. Why do backsolve method’s complications occur? In order to ensure that a backsolve method is conducted in accordance with the IRS regulations, there are a number of complications that must be considered. The IRS takes a very broad approach when evaluating a 409a valuation. It is vital to keep accurate records and details of a company's capital structure, how it is managed and in what amounts. The higher the capital structure is, the more complicated it becomes to follow the . Here are some complications that you must consider when using the backsolve method. IRS guidelines The 409a valuation can be affected by changes to the capital structure. This includes modifications to share counts, the creation of new classes, and the form of capital. Capital structure is one of the key components that can affect the 409a valuation. A complex capital structure can affect the calculation of the 409a valuation. The more complex the capital structure is, the more work it requires, and more time is required to complete a calculation. It is vital to understand what kind of changes can occur in the future that may affect the 409a valuation. This knowledge will enable you to build waterfalls and BSOPs before initiating calculations, which will reduce the time you need to perform this section. Thus, when it comes to the creation of a proper 409a valuation, it is necessary to follow the . IRS regulations Conclusion In conclusion, it can be seen that backsolve method is a reliable and accurate means of determining the fair market value of a company. It can be used for determining the value of stock options, which is an effective tool to help companies meet 409a regulations. In order for this method to be successful and accurate, there are some complications that must be considered. It is vital that a proper capital structure is created and managed to ensure that the backsolve method will provide an accurate and fair valuation of the company.

How Does The Backsolve Method Work In A 409a Valuation?

Hachette, HarperCollins, John Wiley and Penguin Random House are asking a court to reject Internet Archive's request to access huge volumes of data regarding the sales performance of books. IA wants to counter the publishers' lawsuit by showing that its lending library did no harm but the publishers describe the request as not only "burdensome in the extreme" but also "irrelevant". Last June, publishers Hachette, HarperCollins, John Wiley and Penguin Random House , describing its ‘Open Library’ as operating like a pirate site. sued the Internet Archive for copyright infringement The Internet Archive (IA) sees things differently, noting that its ‘Controlled Digital Lending’ process operates for purposes including preservation, access and research, therefore meeting ‘fair use’ standards. In parallel, IA believes its liability is limited due to the safe harbor provisions of the DMCA. As last week, IA wants the opportunity to show that its digital library lending had no negative effect on the publishers’ business. reported To do that, IA wants access to sales data for the 127 books listed in the lawsuit, plus data on one or more comparable works that were not available for digital lending at the same time as those works. However, the parties cannot reach a compromise so IA is now demanding access to detailed book sales performance data for all books sold since 2011. Publishers Respond to Internet Archive’s Request In a new response to the court, the publishers reiterate their claims that IA operates “an illegal ebook distribution service” that threatens to “destroy the legal library ebook market”. The publishers say that they have already produced detailed sales and financial data for the 127 books in the lawsuit, totalling over 670,000 rows of data in Excel. They say that IA now wants access to data related to more than 500,000 additional books, complaining that it only wants access because the data it has obtained thus far doesn’t support its theory of no market harm. “IA argues it is entitled to [access the data] in order to see if any evidence might exist to support the inherently incredible theory that copying entire books and distributing them to any member of the public worldwide upon demand does not compete with Plaintiffs’ sales of the same books,” the publishers’ letter reads. “Even worse, IA’s quest rests on the palpably false theory that it can quantify the harm caused by its infringement by comparing the sales of completely different books. Books are not interchangeable widgets and marketplace performance is driven by countless indeterminate and changing facts.” Publishers: Fourth Factor Fair Use “Misinterpreted” The publishers say they distribute their books to millions of readers around the world through many legal channels, including by selling or licensing ebooks to library aggregators which allow library patrons to borrow ebooks on their devices for free, subject to limitations. However, they insist that IA’s argument that its lending practices do not affect the commercial performance of books misinterprets the fourth factor of the fair use analysis. “The fourth factor looks beyond lost sales and focuses instead on the effect of the [infringing use] upon the potential market for or value of the copyrighted work,” and requires consideration of “not only … the market harm caused by the particular actions of the alleged infringer, but also the market harm that would result from unrestricted and widespread conduct of the [same] sort,” they write. “Here, IA self-evidently harms Plaintiffs’ existing markets by refusing to pay the customary fees that aggregators pay to distribute the same ebooks to library borrowers. The market harm compounds as others engage in the activity, destroying the vibrant market for licensed library ebook lending that currently exists. None of the requested data, or so-called ‘comparables,’ is necessary to or even related to this category of market harm.” Data Sought is “Not Material”, Creates a Massive Burden The publishers say that producing sales data beyond that relating to the works in suit is not only “burdensome in the extreme” but also “irrelevant”. They dismiss IA’s claims that there would be no burden in producing the data as “preposterous” since it would require them to pull masses of data from multiple databases in a way they would not do in the ordinary course of business. This would incur “incalculable” employee time and significant resources to compile what could amount to billions of rows of data. In addition, the publishers say that the entire request for data rests on the false premise that books can be compared to each other and discounts events that inflate sales, such as an author dying, a book being made into a movie, or receiving a great review. “In short, it is impossible to calculate the market harm of IA’s infringement based on the crude comparison IA proposes because there are innumerable reasons why one book sells more copies than another that have nothing to do with IA’s infringement. IA’s demand for this massive data rests on no coherent foundation. It should be denied,” they conclude. The publishers’ letter can be found (pdf) here ” Originally published as “ Publishers: Internet Archive’s Sales Data Demand is “Burdensome and Irrelevant ” with the Attribution-NonCommercial 3.0 Unported (CC BY-NC 3.0) license.

What Publishers Had to Say About Internet Archive’s Sales Data Demand

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Many of our friends in the valley feel completely unempowered to negotiate compensation plans since COVID began making waves in the US in March. The common stories we hear from top talent are either: (A) not even considering recruiting due to fear of the current economic climate (B) a feeling of “no leverage  to have any compensation conversations internally and (C) fear of on-boarding to a new role while everyone is remote. While that fear may have some validity it does not outweigh the potential lost opportunity of a better career advancement. Many in the country are hurting, and plenty of people  are without jobs. However, many software companies are seeing phenomenal growth, and the career options and opportunities for those in tech career paths become better with almost every passing day. With the current climate of uncertainty, even high performers seem to be more risk averse while negotiating their value in roles. But companies are more worried than ever about losing top talent in this uncertain time, and so right now might be the best time for you to renegotiate. This is the time to align your value with your company’s goals and your own. A few of our friends have recently tested this theory, and one even got a raise of $45K from a base pay under $200K. In March of 2020, recruiting and hiring in many companies froze, or was delayed due to COVID uncertainty. It felt like every other day there was a new article talking about layoffs around the country. And while the job market in the tech industry has bounced back, the rhetoric of nationwide unemployment is still rampant. In fact, by May that tide had turned and many companies gained ability to forecast their core business, as well as forecast hiring needs. Two examples include: Truework itself, with not even 100 employees and over as of 11 October 2020 13 openings Bazaar Voice with around 1K employees and as of 11 October 2020. 78 job openings If you sit in a competitive and growing part of the software and tech world, the poor job market is a myth.  This is no time to feel disempowered. Instead, the first half of 2021 is both an important time to consider your and a key time to negotiate for plans either internally or externally. As a high-performer, now may be the best time of your career to renegotiate and create long-term alignment with your company, or seek a new company that is better aligned with either your own values or the massive economic shifts underway. Know what you are worth and push for the right plan for your current contributions to the business. career path compensation We have seen a few trends in how to negotiate compensation / recruit during COVID. to avoid and tips to reframe your thinking. The following are the most common mistakes Focusing only on what you have done and what you have been paid in the past. All come down to leverage in some form or the other. By only focusing on the past you significantly weaken your position. Ultimately a founder's goal is to strategically spend capital in a way that maximizes future return on investment. No company in their right mind would offer an outside hire more money because they felt their compensation was too low at their old job. negotiations A common response when an employee uses this tactic is that your past performance is covered by your previous contract with the company, and that is a valid point. Focusing only on your title Some companies simply lack the ability to make material changes to title without mountains of political buy-in and support. For other companies, they may be able to change the title to your preference, but leave the rest of your compensation the same. Fighting for title, if you choose that path, may win a small battle  but lose the war in terms of achieving your overall goals around compensation. Making it personal / emotional Your negotiation has nothing to do with your self worth or how much your managers respect you. Particularly in this climate, company needs may have changed with scale and markets - what it needed a year ago may no longer be relevant. Preface the conversation by telling your manager this is not personal and you want to find long term alignment with the company. By mentioning this in the beginning you have a framework to reference as negotiations become more intense. Making it obvious that you are not willing to walk away Know your market value and that there are always options out there, and back to earlier points, negotiations come down to leverage. When you make it clear you are staying no matter what happens in the negotiation, your leverage is decreased, perhaps down to zero. Failing to get organized All too often employees simply state they want a higher base pay or bonus. The complete lack of research, lack of preparation, and lack of real-time comparables harms the negotiating process before it has even truly begun. Leverage your internal network, mentors, or even outside advisors on how to prepare for this negotiation including who you should talk to within the company first. Instead of falling into the above quagmire of mistakes, we recommend these solutions to ensure you are putting your best foot forward, and giving yourself the maximum chance of success in your endeavor to obtain a better or more fair compensation package. Focus on what the business needs in the future and why you are a key part of that solution Make clear in words, and ideally in quantitative details why you are the best person who can help the company reach the next stage in their growth trajectory. Clearly communicate how you are a proven asset and team player. Any new hire is risky and expensive,, not to mention the opportunity cost of ramping them up. Know your BATNA (Best Alternative To a Negotiated Agreement) What is most important to you and what is most important to the company, both now and in the future?  Are you willing to sacrifice cash now for equity later, and if so what is your preference, and what is your preference versus your understanding of company preference. For example, Amazon is widely known to have high equity compensation, and yet rarely if ever pays more than around $170K in cash base pay. Knowing your company’s preferences can save you a great deal of time and effort. If you have the time and interest, another offer is often powerful leverage in these sort of conversations. It can take significant time and energy to get this outside offer. However, if you know your company matches outside offers, and rarely works on a negotiation without it, then this may be the right path for you. Patty McCord, ex Chief People Officer at Netflix, is famous for encouraging employees to interview at other companies. Research, and predict what levers your boss/company cares about This research should help inform you on both who to talk with first ( likely your first line manager), and will also probably help shed light on how other negotiations have occurred for either existing employees or current recruits. If you have any relationship with HR or recruiting that can prove helpful to understanding where the market is currently for other hires, and how to think about positioning yourself. Negotiating by Email We rarely hear of anyone who emails these sorts of issues to managers with great success. Even if you are a star player, not using the video or phone call to convey important information like a compensation concern can put a bad taste in the mouth of leadership and harm your overall potential for the ideal outcome. Additionally, you should be ready to adapt your strategy based on the response and verbal/visual clues your boss gives you during the negotiation. You would never call an all-in bet in poker without first trying to read your opponent. Every negotiation is different, and your own compensation makes it difficult, if not impossible, to be fully objective. However, if you follow these steps, our experience is that you create the possibility of a very healthy engagement with your leadership, and probably showcase that you can and will stand up for yourself at the least. In a best case scenario there is an open attitude and mindset, your ask is logical and makes sense, and your leadership grants all or most of what you ask for enabling you to be an even more productive employee. These conversations are almost never easy, and rarely is there a “ ” during COVID to surface these issues. However, if you avoid solving an underlying point of friction for you as an employee, it will likely surface eventually as a point of conflict in either your departure to another job, or decreased performance. Neither of these outcomes are ideal for either party, so get out there and see what is possible. perfect time Hopefully, after you follow these best practices, you achieve your goal in compensation, promotion, and other career advancements. Congrats. The next step is to clearly define goals and objectives required to succeed in the new role / position / etc. Once you succeed in these new goals, it may be time to reach for your next promotion. Why read this / about the authors and have had wins in negotiating compensation for themselves and dozens of others over the last several years in both public companies and start-ups. Ben Faw Jeff Morelli Ben is a serial entrepreneur, an alumni of UBS (I Banking), Tesla, HBS, LinkedIn, and a Co Founder of BestReviews ( , and ). Sold to Tribune Publishing for over $100M sold again to Nexstar for $160M in November of 2020 Jeff was the first non-cofounder hire at (where Ben was an early advisor), and has built two multi-million dollar sales playbooks. On top of leading the company in sales every quarter, Jeff also closed the largest deal in Truework’s history. Truework

How to Negotiate Compensation During COVID (and at other times)

