The Bill Gurley Chronicles: Part IV

An MBA in VCs, Marketplaces, And Early-Stage Investing

Jul 18, 2022

September 4, 2012: The Dangerous Seduction Of The Lifetime Value (LTV) Formula (Link)

Summary: Customer Lifetime Value (LTV) is a popular metric used by investors, marketers, and executives to promote a company’s cash-burning efforts. Gurley outlines ten reasons why LTV ratios aren’t perfect:

It’s a tool, not a strategy: Anyone can copy a formula. LTV ratios aren’t a competitive advantage.
The model is used to rationalize marketing spending: LTV ratios allow companies to justify burning money today for tomorrow’s “long-term” profitable unit economics.
The model is confused and misused: Many forget to add expenses like ongoing customer maintenance costs or fail to remove organic customers from the ratio