(Photo by Diego Madrigal from Pexels ) I’ve been using Elm for the past two years. During that time I’ve written about 34k production lines of code in Elm across four projects. That work spans code from my very first day until today. My overall progression looked something like this. A major part of Elm’s pitch is that it has no runtime exceptions. Does it mean there are no bugs? No, but they are much less frequent than in more orthodox languages. For me, most bugs actually appear in the interface between Elm and its impure environment. How do you get into Elm and how to use it on a daily basis? Is the hype around Elm justified? Are the detractors right? Read on to find my take on the issues. Elm is my overall favourite language. Disclaimer: How I learned Elm Effectively I’ve learned enough Elm to write my first production code within a couple hours. Then it took me a couple more weeks to get a fuller grasp of what’s going on. These here were roughly my stages of progression. Official Guide (, “Elm in Action”) In the beginning I’ve started with the . It’s a great place to start as it provides an overview of the language. However, for a beginner it can lack a little context. Often programming books provide more context, such as toy applications. Check out the new book by Richard Feldman ( ) “ ” for a more complete guide. official guide @rtfeldman Elm in Action Coding with Django and Phoenix While and after reading the guide, I’ve experimented with (seems to be abandoned/reworked now). Then I’ve integrated Elm with an ongoing Django project. Finally, I started to write some production code on the first day. The code still runs today, unchanged. elm-reactor That initial production code was for an admin login. It was not necessary to rewrite that login interface, but it was a good opportunity for practice. Although today that’s an easy task for me in Elm, it took a little tinkering before I got it right on the first day. Don’t get frustrated, stay with it, after a little stubbornness usually things become clear and your brain wraps around new concepts, which then become second nature. Watch talks by those in the know After some more coding, I’ve learned a lot from talks by Richard Feldman  and Evan Czaplicki ( ). Richard evangelizes Elm, while Evan is the inventor and main developer of Elm. I learned a lot from their talks here: “ ”, “ ”, “ ”. @czaplic Scaling Elm Apps Make Data Structures The life of a file Read other peoples’ code Another good source for me was reviewing Richard Feldman’s . Richard has a ton of experience writing in Elm, so his code is an excellent source to learn from. RealWorld example app Join the community Additionally, the usual applies: search for problems on Google/DuckDuckGo, read StackOverflow, check out the Consider joining the . Code a lot, grow your code base, think deeply about the problems you code and how to solve them idiomatically, research and read. Grow larger projects and grow more complex projects. Elm forum. Slack channel Bonus: Exercism Recently, I’ve discovered for myself. Doing a track on exercism kind of feels like cheating when progressing through a new programming language. I’m currently using it to learn Haskell, but I’m sure that the Elm track is great as well. exercism How I’ve been using Elm I’ve been using Elm in a legacy project with (👍) and in new projects with (👍👍). Both are relatively similar with regards to the integration with Elm, but both also have their quirks. Django Phoenix Piecewise adoption In both frameworks I began with server side rendering. Initially, I’ve started to replace existing features and then I began to add new features with Elm instead of templating. Most of the time I’ve used Elm for features that benefited considerably from interactive dynamism. But often enough I’ve also implemented other features in Elm, just for the heck of it. Try it out, it’s fun and provides good practice. Check out for some inspiration. gampleman/elm-visualization Integration with Django and Phoenix via webpack In both frameworks I’ve used webpack to get Elm running. It’s a pain. Each time I ended up wasting hours to get Elm running properly with webpack. This is not Elm’s fault, but still this nags me. Once webpack is set up, it’s great though. During development webpack will trigger the compiler on file changes. In Phoenix you even get an automated page refresh out of the box. In both frameworks, I keep the Elm code in the corresponding global static dir: `assets/Elm` for Phoenix and `static/Elm` for Django. One might want to separate the code by Django-app/Elixir application. However, I prefer to keep all the Elm code in one place and thus to keep the webpack config simple. RESTful APIs over channels (sockets) Again, in both frameworks, I’m using a RESTful API between the backend and the Elm code. That works neatly in Phoenix, which supports the full breadth of HTTP verbs. With Django there are limitations on the available verbs. For example, there’s neither PUT nor DELETE out of the box. So you need to improvise or use additional packages with Django. With Phoenix I’ve tried out channels, which is an abstraction on top of web sockets. There are  (abandoned 🤷‍♂️) for that. However, for my taste there is still too much coding overhead. At least for my use cases the benefit did not justify the added complexity and extra effort. bindings in Elm In the beginning I’ve mostly used embedded apps in legacy code. The normal templates (Django templates and EEX) provide the placeholder for Elm and a dedicated JavaScript file bootstraps the Elm app. By now many of my older pages have multiple Elm apps running. Things I like Let’s quickly go through the best parts of Elm. I am not going into details here, because I’d just be parroting the usual pitch. You can read about the . details in others places Exposing complexity Often Elm forces you to do things in a seemingly convoluted and complicated way. What I’ve realized after a while is that Elm actually only exposes the inherent complexity of the underlying problem. Elm forces you to face the complexity head on. https://twitter.com/elmradiopodcast/status/1254912574115557377?s=21 Furthermore, Elm provides you the tools to cope with that complexity. For example, decoding JSON values in Elm initially may seem . Here’s an example where we decode a user struct with . overly complicated a decode pipeline .succeed |> required .string
        |> required .string
        |> required .string
        |> required ( .list .decode)
        |> required ( .maybe .string)
        |> required ( .maybe .decode)
        |> .map Decode IdentityRecord "token" Decode "emailAddress" Decode "userId" Decode "roles" Decode Role "institute" Decode Decode "color" Decode ColorPicker Decode Identity In JavaScript you can just access the fields once you get a response from a RESTful API. The catch in JavaScript comes later on, when you start to add workarounds for missing fields and fields with unexpected data types, or when you start to modify your data type. This leads to plenty bugs downstream. In Elm you need to decode the response first, explicitly defining every expected field. But once you’ve defined the decoder you’re good to go. Either you can decode the value as expected or you’ll get an error response, which you will be nudged to take care of explicitly. So things in Elm aren’t really more convoluted or complicated, but actually simpler; maybe one could call Elm’s approach more “honest”. The language itself Elm is a great programming language, but for most people not necessarily what they are used to. It’s a functional programming language ( ) with strong, static typing. Functions are pure (i.e. there are no side-effects). The language is strongly and statically typed, so you have to make sure that all pieces neatly fit together before you can run your code. All data is immutable. These three aspects are pretty much the antithesis to dynamic languages, such as Python or JavaScript. whatever that means In my view, after spending years with dynamic languages (e.g. Python, JavaScript, Groovy) that’s really a relieve. As I see it, static typing, pure functions, and immutability add a steeper learning curve and take some getting-used-to.  However, these concepts vastly augment your power to wrangle the complexity when your project grows. (mostly `|>`) is another great concept, which allows to chain function calls, without nesting them and without having to name intermediate results. Once you know pipelines, you’ll miss them in other languages, such as python (pipelines for PyTorch would be , 🤔). Pipelining really magnificent “I call it my billion-dollar mistake. It was the invention of the null reference in 1965.” — Tony Hoare There’s no type or as its inventor Tony Hoare calls it: . Instead you have a type called , which is the same as in Haskell and in Scala. Using leads to a little more work and a lot fewer bugs! null/nil/None “my billion dollar mistake” Maybe Maybe Option Maybe Here’s an example how you can deal with a value. Maybe mInput input ->
        transform input ->
        defaultTransform case of Just Nothing are great and allow you to abstract your code via polymorphism quite a lot. That means that you can write functions that operate on mostly unknown types. Generic types is really good, especially once you’ll start applying more , such as matching in function arguments, the keyword, and advanced pattern matching on lists, records, and tuples. For example, here we’re matching a pattern in a function argument: Pattern matching advanced features as : ( , ) -> (firstValue, _) =
    firstValue fst String String String fst The compiler is great. The help a lot. The type system in combination with compiler messages allows you to do without a headache. The , which is especially important and convenient during development. error messages big refactorings compiler is fast The resulting asset is small and executes very quickly. Especially, when deploying for mobile it’s great to have a small build that doesn’t lag during usage. The new time travel debugger can be of great help. The debugger keeps a history of all actions (received messages) with their resulting state. You can  then jump through all historical state changes while debugging. Finally, Elm pushes you to . Elm is not Haskell, but if you’re only used to object oriented programming or imperative programming, you’re going to dive into a different world that you didn’t know existed. In the beginning the concepts will feel awkward, but after a while they’ll feel like second nature and you will probably prefer the functional programming style for many tasks over the imperative or OO style. stretch your brain The Elm Architecture (TEA) 🍵 defines how you can structure your app. This pattern is used throughout the Elm ecosphere. Its use is not mandatory, but in the end seemingly most projects do apply it. The Elm Architecture Because most projects use the same basic architecture, it’s quite easy to find your way around other people’s code. Still, there’s plenty of flexibility baked into the architecture. For example, the update function can be changed to include additional arguments, such as a random value, the current time, an authentication token or a . Navigation.Key Basically the same architecture is used for single pages (akin to components), for embedded apps, and even for single page applications. Kind of fractal 💥. High quality packages Elm has a list of great packages. My favorite ones revolve mostly around UI. These include , , , and . elm-ui elm-bootstrap elm-mdc elm-visualization These days elm-ui is my go-to package for the UI. Actually, alone elm-ui provides enough value to me, to use Elm in the first place. Another great tool I found useful is , which allows you to create simple parsers. I’m using them for complex form validation (e.g. validating a date input in a free-form text field), and to parse complex values in instances. elm-parser Json.Decoder Of course, there are plenty more packages for all kinds of use cases. Blissful everyday use On a day-to-day basis, Elm is just fun to work with. When you write and deploy your code, you can be reasonably sure that the frontend will work properly. When you or your collaborators change some code, again you can be quite sure that you don’t break something else. Finally, large refactorings are quite relaxed. They still might take some time, but you won’t have the constant feeling that you just jumped into the abyss and there’s just no way out of it. Often enough I’m doing refactorings in Elm that I wouldn’t even think about touching in Python, or for the most part, even in Elixir. Finally, Elm is fun to use on a daily basis. Even when projects grow I can make good progress without running into complexity walls. Things I dislike Nothing is perfect, so there are a couple of things about Elm that don’t suit me that well. Keep in mind that the benefits and downsides are not static. For me this list changed considerably during the last two years. A novice has different requirements than an advanced user. Also, before you read this remember that . Elm is my overall favourite language Missing advanced language features My first, and probably biggest complaint, is about advanced languages features, especially abstractions. Many people complain about those, but I don’t see them as a showstopper. Also, they were no issue for me until I was becoming an advanced user. I would like to have typeclasses, more advanced functions on lists, dicts, and functions ( is gone 🙁), pattern matching on function signatures (with fall-through), and guards. I understand that these features are mostly missing to keep the language simple and consistent. Especially for new users that’s a good choice. My guess is that actually the lack of those features might be the reason why Elm is more popular than , which is rather similar to Haskell and which has more advanced features. flip PureScript Getting a random value, the time etc. Some things are surprisingly cumbersome in Elm. These issues pop up because Elm has no side-effects. For example, getting the time or a can be surprisingly convoluted. random value A pure function cannot produce a random value or the current time itself, since side-effects are required for that. If you need the current time somewhere deep down in a function, you need to first send out a command to the runtime, then you get a message with your value, then you need to write a handler / case in your update function, and then you can go on with your business. This whole process can force you to change a lot of function signatures on the way. Missing packages React has nicer themes. On sites such as theme forrest, you’ll find plenty of themes with React components. You can still use those themes in Elm, but you’ll have to write the Elm integration (at least a couple of wrappers/renderers) yourself. is really impressive. There’s nothing as impressive as material UI (react) for Elm. Elm-mdc, elm-bootstrap are great and will suffice for very most applications. However, material UI is just more polished, including its animations and page transitions. Material-UI For some problems, there are just no good packages. For example, I’ve used in a project. When I used it the first time with Elm it was hard to get to work and required some hacky code. I had to write my own wrappers via JavaScript interop. Now, anybody else who wants to use the Hands-on-Table will have to do the same, because I can’t publish my interop code. Packages that use the port mechanism for interop cannot be published in the package repository 🤷‍♂️. Additionally, probably no one will write a table package that is as advanced as Hands-on-Table for Elm any time soon. So you don’t get proper access to the arguably most powerful JavaScript table package. That’s a trade-off for not having run time exceptions. Fair deal to me, but you’ll have to decide use case by use case. Hands-on-Table Hard to find bugs Some bugs can be hard to find. I usually debug with log statements. Logging in Elm is relatively inconvenient: . Granted, it’s a lot worse in Haskell. Another good approach for debugging in other languages is a step-debugger. Well, there’s none for Elm 🤷‍♂️. let _ = Debug.log “log name” “foo” in ... Recursive imports Recursive imports can be a nuisance, because they are not allowed in Elm. Recursive imports can be hard to avoid sometimes because reality is messy at times. You can easily end up with weird references between data structures. Although a nuisance, this issue shouldn’t appear to often and there are . ways around it Scaling the architecture (🤔🤷‍♂️) Although I’ve written plenty of Elm code and although I had to scale my applications again and again, I still don’t know how to do it properly. I try to stick to writing modules around data structure. This approach sometimes leads to files that are a couple thousand of lines long. I’ve got functions that span hundreds of lines. Although it’s kind of discouraged, I often separate parts out using the page pattern. However, creating a page that can keep track of its own state involves quite some overhead. You’re practically writing another app, which is embedded in your main app. However, writing a page without its own state often doesn’t seem a good choice to me, mostly because it blows up the code of the surrounding module. update Things I dislike even more Setting up Elm and issues due to missing abstractions bother me most. The first issue has not too much to do with Elm. But setting up Elm with webpack to work in Django or Phoenix gets me every time. For me it takes a lot of fiddling until the setup works properly. While some missing abstractions only lead to some more typing, there also are worse cases. As an example, when you want to restrict the keys to your you need to use a . Dict comparable Comparables are defined by Elm and you can’t implement a type yourself. That means you can’t just use an algebraic data type as a key in a . In Haskell that’s resolved in a nicer way. comparable Dict You define your ADT and derive and and you can use your new datatype as a key in a . So in Elm you either lose type safety over those values (by using strings directly) or you have to do some awkward manual conversion between ADT values and strings. Eq Ord Map What’s next I’m coding Elm nearly everyday and I am looking forward to Elm’s future. Furthermore, there are plenty things I would like to explore more in Elm. Probably next up: , , some more . GraphQL Haskell/Elm Bridge gampleman/elm-visualization Besides that I’m going to experiment with expanding the Elm experience to the server by developing a backend with Haskell. End-to-end type safety from Postgres to the browser sounds very appealing to me. Actually, Elm might be the best pitch for Haskell for web developers! If you like this article, please follow me on Twitter ( ). I’m posting  my experiences with Elm, Elixir, Haskell, and PyTorch. @chronz_peter

Elm in Production: Developer Reflections After 34k Lines of Code

The following post is a walkthrough on the methodology we followed to value Perlin's native network token, the PERL. The report and post were authored by , Senior Research Analyst at Decentral Park. @eliasimos Key takeaways Holding and staking Perlin’s native network token, will allow validators access to a stream of transaction fees, to be distributed to them as validator rewards. As such we can deploy a discounted cash flows methodology to find the "fair" value of the token. We conclude that a fair token price for PERLs, stands at , at a fully diluted market capitalization of . $0.823 $850,690,646 The core technical that power this valuation are: . assumptions [validator reward: 2%; main use case contribution: 65%; growth rate for TV: 2%; discount rate: 30%; float rate: 100%] Through a scenario exploration exercise, we projected a . fair value range between $0.177 and $2.675 per token We would strongly encourage further research on the modelling approach and more specifically, in incorporating variables such as token velocity to the model. For the reasons above, we have open-sourced the valuation model. Perlin; a short introduction Perlin is a bleeding edge, lightning fast, DAG based distributed ledger, that offers Bitcoin level security through a novel, leaderless PoS consensus protocol (Wavelet), while achieving 31,000+ transactions per second and consistently has 0 to 4 second time to finality. What Perlin also brings to the table, is a straightforward token economics model, that lends itself out to applying a discounted cash flows approach to value its native token. The main use cases that PERLs (the native network token) will assume, are to facilitate: (i) payments for ledger transaction fees (ii) payment for smart contract fees (iii) as a PoS consensus token, used for running a validator node and and potentially (iv) as a governance token as the network grows towards maturity. Given that very little is yet known about (iv), for the valuation exercise purposes, this post will be focusing on use cases (i) through to (iii). According to the team behind Perlin, the validators will receive the full amount that is collected on the ledger as fees, as a reward for securing the ledger via incurring the opportunity cost and risk that is associated with staking. As such, the Perlin token holder and validator, can expect a form of residual income to accrue to them over time, that is relative to the amount of value that is transacted on-chain. The purpose of this short report, is to act as a walkthrough for the line of thinking we followed in this exercise, while acting as a manual for those that are interested in using the model to experiment with their own inputs and potentially even extensions thereafter. While our selected assumptions are strongly influenced by our understanding of the fundamentals of the project, we will avoid getting too detailed on the technical and fundamental merits of Perlin as a nascent platform, and will solely focus on the valuation exercise. The Core Assumptions As a general purpose distributed ledger, Perlin can eventually assume a multitude of use cases. However, given the strong ongoing relationship that the team is developing with the ICC (the largest business organization in the world, with 6 million members in over 100 countries), and the first products that the team is building for the platform, we have benchmarked our analysis on the activity that will concentrate on Perlin, to come from 3 distinct industries; trade finance, supply chain management and distributed computing. We have leveraged 3rd party evaluations to benchmark on rates of compound annual growth for each of the 3 industries, which we are using as a proxy for the transaction volumes that can be driven through blockchains over the course of the coming decade. We have further assumed that technologies based on distributed ledgers will achieve varying adoption levels in the aforementioned industries, with different adoption patterns – though all based on a logistic “S- shaped” function. At the same time, we assume Perlin’s share of the blockchain dominated partition in the industry, to be static and grow in proportion with the overall share of blockchain related solutions (for simplicity). Given Perlin’s unique relationship with the ICC, our base assumption is that Perlin will be a market leader in the trade finance vertical with a 25% market share at the end of the decade, a strong player in the supply chain management vertical with a market share of 8% and a dynamic entrant in the distributed compute vertical with a 3% overall market share. We have further assumed that the adoption curve will reach maturity faster for the first two use cases – again by merit of Perlin’s relationship with the ICC, and our evaluation the transformation capacity the already existing infrastructure and current modes of work allow, and slower for the latter. The table below outlines the quantitative inputs of the assumptions above, and the resultant adoption rates for Perlin, as well as the total value Perlin stands to capture as validator rewards (assuming that the 3 use cases explored here attribute to 65% of the total value transacted on Perlin, and a 2% validator reward) Transaction fees Value will accrue to PERL stakers in the form of transaction fees on the platform. As such, our valuation of the PERL is based on an assumption of a given, competitive transaction fee level. To the best of our knowledge, the team has yet to decide on a transaction fee function, and as such, we have assumed a certain static fee level in order to calculate the amount of value that gets distributed back to the validators. Our base case scenario benchmarks that level at 2% of the total value that gets transacted on the Perlin ledger. The main reason why, is that we feel that this is a fair multiple on the average transaction fees that users have to pay on existing comparables, while (in most cases) remaining competitive compared to centralized clearing parties, adjusted for transaction speed and resource availability. Take Ethereum for example; the table below ranks 6 separate, randomly selected points in time from the past 12 months, and explores the relationship between median transaction value and median fee charged. The result is an aggregate 0.25% median fee charged for every transaction that is processed on Ethereum. Given that Perlin’s latest performance test recorded a resource availability multiple of 2000x compared to Ethereum (31,000 tps vs 15tps), we believe that a modest 8x increase in the cost of service (2% vs 0.25%) can be justified. Given the above, and combining the output of the adoption rate assumptions outlined in the previous section, we arrive at a forecast for the total value projected to be funnelled through the Perlin blockchain and a resultant projection for the figure that validators stand to collect as fees. Valuation assumptions The final pieces of the puzzle that complete the discounted cash-flows model are relating to the modelling process itself. A core assumption in the process of arriving to a “fair” token price, is that the valuation of the whole set of tokens issued, is equal to the net present value of future cash-flows that will accrue to token holders. In this line of thinking, tokens are effectively tickets to a stream of future income, and the maximum a potential holder would be willing to pay, is the value of the whole income stream discounted for risk, opportunity cost and the time value of money – so that cash flows of equal magnitude that materialize further away in time, have a present value that is smaller than that of cash flows that occur sooner. In this process, we assume a discount rate of 30% - the lower bound discount rate among venture industry standards. We believe that both (i) the unique opportunity that is presented to Perlin via the ICC membership and (ii) the quality of the code and early reception from the developer community, de-risk the project and justify a more lenient discount rate. In order to arrive to a valuation for PERLs, we then project cash flows 10 years out, discount them accordingly, add them up (including the cost of building the platform, which we have assumed to stand at $40M) and combine them with the terminal value we estimate for the project (capturing the value accrual beyond the 10 year period explored). To do this, we used the , assuming a 2% steady growth rate, and discount the resultant figure at year 10’s discount rate. The two modules, under the assumptions outlined above, give us a present value of $663M for the first 10 years of cash-flows and at terminal value of $188M that together give a net present value of ~$850M. Gordon Growth Method Divided by the total amount of tokens floating on the 10th year, generates a price per PERL that stands at $0.823. (To keep reading on a scenario exploration exercise and how we arrived at a credible valuation range, refer to the full report here .) Conclusion Perlin is an exciting new entrant in the generalized distributed ledger and smart contract platform space. Though we understand that this is the most highly contested vertical among cryptoassets, we cannot help but look beyond the fact, accounting for both the technical innovations that Perlin brings to the table (leaderless PoS, high transaction speed and throughput) and the pipeline of business opportunities that the executive team has conjured up. Besides the specific value opportunity that this type of analysis helped uncover (the lower boundary of the projected value range stands at around $0.177 a piece, ~ a 2x from current prices), what we are really hoping for here is to further the conversation on different approaches to value cryptoassets and give the tools to anyone interested, to build and extend on this type of modelling. Solidifying a generally agreed upon toolkit for asset valuation in the cryptoasset space, is one of the keys to unlock the next stage of evolution in the industry, inviting new capital to flow into the space - so don't tread lightly! Download the full report and model here Disclaimer : Decentral Park Capital is an investor in Perlin and a PERL token holder. The above DO NOT constitute investment advice in any shape or form.

Token Valuation Done Right: A DCF Model To Value Perlin's Native Network Token

During my own preparation for Winter 2018 class interviews, I’ve reviewed every public resource on the topic and did over 20 practice interviews with Y Combinator alums. Everything I’ve learned is summarized below. This guide is my personal take and doesn’t represent an official position of YC. Along with this guide, you can also read and reuse our YC interview answers . To get more help, join a chat community of startups applying to YC . Answers development The core of your preparation process is writing a document with all anticipated questions and your answers to them. Start with the items below, then expand by adding answers to new questions asked at your practice interviews. Answers document. Your first sentence in the interview is either a solution description or value proposition. It should be 4–8 words long and pass the “mom’s test”, i.e. your parents should be able to repeat it back to you. Opening description. Define 3 core strength points in advance. Steer conversation to hit them all, sometimes even regardless of questions.Types of strength: revenue/growth/traction, domain expertise/done this before, insight aka “a-ha moment”, market size.Consider repeating or rephrasing your top three points when you aren’t sure they landed well the first time.Test your strength points: Will someone be excited about your company if she/he only hears the one-line description and three strength points? Strength points. Those are anecdotes, quotes, or factoids that receive consistent “a-ha” and “hmm.. interesting” reactions during your practice runs. Insights. Know your 2–3 key weakness areas and prepare short, crisp answers to most common concerns.For every question that you don’t answer with a strength point or an insight, limit yourself to one sentence. You want to maximize the time for strength discussion, not secondary issues. If you use the second sentence, it should go back to strengths or insights. Defense. How to write strong answers Use a lot of factoids and numbers. Your answers document should have at least 20–30 answers with numbers. Whenever possible, eliminate verbs from answers. E.g. “What’s your go-to-market?” — “A, then B, then C”.Use simple words and examples, avoid buzzwords or abstract concepts. For questions on weakness areas, acknowledge or defend it in one sentence, then go back to strengths in the second. Use examples and facts over forward-looking plans. “In the past, we’ve solved it by X with results Y”.Explain implications: “if we achieve X (hard, but possible technical achievement), then we will get Y (major business win)”. Whenever possible, use primary data from customers instead of analogies. Generally, YCombinator doesn’t see analogy-based arguments as reliable or strong.Avoid top-down market sizing. Either do bottom-up or close comparables. “Sell your co-founder”, be ready to tell why your partner is great. Practice runs Schedule at least 10–20 practice runs. For mock interviews, ask investors and founders you already know, YC alums from your city / country / university, YC alums in your industry or with a similar business model, and YC alums who volunteer to do practice interviews on Twitter. You don’t need an intro. Ask early, at least 7–10 days before your interview day. Take notes and rewrite your answers after each practice run. Do a debrief with each mock interviewer. Ask which answers were clear and strong, and which ones were not. Discuss how to improve your individual answers. Iterate on your top strength points, unique insights/anecdotes, and defense answers. Additionally, watch YC’s public office hours (links below) to get a feel of YC interview format. Interview day Arrive early, identify your room and learn who is on your panel, research panel partners in the remaining time. Make new friends with fellow applicants. Have the demo ready on the laptop with all important screens in multiple tabs. Don’t rely on YC WiFi.Assume that YC partners have no prior knowledge. Review partner’s bios in advance, identify partners who can become supporters due to their personal interest in your space. From YC’s standpoint, the purpose of the interview is to extract as much info as possible in 10min. At least one of YC partners will look closely for body language and nonverbal signals. Expect 40–80 questions in 10 minutes, 8–12 seconds per question-and-answer round. Be ready for constant interruptions (even after the first 2–3 words of response). Be ready for unique questions outside of your list. Be ready for parallel interview with multiple co-founders (not very common). Be ready for a narrow and deep drill on a single question, most likely related to your biggest weakness. Logistics and expectations. Talk fast, but not super fast. Feel happy, high-energy, and excited to pursue the opportunity. Be casual and friendly, maintain eye contact. Be confident, yet humble. Confident and concise = formidable. A few weak answers are ok. A long weak answer is much worse than a short acknowledgment like “I don’t know” or “we plan to work on this”. Don’t be too defensive, show coachability. Consider repeating or rephrasing your top three points, if they weren’t well received the first time. Most answers should be one sentence, some can be two sentences. Limit yourself to only 2–3 longer replies throughout the interview. Don’t interrupt each other, don’t argue on unexpected questions. Instead, say “yes and …” or “and I’ll add to this…” to continue after your co-founder. When disagreeing with YC partner’s statement, either give counter-facts or accept it as a hypothesis to test. Don’t make straight deflections. Answer the question asked, before changing direction. When challenged on critical hypotheses for your business, be ready to push back with crisp defense and facts. When the conversation goes sideways, try to steer it back to strengths, e.g. “and I want to make sure you hear this…”. Interview time. Interesting problem. Ideally, unique or novel. Otherwise, a new insight or approach. Compelling value proposition. Clear and concise solution description. Clarity on how the hard parts of the solution work. Inspiring mission. Market size and dynamics. A small but rapidly growing market is always compelling. Insightful ideas for overcoming market-specific concerns. Activation of “spidey sense” i.e. “hmm… something interesting should happen in this space” feeling. Team with deep relevant expertise and domain knowledge. Strong communication skills: crisp, short, clear answers. Competitive landscape fluency. Proven rapid pace of making progress. Energy and resourcefulness, “get things done” attitude. Coachability, being good at taking feedback constructively. Determined, yet flexible. Original thinking and learning ability. Unconventional points of view and insights directly from customers. Positive team dynamics, no interruptions or arguing, alignment on vision. Low chance of founder conflict. Good English and easy-to-understand accent, no language barriers in communication. Ability to inspire and recruit star team. Make YC partners want to work for you. Can grow into “forces of nature”. Direct path to building momentum by the end of YC program aka “become a hot seed deal”. Direct path to hitting high revenue in 2–3 years aka “getting big”. Expected YC evaluation criteria. Y Combinator Interview Resources , , , , . Official resources: list of partners preparation advice preparation advice video old advice Michael Seibel’s 7 points , , , , , , , , , , , , . Advice from alums: Quora thread Kwindla Hultman Kramer Henrik Zillmer Tristan Zier Barak Ben Ezer Scott Wheeler David Rusenko Sumon Sadhu Robby Walker Natalie Bartlett Fabrizio Buzeto GetAccept Gareth MacLeod , , , , . Question collections: PG Simulator Aptible Brad Flora TechCrunch QZ , , , , , , , , , . Public office hours: SS 2011 SS 2013 SS 2014 SS 2014 NYC TNW 2014 SS 2016 SS 2016 SC17–1 SC17–2 SC17–3 Acknowledgments I am forever grateful to everyone who helped us through the process: Hrachik Adjamian, Daniel Ahmadizadeh, Andrew Arruda, Delian Asparouhov, Chas Ballew, Kirill Belov, Eva Breitenbach, Matt Brezina, Tom Broderick, Levon Brutyan, Jeremy Cai, Dan Carroll, Deepak Chhugani, Nick DeMonner, Dmitry Dumik, Evan Farrell, Herbie Fu, Jim Gibbs, Anton Gladkoborodov, Allan Grant, Vlad Gurgov, Chetan Jhaveri, Ryan Johnson, Dave Kim, Alexander Kim, Kwindla Hultman Kramer, Sam Lang, Clarence Leung, Bowen Lu, Max Musing, Ivan Novikov, Thomas Pun, Roberto Riccio, Wen Sang, Boris Silver, Preston Silverman, Zac Townsend, Brett Van Zuiden, James Vaughan, Praveen Venkatesan, Tracy Young, Diana Zink. Good luck! To get more help, join a . I am frequently there to help with any preparation questions you might have. chat community of startups applying to YCombinator

The Ultimate Guide to YCombinator Interview Preparation

Zac Prince on the Future of Banking With Bitcoin

King Tether and the Stable Coin Wars

Credits: ThugStart.com Knowing can be one of the hardest things as a founder. But the real problem is not necessarily finding , but avoiding a valuation too low or too high. What are the big problems with missing the and not finding the golden middle ground? what your startup is worth startup the right valuation method Goldilocks Principle Startup valuation in a nutshell Startup valuation essentially points out the worth of your business — its idea, the product or service and so on. For an established business, knowing the valuation is rather straightforward. They can calculate the market value of the business using tangible metrics and assets, such as revenue, profits and customers. Your startup might not have any of these — after all, you’re working towards continuous growth. A startup by definition is a . How, in this situation, can you know your worth? high-growth business You need to pay attention to . The most common things to look at include things such as: elements that influence growth The hotness of the industry. The capabilities of the startup team. The product or service and its competitive advantage. There are also different valuation methods you can use to calculate your startup valuation. The include: most common methods — Your startup is valued in comparison with a similar startup. Comparables — Your startup valuation is drawn by examining investor preferences. Conformity — Your startup is valued by looking at the average or the most realistic valuation; i.e. you take the worst and the best-case scenario and look at the average. Averaging But whichever valuation method you use, the real problem is making sure the valuation is right — not too low or not too high. What happens when your valuation is not enough? You should know what amount of money you need to raise. If you end up raising it with a low startup valuation, you might be in trouble. Why? Because low valuation usually benefits the investor — it gives them a bigger equity stake in the company. However, you might also suffer from the following startup valuation problems: . is important — you’re looking for a VC who understands your passion and vision. If they do, they should understand the exact value of your startup and not value it too low. When the valuation is low, the investor might not really get your business. You end up with the wrong kind of investor Finding the right investor . Now, this kind of investor apathy (they know they got a huge bargain) might end up causing many problems. The investor might not have as much interest in helping you out because they need to work harder with startups with bigger valuation, i.e. with more on the line. You know your valuation is too low and the investor is not interested and so you start resenting them. When investor relations turn sour, things can start going downhill. Your investor relations turn sour . Low valuation results in lots of dilution, especially at the seed stage. If you have a low valuation and a hefty investment, you naturally end up losing a lot more equity. The more equity you need to give away at the early stage, the less of it, you have to give away in the rounds. A hefty dilution will be a red flag for future investors. You’ll have trouble raising money in the future future What happens when your startup valuation is too much? Your startup will undoubtedly want to push for a higher valuation because it means you can raise your required amount of money without losing a lot of equity. However, your startup could also suffer from a valuation that’s simply too high. An unreasonable high startup valuation could lead to problems like: . Similar to a low valuation, an extremely high valuation doesn’t necessarily mean the investor gets your startup concept. You might simply be attracting an investor with a lot of money to spare, but not one that’s super excited about the firm. Bad VCs and you need to be wary of them. You end up with the wrong kind of investor are out there . A high valuation might lead to short-term gain, but it can do damage to your startup in the long-term. You might send the wrong signals to investors: you’re not thinking about the company success, but personal gain. A high valuation increases expectations for the next rounds and makes it rather hard to keep increasing the valuation — you leave no margin for error; something startups should always do. You give up long-term strategy . High startup valuations are also rather efficient in distancing investors. The investor might start viewing the high valuation with resentment if things don’t go according to plan. Furthermore, since your next round will require a lot of traction, you might find it harder to attract interested investors. You’ll distance investors How to get the valuation just right? So, what happens when the valuation is just right? A good valuation will probably leave both the investor and you satisfied, but not overly happy. In a sense, — neither party feels like they got the better out of the deal. the right valuation is often a compromise How to guarantee the valuation is right? You really need to pick your valuation method and use it to come up with a figure you can justify. Startup valuation is often about predictions and estimations. However, this doesn’t mean there isn’t actual truth behind the valuation you come up with — . the investor and you need to be able to look at the figure and understand the reasoning Perhaps you have a $3 million valuation and the reasoning is the current market or the traction your startup has from the past six months. The key is to ensure you can point out these actual metrics and data to support your valuation. Figuring a method for startup valuation can be easier than ensuring the valuation you come up with is the right one. It’s important to try different things and make sure your valuation isn’t based on hopes and dreams, but cold, hard facts. Suggested Reads 1. Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms 2. Startup Evolution Curve From Idea to Profitable and Scalable Business: Startup Marketing Manual 3. The Startup Funding Book 4. The Funding Is Out There!: Access the Cash You Need to Impact Your Business 5. The Entrepreneur’s Growth Startup Handbook: 7 Secrets to Venture Funding and Successful Growth 6. Funding & Financial Execution for Early-Stage Companies 7. The Crowdfunding Handbook: Raise Money for Your Small Business or Start-Up with Equity Funding Portals 8. Startup Fundraising: How successful founders raise capital for their startups: Building an Investible Company, Pitching to Investors, Negotiating the … Else Tech Founders Must Do 9. How to Break Into Venture Capital and Think Like an Investor Whether You’re a Student, Entrepreneur or Working Professional 10. Funded: The Entrepreneur’s Guide to Raising Your First Round If you liked this and want more: How about few claps, 💬 comment on it, and/or follow me 😀 Also, if you would like to read more captivating stuff on the topics of entrepreneurship, marketing, social media, leadership, technology, innovation and venture capital via my regular posts then please click ‘Follow’ and feel free to connect via , , and . SlideShare Twitter Facebook LinkedIn P.S. here are my other . Articles on Medium

The Problem of Startup Valuation Going Too High or Too Low!

We also published this via CRV’s Medium page — check it out here ! As venture investors who have followed the crypto space, we’ve been keeping an eye on the Telegram token sale. To recap — is an encrypted messaging service available both on the Web and via app. It’s completely free and has no ads. Users can send any kind of media or documents, and can program messages to self-destruct after a certain period of time. The team claims that Telegram is “faster and more secure” than any other messaging service, though some security researchers have with this. Telegram taken issue A Telegram message thread can host up to 100,000 users, which means that many communities use it as an internal social network — crypto investors, for example, use it to host group chats about various currencies. Telegram intentionally doesn’t collect data about where its users live and what they use the platform for, but it has hit #1 in social networking apps in 100 countries. According to AppAnnie rankings, Telegram is particularly popular in countries like Uzbekistan, Ukraine, and Russia, where Internet access may be limited or closely monitored by the government. As of 3/8, App Annie data for Telegram’s top 10 countries by overall rank. The company decided to launch a blockchain platform and cryptocurrency (called TON) earlier this year, and has $850M in an initial token sale. Telegram is reportedly raising another $850M now, with a plan to raise a third round later this year. A number of top tier VCs have (KPCB and Benchmark are reportedly among them), though some of the most established venture investors in the crypto space . since raised invested don’t intend to participate According to , the Telegram team will create 5 billion tokens (called “grams”) — 44% will be sold, 4% will be allocated to developers, and 52% will be held as reserve currency. What will these tokens be used for? Users can exchange tokens with each other or use them to pay for services offered by Telegram or other providers (e.g. file storage, viewing content, etc). If all works as planned, grams will let people quickly and securely pay for goods and services worldwide, with no currency conversions required. leaked documents Investors and experts in the crypto space have published a variety of opinions on the Telegram token sale — some claim , while others argue that it’s an amazing opportunity to invest early in a foundational platform of communication and commerce. We summarized these viewpoints into a list of five pros and five cons of investing in the Telegram token sale below, from the perspective of a venture investor evaluating the opportunity. We also took a look at Telegram’s ICO in comparison to two other established messaging platforms that have ICOed, Kik and YouNow. it’s a scam Pros Telegram is one of the most popular encrypted messaging platforms, with . This is significantly below WhatsApp and Facebook Messenger (both at ~1.3B MAUs), but sizable for a standalone messaging platform launched in 2013. The platform has become critical for many communities in the crypto space — according to , 99% of ICOs use Telegram to communicate with prospective investors. Significant adoption. 200M MAUs ICO Whitelists Bitcoin was initially envisioned as a medium of exchange. However, given price volatility, high fees, and difficulty in processing BTC, it has primarily been used as a store of value. The Telegram team argues that TON will be used for real transactions, allowing micropayments between users (and businesses) worldwide. If this does happen, it could be a business. WeChat, a Chinese messaging platform with a payment service (users can buy things, pay for rides, tip friends, etc. in-app), was at $83.5B in 2015. Ability to be a transactional currency. huge reportedly valued The founders of Telegram, Pavel and Nikolai Durov, are experienced entrepreneurs — the brothers previously co-founded VKontakte (VK), Russia’s largest social network. VK was acquired by Mail.RU in 2014 in a deal that valued the company at ~$3B. It’s rare to find a team in consumer technology that has experience building and scaling another successful consumer platform, and speaks well to the founders’ ability to navigate obstacles and capitalize on opportunities. Strong team. Unlike a typical venture investment, where capital is locked up for 5–10+ years, Telegram investors will receive tokens in December 2018. Depending on the round in which the tokens were purchased, investors will be subject to a lock-up period that will reportedly range from 3–18 months. Even at the longest end of this range, investors will have the opportunity to liquidate their stake significantly earlier than a normal venture investment. Some investors are even taking advantage of the opportunity to flip their ICO allocation early, locking in a gain — with some that they purchased at ~$0.30. Liquidity. selling coins for $0.60 We’ve heard from many venture investors that they are looking to get exposure to the cryptocurrency space without having to hand-select specific coins. While TON itself is a coin, investors also get broader exposure to the general crypto market, as Telegram is one of the community’s main forms of communication. This exposure is fairly diverse, as almost every coin has a Telegram channel — we would expect TON’s price to be somewhat correlated with a crypto market index. Unique form of crypto exposure. Via Telegram’s — as of October 2017, Telegram was by far the most popular official discussion platform for current and upcoming ICOs, with 75%+ of these projects utilizing it. leaked whitepaper Cons Telegram will reportedly raise $2.6B through token sales — a significant amount of funding to raise in an extremely short period of time. As mentioned, this is incredibly fast compared to some of the fastest growing consumer companies —it took Facebook and Uber seven and five years, respectively, to raise $1B. Even in the crypto space, Telegram dwarfs the second and third largest ICOs, Filecoin (which raised $257M) and Tezos (which raised $232M). Critics have questioned whether the size of this raise is necessary. Size of fundraise. The New York Times The size of this fundraise is particularly notable given that the company is not yet generating revenue and is still developing the product. Though Telegram’s core messaging feature has significant traction, the blockchain platform that will power micropayments and other decentralized apps is in development. Some crypto experts, including the team at , have questioned whether the platform will be successfully developed, and argue that the whitepaper is unsatisfactorily vague in explaining the underlying tech. While Telegram via investor documents to refund capital if the blockchain platform is not completed by year-end 2019, they later clarified that they may not have all (or any) of this money left to return. Pre-revenue & largely pre-product. Pantera Capital promised Telegram reportedly burned $70M last year on server expenses, user verification, security, and employee salaries. This number is projected to increase as the team and infrastructure scale to accommodate the new blockchain platform. According to the leaked whitepaper, Telegram plans to in the next four years. If Telegram isn’t able to start generating revenue and spend continues to increase, the company could eventually risk bankruptcy or be forced to raise additional capital at unfavorable terms. Significant burn. spend $620M Leaked Telegram data shows the company’s historical MAUs and budget (through 2017) as well as projections for 2018–2021. As we mentioned previously, the Telegram founders have twice demonstrated an impressive ability to build and scale a social/messaging platform. However, they don’t have experience building blockchain platforms and haven’t yet hired any high-profile blockchain developers to lead the charge. As far as we can tell from Telegram employee profiles on LinkedIn, none have blockchain-related experience. Telegram will likely need to bring in new talent. Limited crypto experience. *It almost goes without saying, but another huge concern is regulation — in recent weeks, the U.S. government has been hotly debating further regulation of ICOs and blockchain-related startups, and Facebook and Google have moved to boot ICO content off of their platforms. Team is therefore especially important as Telegram will need the expertise to navigate a minefield of uncertainty. The structure of a token sale is fundamentally different than a traditional venture investment — investors will not receive equity in the company, won’t take board seats, and won’t have the control rights that they typically receive. Investors must therefore feel confident enough about the team and vision to give up many of the provisions that protect them from bad actors and ill-advised decisions. Lack of governance. On the point of ownership, it’s worth noting that owning tokens (versus owning an equity stake) could be positive or negative. It’s possible to imagine a scenario where the platform’s public or private market valuation doesn’t fully capture the value to users. Twitter is often cited as an example of this — though it is incredibly valuable as a network, the company has struggled to monetize successfully and the stock has suffered as a result. In this case, a token that reflects how much users value the platform might be worth more than the comparable equity ownership. However, it’s equally possible to consider a scenario in which an equity stake would be significantly more valuable than tokens. For example, if the velocity of usage of TON slows significantly, the token could drop dramatically in value. However, outside investors might place more value an equity stake in the company if the underlying technology is still strong or the business has other valuable assets. Even if the value of the token drops to zero, equity owners could sell the business and recoup some of their investment. Comparables In the last year, we’ve seen other social and messaging platforms announce the launch of their own crypto coins. Here are two ICOs we’ve seen from more established companies, and how they compare to Telegram: Kik Instant messaging platform Kik, which was founded in 2009 and has raised upwards of $200M in venture funding, held an ICO in fall 2017 to raise $98M for a new currency called Kin. This included a $50M institutional pre-sale round, and ~$48M from almost 10k other investors. Similar to TON, Kin can be used for in-app transactions. At the time of the ICO, Kik had approximately 15M monthly users according to — falling significantly short of Telegram’s 100M+ MAUs. TechCrunch Kin now has a market cap of $167M, with an ICO token price of $0.0001, and a current price (as of 3/9) of $0.00022. Kin has seen appreciation of ~120% since the token sale ended on 9/25/2017. It’s difficult to compare this to overall crypto market performance as many new coins have been spawned since then — but the current top ten coins (eight of which were also in the top ten as of 9/25) saw an average return of 595% (median of 320%) since 9/25. In terms of the actual crypto implementation post-ICO — Kin is still not available for use inside of Kik, though the company’s website says it is doing a “very early, limited integration” of Kin with a small group of users. The said Kik would integrate Kin “over time” but gave no specific timeline. Additionally, the company’s founder recently that they planned to shift the Kin network from Ethereum to Stellar for scalability. initial whitepaper announced In their whitepaper, the Kik team suggested a variety of implementations for Kin — including joining VIP groups, tipping friends, placing orders via bot, and getting rewarded by brands for posting about their products. YouNow (Rize) Livestreaming app YouNow launched their own crypto platform last fall, with an app called Rize where users can pay each other for creating content in coins called PROPS. YouNow was founded in 2011, and had raised $26M in venture funding before raising $25M in an ICO for the new PROPS platform. At the time of the ICO, Rize (the first PROPS-powered app) was pre-launch, but 40M registered users, an average of 60k in-app purchases daily, and $5M+ in quarterly virtual goods sales. YouNow had Though distribution of the PROPS coins were slated to take place in Q1 2018, the company that they were delaying distribution due to regulatory comments to “allow sufficient time for further growth of utility and value” within the ecosystem — so the coin has not yet started trading on any exchanges. However, the Rize app (ex-PROPS token) in public beta in February 2018, and the company has three other apps that operate on the PROPS platform already in development. In contrast to YouNow, where one user live broadcasts to an audience, on the current version of Rize all users are live on camera and can join group chats led by a host. recently announced launched In their whitepaper, the Rize team suggested a variety of implementations for PROPS — including live auctions, social games, singing contests, and viewing parties for big events. Comparison to Telegram Kik, YouNow, and Telegram are similar in many ways — all three have the following characteristics: Established messaging platform available worldwide Didn’t fully develop crypto platform or build out a crypto team pre-ICO Plan to integrate the coin for in-platform transactions Don’t need a crypto coin to power transactions — Kik and YouNow have both previously experimented with non-crypto digital coins that could be converted to fiat or used for brand partner purchases In our opinion, Telegram has a few advantages over Kik and YouNow as an ICO candidate: Usage of the platform is on an upward instead of downward trend — while Kik and YouNow weren’t dead, usage of and buzz around both has dropped somewhat significantly in the last few years (as illustrated by Google Trends graph below). While Kik and YouNow’s core demographic are teenagers, Telegram has a large base of adult users, particularly crypto enthusiasts who are more likely to be comfortable with usage of a crypto coin. In the case of YouNow, it’s somewhat confusing to have two independent but similar apps — YouNow and Rize — that are both livestream-focused and feature different in-app currencies. Users may just default to the tried-and-true YouNow if they aren’t able to grasp the crypto framework of Rize. Conclusion Our conclusion? We aren’t convinced that Telegram will deliver significant upside beyond the ICO valuation. If the team is successful, the Telegram platform could power a multi-billion dollar business that facilitates millions of micro-transactions daily. This would be attractive for an early stage venture bet, where we could see the path to a potential 100x return. However, given that Telegram is raising $2B, we have too many outstanding questions around the development of the platform to believe that these tokens will yield a similar return. Telegram has yet to recruit the team and build the platform necessary to launch the TON coin, and as we observed with Kik and YouNow, this can be a many month (or even many year) process. In addition, the team has not clearly outlined these recruiting and product development milestones. Thanks to Saar Gur for his help with and feedback on this article! Have you considered investing in the Telegram token sale? Let us know what you think! We can be reached via email at justine@crv.com and olivia@crv.com, or on Twitter . @venturetwins

Considering the Telegram ICO? Proceed with caution

One of the reasons why organisations ultimately fail at Cyber Security, is because the office of the lacks power. In this post I’ll explain why that is and what we can do about it. CSO Why The CSO Lacks Power The Cyber industry constantly strives to produce better products and services. Engineers work tirelessly to improve deployment practices. There are dozens of courses and certifications designed to improve skills. These endeavours whilst helpful to the CSO, do little or nothing to improve his standing within the wider organisation. Improvement in these areas is essential and welcome but provides only a tactical advantage. This is because CSOs are not rewarded or promoted merely for avoiding disaster. Their standing only improves when they are perceived as competent managers of risk. An appearance of confidence and control will do more for the CSO in practical terms than any marginal gain from a new security product, service, or technology. Security In order to improve Cyber Security outcomes in the long term, the CSO must increase his power and persuasiveness. It is at this strategic level that the greatest gearing will be achieved. I had lunch recently with a CSO from one of the UKs largest companies. He was quitting. The job wasn’t as described. He had no real power or influence, and without it he could see himself becoming just a fall guy at the next major security breach. He put it to me: “Security isn’t a delivery function.” Security must work with IT and the business. It has to influence, enlighten, and improve operating procedures. It’s the difference between explaining to people why they should take care of their environment, versus running around after them with a litter spike, picking-up every discarded item. Rarely does the security function have enough manpower to directly impose control at every level across every device. We are entering an age where even light bulbs have IP addresses. At the same time there is no sign that software or hardware is being designed more securely. Unless the CSO operates strategically, his position will always be precarious. It used to be that boards weren’t listening. Cyber Security was a mystery to them, abstract, distant, obscure. Seemingly unconnected with their quarterly concerns. I don’t think this is the case now. Legislation, regulation, breaches, fines, prosecutions, and a few high-profile resignations mean that boards are more likely to listen now than at any time in the past. The problem is that not enough CSOs are talking their language. While vulnerabilities, remediation, and initiatives can be measured and reported on, none of this means much to boards. The CSO must talk the language of risk instead, but conversation is only the beginning. Documentation matters too. If you really want to command a board’s attention you must frame your information in a format they are familiar with. If you’ve observed boards you’ll be familiar with “the pack”. This is the collection of documents the board requires in order to make decisions and have informed deliberations. It presents an opportunity for the CSO to increase the power and persuasion of his office. The most important part of any board pack is the balance sheet and its associated trends, ratios, and comparables. What To Do About It What if a CSO could present his information in the form of a balance sheet too? Not a balance sheet of pounds or dollars, we know how hard it is to equate those things with security in a robust, defensible way. One can however imagine security analogies to assets, liabilities, goodwill, impairments, debt, and deferred costs. How would that change a CSOs ability to communicate and to persuade? How would that improve his standing in the organisation? How much more effective would he be at getting things done? It’s my contention that the CSO’s position would be transformed immediately and permanently. He’d become a full member of the “C-suite”. Assuming I’m right, what might the intrinsic properties of a Cyber Security balance sheet be? For a board to have confidence in a new way of representing their Cyber Security, it will need to withstand scrutiny and be endorsed by a respected pillar of the accounting, audit, or governance world. It would need to be standardised across all business, such that executives, non-execs, and shareholders could compare companies, in much the same way is used today. GAAP It would need to be derived from simple principals and irrefutable truths. While products, technologies and methods all change over time, the Cyber Security balance sheet must be above these implementation details. There should be no hiding from its reckoning. How might such a balance sheet be derived? Raw inputs would be collected. Continuously, automatically, just as financial data is. This information would be stored. There may need to be corrections and restatements. Calculations would be made. Totals, ratios, trends, derived. One can imagine such information published under the same auspice as a financial balance sheet. After all, company annual reports routinely contain statistics for customer satisfaction, diversity, staff churn, and other metrics. Given the impact of a breach on share price and long-term company prospects, equity analysts should be paying attention to the cyber balance sheet. A CSO armed with the persuasive power of his own balance sheet would be in a much better position to act strategically. Both in the interests of shareholders and customers. If vendors and service providers truly want to improve outcomes for the CSO, not to mention his spending power, they should think less of helping him out and more of building him up. To build anything, you must begin with the right tools. Only once the CSO is built-up will he truly have the ability to grasp today’s Cyber Security challenges. Originally published at blog.eutopian.io on February 20, 2018.

Don’t help the CSO out, build him up!

Note: CRV is not currently an investor in Intermedia Labs, the parent company of HQ Trivia. The following are our personal views and don’t necessarily reflect the views of CRV. As early players of (and three time winners!), it’s been exciting to watch the app grow from ~3k DAUs in early October to 1M+ now. HQ seems to be on the path to becoming a household name — host Scott Rogowsky on New Year’s Rockin’ Eve, Jimmy Kimmel a game, and Twitter is awash with from hysterical winners. HQ Trivia made an appearance guest-hosted videos Given the buzz around the app, we decided to dig into the business model to better understand HQ’s long-term potential. In this piece, we discuss the economics of traditional game shows, monetization options, HQ competitors, and potential risks with the business. We’d love to hear your feedback on our analysis or on your experience with HQ — you can find us . @venturetwins Game Show Comparables We took a look at the five most popular TV game shows in the U.S. — The Price is Right, Family Feud, Jeopardy, Wheel of Fortune, and Let’s Make a Deal — to see how their costs and revenue compare to HQ. These shows make money through ads, and their major expenses are host salary, cash prizes (product or travel prizes are often donated), and production expenses. Compared to the standard TV game show, HQ likely saves money on the host salary, production budget, and contestant vetting and travel expenses. On the costs side — in mid-November, we found that HQ was paying around $0.01-$0.02 in prize money per viewer, with a nightly user base of ~100K and a $1k daily prize. This was right in line with our calculations for the top five televised game shows, which we estimated pay $0.01-$0.02 in prize money per viewer. Notably, HQ now regularly has 1M+ viewers, with a $2k nightly prize (except for Sunday shows, which feature $10k prizes). Assuming 12 weekly shows, an average of 1M viewers per show, and a $2k prize on every day except Sunday, prize money/viewer/show averages $0.003. This is compelling both because it is than TV game show comps, and because prize/viewer/show has declined significantly for HQ over time — they have been able to scale their user base much more quickly than they’ve needed to scale the prize money. This also speaks to HQ’s power as an addictive consumer experience independent of the prize money. ~3x less In terms of valuation of these game show franchises — we estimate that a successful franchise (10+ seasons) is likely worth $500M-$1B+ based solely on ad revenues (not including syndication rights). We calculated the CPM for a network TV game show at $15*, which would put yearly revenue for a 30-minute show with 5M viewers that airs 200 episodes a year at $210M. A long-lasting franchise of this nature is rare — we estimate that 75% of American game shows last two seasons or less. Therefore, a show that has a long tail of consistent annual cash flows could be expected to valued at at least 2–5x revenue, but likely higher. If HQ was able to expand to a similar 5M viewers per show, with a $15 CPM and 12 shows a week, they could see ~$50M in revenue/year from playing one ad before each game. This assumes that advertisers would see ad spots on HQ as more similar to network TV ($15 CPM) than YouTube (~$5 CPM). With YouTube CPM rates, HQ’s yearly revenue from pre-game ads under this scenario would fall to ~$15M. * Based on our metrics in the table above, we can assume that the average 30-minute network TV game show has 5M viewers per episode, 200 episodes per year, plays 7 minutes of ads per episode, and charges $75k (on average) for each 30-second ad, or a $15 CPM. We calculated the $75k/ad rate based on The International Business Times’s 2013 article on network TV ad rates, with $70k — $80k as the approximate range for shows with similar viewership. Business Model As far as we know, HQ has not yet monetized its user base. Here are some of the ways we see the company potentially making money in the future: While HQ displays ad-free, 2.5 minute countdowns before each game, competitor push notifies users five minutes in advance and occasionally plays ads as the clock counts down. It seems as if users could easily avoid ads by waiting a few minutes after the push to log in. However, our attempts to do this have ended poorly, as we often forget to log back on and miss the game — we’ve resigned ourselves to waiting out the countdown and would be a fairly captive audience to these ads. Pre-game ads. The Q HQ’s questions span a range of topics, many of which either center around companies or brands or feature them as an answer choice. It would therefore be fairly natural for HQ to offer sponsored questions, as long as they aren’t phrased in an obviously promotional way (e.g. “Nintendo Wii was the first video game platform to debut which feature?” would work, while “What amazing new feature does the Nintendo Wii enable?” would not). Sponsored questions. These questions could have easily been sponsored, but didn’t raise objections or interrupt the flow of the game. Consumer mobile games like Trivia Crack have been able to monetize in-app purchases fairly effectively. , purchases of extra lives or bonus “power ups” composed 50% of Trivia Crack’s revenue, which proves that users are willing to pay for in-game advantages even without the chance of winning real money. HQ users currently can only get free lives through referring the app to friends, but we could easily see the company charging for lives, free passes, or hints. In-game purchases. As of 2015 Similar to how YouTubers and podcasters provide exclusive content on Patreon and Stitcher, HQ could host special games for paid subscribers or give them recurring benefits (an extra life each game, ability to start late, etc.). As HQ’s hosts (particularly Scott Rogowsky) continue to gain fame, users may also be willing to pay for content or merchandise featuring them — Rogowsky recently hosted a where users paid $36 each for a custom video from him (he donated proceeds to the National Multiple Sclerosis Society). Subscriber-only games or content. Cameo campaign Competitors A number of competitors have launched with the hope of capitalizing on HQ’s success. We’ve played all of them, and find none of them as compelling as the original — HQ’s production value, host quality, and online community far outclass the rest. However, there are a few apps to watch in this space: — The most popular of the HQ competitors, attracts 5,000–10,000 viewers per game and typically hosts games twice a day. The game has an identical format to HQ, with 12 questions and 10 seconds to answer each. However, the prizes tend to be smaller — usually $200 on weekdays and $500+ on weekends. The Q briefly benefited from having an Android version before HQ’s launched this month, but has also struggled with the server issues that plagued HQ (see the Google Play ). The Q the Q reviews — is a less popular competitor — most games have a few hundred viewers and a $100 prize — but it has some interesting features. With only five questions, the game is faster, and it’s also more forgiving, as you can change your answer before the time is up. The same person hosts every game, and he tends to ask more cerebral questions like “How many prime numbers are between 1 and 51” (try to answer that in ten seconds!). The app is on a five-day break, and we’re excited to see the improvements they’re working on. We like that Genius isn’t just an HQ clone — the team is testing different factors like length of game and type of question. Genius Genius — isn’t a trivia game, but it’s a live game show competitor. There are two games daily, and you pay to play with an in-game token that you buy via PayPal or earn by completing tasks (e.g. following the game on social media, watching ads from sponsors). The hosts spin a wheel with blue and yellow panels, and you guess which color it will land on. If you’re right, you move on to the next round, and eventually start winning part of a $500 total prize. We’re less excited about this one — it’s missing the challenge of a skill-based game, and the ads get pretty annoying. Qriket Qriket HQ’s four main competitors are The Q, Genius, and Qriket — but thus far, engagement and usage of HQ has blown the other three away. Though HQ currently dominates the market, it’s worth noting that the live trivia show space doesn’t have to be “winner take all,” as traditional TV game shows illustrate. There’s no real cost to participants to play a game (other than 5–15 minutes of their time) — there’s only the upside of potentially winning money. We can envision a scenario where users tune in for several games a day from different apps, with games varying by length, topic, or skill level. Risks While HQ has been able to grow and maintain an impressive user base, there are risks when it comes to the company’s ability to succeed as a stand-alone platform in the long term. Here are some of the concerns we have: The fact that HQ is live only twice a day creates a powerful sense of FOMO that pushes users to open the app, even if they might not otherwise play if the game was constantly available. However, it also excludes potential users who have other commitments at the daily game times. We’ve been impressed by the willingness of some users to reschedule meetings in order to make HQ, but are unsure of whether this will become a limiting factor, especially as the newness of the app wears off and users have to continually decide whether to sacrifice other activities for HQ. Limited user base due to time-specific nature of games. Kerry’s tweet is one of dozens referencing missing or rescheduling meetings due to HQ. Unlike most consumer social platforms, HQ arguably has reverse network effects, as each user is disadvantaged by a larger total user base. For example, lags and delays are more likely as the number of users increases. In addition, with a larger user base, the company has to decide between increasing the prize size, allowing more winners (with a smaller prize for each) or making the questions harder, which could dissuade some users from participating. The comments feed, which once felt like more of a community, has become almost impossible to follow, as hundreds of comments are posted a minute. We expect the HQ team can work around these issues as the company scales, potentially with segmented feeds of the same game. Reverse network effects. As early stage investors, we are well aware that consumer behavior is often unpredictable. Apps can skyrocket to success and then plummet back to earth as consumer preferences change, better alternatives become available, or people simply lose interest. As the co-founders of Vine, Colin Kroll and Rus Yusupov have more experience than most in building sticky consumer products, and winning free money is a strong value prop. However, while the early traction is compelling, HQ needs more time to prove it’s not just a trend, and we worry that the continued discouragement from not winning may cause significant user attrition. Consumers are fickle, and may leave the app if they never win. Related side note: Psychological experiments have shown that intermittent conditioning (e.g. winning HQ or coming close once in a while) is actually more likely to produce the instrumental conditioned response (playing HQ) than continuous reinforcement (winning or coming close all the time). This would suggest that if a user can at least occasionally have a taste of victory, they’ll keep coming back to the app. We’ve certainly found this to be true! While game shows like Jeopardy, Wheel of Fortune, and The Price is Right demonstrate the value of a lasting franchise in the space, our research suggests that a new game show is much more likely to flame out than be a hit. In a random sample of 100 game shows that aired in the U.S., we found that the average show lasted three seasons. However, this was heavily skewed by a few shows that lasted 10+ seasons — 75% of shows lasted less than two seasons. This demonstrates how challenging it is to build a game show that survives over time, which is definitely a risk to consider when evaluating HQ. Difficulty of building a lasting franchise. HQ’s main host, Scott Rogowsky, has become a celebrity due to his magnetic on-camera personality and ability to roll with the punches when the app glitches. Rogowsky was a for Halloween costumes this year, is for the 2018 Shorty Awards, and has recently been the subject of profiles and features in , , and , among others — he even made an appearance in . Rogowsky is one of the first digitally native stars to appeal to a demographic beyond Gen Zers and millennials — he’s famous enough to be seen as a celebrity, but approachable enough that fans feel comfortable striking up a conversation or . HQ has had success experimenting with guest hosts in Rogowsky’s time off, but Scott remains an important part of the HQ brand, and we suspect the app would see some attrition if he were to leave the company. “Key person” risk with host. popular choice nominated NY Mag W Magazine HuffPo Page Six asking for a selfie Though some “HQties” make fun of Rogowsky for his occasionally off-topic riffs and enthusiastic dancing, he’s widely regarded as the best HQ host. Though HQ is a mobile game, the most obvious revenue stream (ads) makes it more comparable to a media company like Facebook, Twitter, or Buzzfeed. Gaming companies can make substantial recurring revenue from their core customer base on in-app purchases. This allows them to have a high CAC, as it will be paid back in the first few months of use. Revenue per user for a media company is typically much lower — even if HQ was able to achieve the $15 CPM, and a user played every game for an entire year, the company would only make ~$9 in ads off this user in a year (assuming one ad per game). HQ will need to be smart about user acquisition and keep CAC low when the initial hype dies down, or find a way to incentivize substantial in-game purchases. Difficulty with user acquisition as a media company. Thanks to Saar Gur for his feedback and contributions to this article! Thanks for reading! We’d love to hear your feedback on this post or thoughts on HQ. You can find us on Twitter , and our email addresses are justine@crv.com and olivia@crv.com. You can also give us extra lives on HQ — our usernames are justine and oliviam. @venturetwins

What could the future hold for HQ? A look at 2017’s most buzzed-about app

As a former entrepreneur — I often thought about the “how” and “why” of venture capitalists. I also wondered if their job was really that hard or if they were just riding the money train. Now that I’ve gone to the “dark side” and become a myself — I (hopefully) understand this much better. VC Understanding the of being a VC will help explain some of the questions entrepreneurs may have including: math Is the job that hard? Don’t they just golf, cycle, or kite surf all day? Why do they care so much about ownership percentages and check sizes? Are they just scheming to throw me out? Why are they so obsessed with unicorns? Shouldn’t they care if my company turns $10M into $100M, that’s 10x! I’m a scientist/engineer by training so I always like to look at things analytically. The limited partners (LPs) of venture funds typically have the following minimum expectations of their venture asset class investments at the completion of a fund (typically 10 years): Seed/early stage — 3–4x returns (12–15% annualized) Early/mid stage — 3x returns (10–12% annualized) Late stage — 2x returns (6–8% annualized) As a general comparison, LPs can obtain 1.5x returns after 10 years on many different types of asset classes including private equity, public equities, and real estate. LPs look to venture capital to provide premium returns due to the increased risk and illiquidity of the asset class. For riskier and longer term investments like seed funds, LPs expect an even higher premium. Otherwise, there is no financial reason to give money to venture firms. Historically, many venture funds do fail to hit these targets, and a large proportion also fail to return 1.5x or even 1.0x. Let’s see how this plays out with a hypothetical seed/early stage firm called Dough Ventures. They just raised a 3rd fund, Dough Ventures III LP, with $100M in total cash. For LPs at the end of a standard 10 year fund, Dough Ventures needs to return $300–400M in cash. That doesn’t sound horrible does it? Let’s look at how returns are generated. There is a concept in venture called the — where most of the funds’ returns are generated by very few (sometimes one) investments. It’s all about investing in the “home run winners.” There are very few big winners. Power Law Dough Ventures typically targets a 10% ownership stake in the companies it invests. On average, they write checks of $1.0–1.5M for companies with pre-money valuations of $8–12M. Let’s assume across the portfolio, Dough Ventures owns 10% equity stakes for all companies. Fast forward 5–10 years: the portfolio matures and the successful companies exit at IPO or via M&A. What does the total enterprise exit value of the portfolio need to be to hit the target return metric of $300–400M? ; 10% of that value is $300–400M. The answer is $3-4B Returning the Power Law, statistically, 10% of the portfolio will be drivers of fund return. For a typical portfolio of 20–30 companies per fund, 2–3 companies will drive all the gains. For Dough Ventures’ portfolio, those 2–3 companies need to be worth $1–2B each, returning $100–200M to the fund per investment. Data compiled by Correlation Ventures showing the historical distribution of returns. 10% of financings provide over 5x return while 65% are partial or complete write-offs. This is why you hear investors asking questions relating to market size/TAM, and potential revenue, comparables, etc. They are trying to understand if your company has the potential to be a company that will be valued at $1B or higher, i.e. a unicorn. A fund needs a few big winners to hit the return metrics that the LPs demand of the VCs. The strategy and math change for a $10M or $1B fund, but the concepts are still the same. future It is important that the VC invest in companies that have the potential to “return the fund” because they need every investment to have the possibility to be a big winner. It’s nothing personal, it’s just math. Relatedly, you may also hear some VCs say a $100M exit is a “failure.” While this wording is harsh and partially disconnected from reality, an exit of this value will not do much to move the needle on providing fund returns. If Dough Ventures had a company exit for $100M, with 10% ownership at exit, they obtain $10M in returns. However, if the goal is to return $300–400M, $10M is only 2–3% towards that goal. Let’s examine another scenario where Dough Ventures invests in 20 companies: 10 exit for $100M, 10 exit for $50M. This would seem like a rousing success since all 20 companies exited for decent amounts. However, in doing the math, assuming 10% ownership, Dough Ventures only nets $150M in total, providing for a sub-par 1.5x fund return. On the flip side, let’s say of those 20 companies, 19 go bankrupt but 1 company exits at $5B. Assuming 10% ownership, the fund returns $500M for a 5x fund return. placing it in the upper decile. This is why the Power Law in venture is important. In reading this, you can probably infer some of the key metrics which can have an effect venture return math: — larger funds can have a harder time providing high multiple returns because of the exit valuations needed (a $1B fund needs $2–3B in returns with exit values of $10–30B) Fund size — early stage companies have lower valuations that can enable higher ownership percentages Stage — lower ownership percentages proportionally increase the exit valuations needed to hit return metrics (a 2% ownership at exit nets you 5x lower returns than 10% ownership) Ownership percentage — small checks result in low ownership percentages Check sizes — A fund’s ownership percentage will decrease in each round and be diluted unless investments occur Follow-on funding/dilution pro rata — VCs want to see potential revenues higher than $100–300M annually and TAMs at least in the $10Bs in order to have confidence the company can reach a $1B+ valuation at exit Market size/TAM/revenue Boiling that all down, this is why VCs ask the questions they do — it all comes down to determining these parameters for the math equation. In reality, the numbers are not always in the VC’s favor: : Grabbing 2–3 unicorns in a portfolio is no small feat as many funds do not even have one at the end of a fund cycle. For Dough Ventures, a 10% hit rate would be considered a success. There are other funds who take a “spray-and-pray” approach to portfolio construction, but typically those funds cannot place high enough ownership percentages to take advantage of the winner. Picking winners : For Dough Ventures, $3-4B in total value at exit may not seem too bad considering ~$50B is returned in VC annually on average. However, most of this money is locked up in a few big winners. Think about how many companies have exited for $1B+ each year in the last 10 years. Exit enterprise value : Many funds can start out at 10–20% ownership in a company, but if a it raises large sums of capital to scale the business, that requires deep pockets to maintain that ownership. With the exception of the flagship funds like NEA or Sequoia, that can be a hard task due to fund size constraints. Ownership : VCs charge fees like any other investor for operations. Those fees reduce the cash returned. The actual return net of fees must be even higher than the target metric to compensate. So a 3x return may actually need to be a 4x return on invested capital. Net vs gross returns It is also important for founders to understand what VC investors are thinking as they evaluate an opportunity. That is just how the math pans out. This is why it’s so important for VCs to pick entrepreneurs, technologies/products, and markets that have the potential to scale up to be a $1B+ company. Of course there are many companies that will be smashing successes, but just won’t provide “venture returns”. Founders should not take it personally. I’ve turned down some companies I knew would be great outcomes for the founders, but it just didn’t make the math work for our fund. Finding other investors who are not beholden to LPs (say angels or family offices or even corporate investors) are a great way to build those businesses up. This was a very simplified run down of how the math works and there are plenty of nuances, adjustments, and variables that come into play. Perhaps another article another day on that.

VC Math

In other terms, when numbers meet narrative and vice versa Can you measure the value of a company relying entirely on financial tools and models? Should you ignore the story and vision behind the numbers? We say that an interplay between the numbers and the story produces the most reliable valuation. Startup Valuation Explained The business valuation process is an agreement between two parties, where the object of transfer is a business, or very often, a portion of this business. To reach an agreement, it is important that the entrepreneur builds a relationship with the investor. and about the business and the investment terms are the two components to build a good relationship with investors. Trust transparency There are essentially three important things to keep in mind (and be transparent about) during the negotiation process — the equity percentage to give away, the investment amount and the valuation. During the initial investment discussions, your goal should be to find out what the most sensitive variable for your counterpart is — the one they feel less inclined to negotiate on. That way you can prepare and adjust your own negotiation strategy. The equity stake is usually the less flexible lever, while the investment amount and valuation have larger variation. Let’s take the following example: If you feel that the people on the other side of the table are less willing to discuss valuation ranges, emphasise on the amount of capital you need to meet your target and reach a subsequent funding round. Having a clear step-by-step plan of how the capital will be invested as well as a comprehensible definition of your growth strategy will further reinforce your investment proposition. Many investors enter into negotiations bearing in mind the equity percentage that they want to receive. To succeed in negotiations, you need to consider the of your startup, since oftentimes, the percentage is respective to the stage. Generally, for an initial fundraising round (pre-seed stage) you would be negotiating within 10% -20% of equity. At the following stage — seed to Series A, the range of negotiation increases to 15%-35%. stage of development For a clear overview of the ranges of negotiations for startups in different stages of development, take a look at the Startup Fundraising Path There are two things you can do: Try to negotiate within these ranges Present strong assumptions supported by data and prove the preconceptions of the VCs wrong One of the approaches towards creating solid assumptions is looking into — those companies or deals that are similar in size, type of company and industry. Having solid arguments for your assumptions clears the path to negotiate on the investment capital that you need and the equity percentage you are prepared to give away. comparables The other point you can negotiate on is your — the fair market value of your business. valuation First things first, let’s clarify what valuation means. Valuation is: an instrument to support your claim a disciplined process to measure and quantify the future (based on a set of assumptions) Valuation is : NOT a purpose on its own: numbers are just numbers a science — a perfect and indisputable picture of the future To recap, valuation is not a stand-alone concept. You should use your financial modelling, strategy and growth plans to help you get your point across. Financial modelling, strategy and growth plans do not mean much without a narrative to back them up Numbers vs Story The current valuation landscape is divided in two — the narratives people and the numbers people. As you can tell from their name, the numbers people believe that and that narratives and stories are distractions that just include a factor of irrationality in investing. Most traditional valuation practitioners support this creed. valuation is primarily about numbers On the other side, we find the narratives people, who believe in the power of storytelling when it comes to valuing companies. The narratives people say and find that it is impossible to try to estimate specific numbers when faced with uncertainty. valuation, and investing in general, are about great stories We believe that it’s never as simple as one or the other. Valuation is a mix of narrative and data crunching So how should you build your valuation case? You need to have strong and defensible argumentation to solidify the assumptions behind your financial model and valuation. That will make the overall investment proposition more well-grounded. One thing you can do to prove the credibility of your assumptions is to use market data. Another way to make your assumptions more feasible is to use your story. The story makes people see the vision, the potential behind your company and helps translate that to numbers. Ultimately, investors are buying the potential of your company, so you need to make sure that they have a clear picture of your vision for the company. Additional perk: The presence of a narrative will engage your potential investor at an emotional level and help them remember more information about your investment proposition. “If you believe the story attached to it, you believe the valuation” Valuation Process NYU professor Aswath Damodaran — expert in startup valuation — created a step-by-step framework to follow when valuing a company. Step 1 | Develop a narrative Develop a vision, a feeling of mission, a credible plan with milestones and communicate that with a sense of urgency. Here’s a useful framework to define urgency: When answering these questions, try to emphasise on your related experience and previous track-record in the industry. Display enthusiasm and passion while telling your startup’s story and try to show leadership and assertiveness — . investors look for these qualities in entrepreneurs Step 2 | Test the narrative Choose a story that is . Test it and be receptive to feedback. possible, plausible and probable Here it is important to note a few details. When it comes to the narrative, people genuinely only understand up to . If it takes more than that for them to understand, your story is probably too complex. Once your narrative is complete, try telling your story to different people to check if they understand and relate to it. 2 layers of complexity Quick tip: Try different audiences and take their feedback with a pinch of salt — not everybody can understand it, but the more the better. Step 3 | Convert the narrative into value drivers Once you have tested your story, convert it to value drivers. In other words, attach numbers to your story in order to reinforce your narrative and make it concrete. There are two approaches to do that — top-down and bottom-up. (from the outside-in): Focus on the big picture — total available market size, target market share, etc. Break these components down in terms of number of acquisitions, conversion rates, and other metrics to give an estimate of the company’s expected performance. Top-down approach (from the inside-out): Focus on the company and it’s drivers such as productivity, price, hiring, etc. Make assumptions on the future evolution of these metrics and use these assumptions to derive the company’s expected performance. Bottom-up approach Choosing between the two approaches depends entirely on the type of company and the availability of the data that you need to make the assumptions. Whichever approach you choose, the number that constitutes your company’s performance needs to be supported by evidence that the company can reach these goals. For example, you can use the performance of similar companies (comparables) as a benchmark. Quick tip: The top-down approach is preferable for young, high-growth companies. The bottom-up approach is applicable when you don’t have reliable market figures. Step 4 | Connect the drivers to a valuation This is the moment where you make the actual valuation estimation. There are tools and resources you can use to determine the specific value of your company. We recommend using a combination of methods and calculations to arrive at a comprehensive valuation estimate. Don’t forget that the valuation is just a reflection of the assumptions you make in the financial modelling process. So, continuously question and challenge your own assumptions. In the negotiation process, focus on the assumptions rather than on the valuation itself. If the other party agrees on them, then they will most likely agree with the valuation. Step 5 | Keep the feedback loop open One last piece of advice on this, be passionate about your story but don’t make it a dogma. Defend the narrative that you have created but be receptive to criticism. If a disagreement arises on the assumptions you have presented, try to pinpoint the main criticism and work towards smoothing that over. Quick tip: Make assumptions and value drivers clear and ask for feedback on them, that makes setting common milestones much easier. If you do steps 1 to 3 right, chances are steps 4 and 5 will go pretty smoothly. But . Remember that trust remains an important aspect of every investment: without trust it will take much much longer to complete the negotiations stage. get ready for negotiations Case Study: Uber Narrative (as of September 2014) The story of Uber and its unicorn valuation have been highly controversial. This also makes it the perfect example of how narrative can influence the valuation and increase several times the value of one company. In a post on , professor Damodaran tries to discredit the big number given for the valuation of the ride-sharing company. He said that “ ”. FiveThirtyEight Uber’s growth potential rests not only on being able to claim a larger share of the car-service market but also on expanding this market by attracting those who use public transportation or drive their own cars He took the top-down approach as mentioned above to estimate the value of the company. One of the ways to do that is to find the present value of the future cash flows of that company. The future cash flows of Uber were dependent on three components, according to professor Damodaran — size of potential market, Uber’s market share and percentage of gross receipts Uber takes. One pivotal assumption he made is that Uber is focusing entirely on the car-service market. He estimated a 6% year-on-year growth for the global taxi and car-service market, hence projecting the in 2024 at $183 billion. total available market Another assumption that he made is the estimate of the market share of Uber. The global market for car-services is still splintered — there are local leaders in every city. Network effects are limited, since a customer looking for a taxi in New York does not benefit from available taxis or cars in a different location. Then, the estimate of Uber’s target was 10%. market share In order to estimate the value of the company, he assumed that Uber would retain their 20% commission on the fare as well as their low-cost model. Professor Damodaran arrived at a concrete number for the of Uber — $5.9 billion, which was a staggering 3 times less than what Uber was valued at in 2014 (the time the analysis was made). valuation In September 2014 the valuation of Uber was $17bn, based on its recent investment of $1.2bn. How can numbers explain that? The answer is they cannot. Bill Gurley addressed the issue in his (a reply to Damodaran), where he discredited Damodaran’s assumptions. Gurley explained that Uber is car-company set out to disrupt and replace not only the car-service industry but also the car ownership industry. post Taking into account the global car industry, the for Uber greatly exceeds the one in Damodaran’s calculations. total available market Gurley also made the point that the larger the user base of Uber, the more partnerships they are able to secure. Hence, global network effects also exist, which affects the size of the Uber can take. market share Based on that he claims that Uber’s valuation was at least 25X what Damodaran estimated at the time. And the difference comes entirely from the story around the numbers! As a matter of fact, Uber is growing so fast that everything seems possible. But is it? Time will tell… Here’s a complete analysis of the case together with some more insights on how to incorporate your vision in your pitch:

Can Unicorn Valuation Be Explained Only By Numbers?

The movement was created for this purpose — it seeks alternatives to traditional project . Project management has always been a system to monitor project deliverables by tracking the allocation of resources — people being the most important one. Agile management Agile approaches help teams respond to unpredictability through incremental, iterative work cadences and empirical feedback. The scrum master helps keep the team focused, removes obstacles in the way of success, and protects the team from distractions. To incentivize the team as a whole, you must reward the team as a whole The Agile method and scrum is inherently a motivating movement. Incentivizing the team, on the other hand, is external to that. To incentivize the team as a whole, you must reward the team as a whole (bonuses if the team acheives development targets etc.) Total compensation is what will attract the kinds of candidates that you need, and get them to stay. This includes pay, stock options, bonuses, benefits, vacation time, paid time off for various reasons that reflect company values (volunteering, professional development, etc), and parental leave benefits (salary top ups). The simplest and most straightforward way of knowing what compensation will attract the right candidates is to seek comparables from other companies, or to ask the candidates themselves. Base compensation is the price you pay for the exclusive use of a person’s talents. To extract work from that person, to get deliverables done on time and on target, those iterations are motivated by other incentives (meaningful work, professional development, leadership opportunities, and growth). _​In today’s knowledge economy, people are often a company’s most valuable asset, and losing talented employees can be…_www.independent.co.uk Google HR boss explains the only 2 ways to keep your best people from quitting The lavish perks that Google is known for — — are nice-to-haves but ultimately not game-changers. free gourmet meals, in-house massages, and dry cleaning on campus Laszlo Bock, the SVP of Google’s People Operations said “The dirty secret of all these perks is it doesn’t actually retain people or even attract people,” Bock said. While the perks may provide efficiency, community, and an inviting atmosphere, he believes they ultimately won’t swing people who are thinking about leaving. Compensation and incentives are two totally different strategies for two different goals. For more in the series on The Absolute Minimum a Start-Up CEO Needs to Know About HR How To Find Good Candidates to Hire 2. How to Hire and OnBoard An Employee 3. How to Motivate, Incentivize and Manage The Performance Of An Employee 4. How to Foster Healthy Company Culture and Avoid Conflict that Will Cause Your Company To Fail 5. How to Fire An Underperforming Employee

How to Motivate, Incentivize and Manage The Performance Of An Employee at a Start-Up

By Sanford Diday & Victoria Yampolsky, CFA - Initial Investment Structures are Critical Building Blocks - We all know time is money, but taking the wrong kind of money at the wrong time can be crippling. We think everyone needs to stop, take a deep breath, and think carefully about their role in the ecosystem. startup Business fundamentals rest at the core of our beliefs. We counsel lots of early stage companies and, as a rule, we challenge ourselves to remain critical of the status quo with hard analyses to make us better in all we do. For this piece, we focus on how choosing between convertible debentures and priced equity rounds can affect investor confidence, company growth, and founder dilution. , , and their principals have been consulting, advising, investing in, and working with startups and growth companies for over twenty years. Each new deal goes through a similar process, and we begin each with some basic truths in mind. Good fundamentals build good businesses. Do things the right way the first time, and you can avoid a lot of costs and headaches in the . JrPixels the Startup Station future The logic of executing well on fundamentals is nowhere more prevalent than in the financing process. In our experience, the importance of financing as part of company building is often lost on founders because they don’t have the necessary expertise to understand it well. Many founders think they don’t need it at such an early stage. That is a mistake. Because of the weight financing carries throughout the growth process, attempts to hack this process with quick, poorly structured deals may put your company at great risk. Nowhere do we see a need to sound the alarm more than with early funding rounds, specifically as it relates to the use of as a financing vehicle for pre-revenue companies. Historically, convertible debentures were not designed for pre-revenue companies. They were designed for revenue-generating companies to reduce their cost of debt while maintaining the tax benefits from interest payments. A call option on the company’s stock is a form of compensation to debt investors for the reduced coupon and is a way for them to participate in the upside when the company does well. convertible debentures (the convertible feature) Generally, we recommend all pre-revenue companies create a and do . We did this with great success with , , , and others within the last year. Unfortunately, we’ve seen an explosion of convertible notes in recent years, and we’re deeply concerned. pro forma financial model priced equity rounds Opkix InPerson Change My World Now Our rationale in support of crafting a financial proforma for priced equity rounds is rooted in firm business strategy. “ ?” We hear this — All. The. Time. Like with the rest of the MVP process, many entrepreneurs have trouble reducing the uncertainty in which they operate to a limited set of variables within a structured model. Their mistake is how they define the objective they aim to accomplish. Why create financial projections when it is all a guess The goal of financial projections is not to guess the future. That is not possible. Rather, the goal is to define the company’s business strategy for the next 2–5 years and create a mathematical representation of that strategy in the form of a financial model which may then be used as a core piece of your valuation argument and, of course, a natural guidepost for your priced equity rounds. - The Unsaid Pitfalls of Convertible Debt - The U.S. economy used to have a 66% failure rate for new businesses; now it’s ~ . It’s intellectually dishonest to suggest the reasons for this increase may be summarized in anything short of a doctoral thesis in Economics. Nonetheless, this fact tells us a lot about the state of the startup ecosystem and provides a clear reason why priced equity rounds present healthier options than convertible debentures for pre-revenue companies. Also, because startup investment risk has undeniably risen, investors have additional incentive to utilize complex financial instruments to their advantage. 90% We’re not saying convertible debentures are a bad instrument. Instead, we’re saying convertible notes are both misunderstood and frequently misused by startup founders and investors. You may have read some “industry experts” say things like, “convertible debentures are designed not to be paid, but convert to equity.” Let’s be clear, that both obfuscates the nature of convertible notes and is woefully incorrect. Let’s review the classic features of convertible debt. They were designed for revenue-generating companies with the intention of giving them access to lower-cost debt. They are a complex debt-equity instrument with compounding interest + maturity date + conditions on conversion + preferences + a lot more if you’re not careful (like , ‘lower of’ , and onerous ). Full Ratchets VWAPS OIDs The interest coupon is usually a cash payment to investors, made at regular intervals. While these payments may be deferred until the debt’s maturity, or converted to equity upon triggering events, these features are meant to be deal sweeteners not primary parts of the instrument. If the principal loan amount plus capitalized interest isn’t paid at regular intervals and doesn’t get converted, then the total amount (principal + capitalized interest) is due in full on the maturity date. A company must have a formal valuation prior to debt issuance to determine conversion terms. The inherent complexity of these instruments is far greater than the complexity of priced equity rounds. Specifically, this complexity may pose a grave threat to your company’s continued operations by creating cash flow pressures ( ) you may not be in the position to satisfy. They may also prevent your company from gaining future financing via a suddenly expanded capitalization table after a forced conversion. interest and principal payments We think it’s rational to say no one should enter into a contractual agreement they do not understand. After all, you could wind up with a fox guarding the hen house. Why would it make sense to load up a pre-revenue company with debt they cannot repay, which creates a ticking time bomb of a capitalization table with the potential to decrease founder ownership to de minimis levels? We certainly can’t think of a good reason. - Dubious Benefits of Convertible Debentures - . Perhaps, but as a result, you may give up a larger percentage of your company later at an unattractive price for a bit of saved time now. It’s faster . So, you’re saying you don’t want the right investors, but instead want fast money that may not be right for your company? Additionally, do you mean to say that understanding the correct corporate structure for the needs of your business such that it supports good corporate governance and the further success of your company doesn’t matter? It allows me to jam investors in quickly and provides more flexibility with regard to whether I’m an LLC or an Inc . You’re right; it is more expensive. However, doing this work provides a more thorough view of your business model combined with a solid financial model so you can have realistic valuation discussions with potential investors. Doing this work will enable you to lay out concrete near-term goals for your company as well as a salient strategy to hit those targets. You will also be able to evaluate which human, infrastructure, and financial resources are required to launch and scale. Further, you’ll identify when you can expect to see revenue, break-even, and enjoy profits. What’s more, this analysis will organically determine critical company milestones which guide the timing of financing. Doing an early priced equity round is more expensive because it requires me to do more financial and legal work . Sure, but again, the cost savings are not enough to make up for the potential loss of equity and control of the business. It reduces transaction costs You see where we’re going with this? Long-term thinking is always a beneficial exercise, and long-term planning usually wins the day. - Fundamentals Matter - Here’s the deal: in companies is about aligning the economic interests of the company with those of investors. Priced equity rounds on pre-revenue companies support this basic tenet; convertible debentures, generally, do not. Likewise, it follows that it’s best to value pre-revenue companies using their own business and financial fundamentals rather than an arbitrary valuation (or valuation cap) taken from a so-called comparable that qualifies as such only by virtue of it being in the same industry. That is especially true when those “comparables” have different business models, products, and growth strategy, and therefore have nothing to do with the company being valued. investing Founder marginalization is potentiated with convertible notes because the deal terms don’t include the right to invest in future rounds ( as well as a set of information rights that spell out the rights and conveyances of all parties. Both features are typical of seed equity instruments, and when absent, may increase the likelihood of a host of problems, including 1.) Confusion about the precise nature and meaning of the verbiage outlining the legal rights conveyed by the convertible debenture agreement, 2.) An expanding investor pool at later financing rounds that may not agree with the legal language, and 3.) A litany of capitalization table issues that distribute decision-making power between increasing numbers of entities. Do you want a one-time investor?) When convertible notes are misused, and conversion is set as a primary feature, there is a misalignment of incentives between investors and founders; not to mention pricing confusion in the marketplace. This applies especially to debentures without caps and discounts. It goes without saying that founders want to move quickly to hit milestones and get to the next round at a maximum valuation they can justify. However, the debt holder has an economic incentive to get a lower price for the first priced equity round, so she is in a better position upon conversion or sale . Such misalignment tends not to exist with priced equity investments because each investor agrees to buy X shares for Y price, which is much cleaner and allows all parties to know what they own and when. Clarity is always good. (remember, the debt is tied to the equity, so as the price goes down, investor share count goes up) As if all that wasn’t enough, convertible debentures remove founders from the immediate responsibility of carefully managing the capitalization table, which can be deadly. Mastering the math of how investments affect the capitalization table is essential for anyone growing a company and a categorical imperative if you’re raising money. We presume no one wants to drop the ball with such a critical piece of business. To be fair, there is at least one reason to use a convertible debenture in a pre-revenue company, and that’s as a bridge loan to an appropriately valued predetermined equity financing round. In this case, when structured properly, they make sense because they remove conflicts of interest between insiders. Is it possible to structure convertible debt to have the same properties as a priced equity round? Yes. But, if you are going to do that, why not use the instrument you are trying to emulate, which is easier to understand and structure? If your company is pre-revenue just do priced equity rounds. Don’t believe the hype. They’re not that hard to execute, and over the long-term, they better align the interests of founders and investors and help evaluate how successfully you are executing your strategy. There is no better tool for evincing clear proof points that will define and drive the need for a higher valuation. - Conclusion - Fundamentals First! Make it your motto. Do your research, build your business strategy, create your financial model to reflect your company’s execution plan, and then make sure your company’s financial model and business model make sense. Ask yourself if you would invest in your company. Is the business case compelling enough? Is there enough long-term potential? How confident are you that you can hit your valuation benchmarks with all the strategic initiatives you intend to put in place? After you complete these steps, you can create a meaningful business plan deck, executive summary, corporate profile, and a product outline for presentation to investors. Do this well, and you radically increase your chances of finding the right investors that serve the growth needs of your company. Along the way, you’ll glean a much more thorough sense of how your business is geared and what levers you may pull to execute your company’s go-to-market strategy. As a result, you will be much more likely to succeed because you’ll be prepared for changes that will invariably come your way after launch. Don’t forget, . strategic planning and execution are everything Cheers and good luck! . Originally published at JrPixels

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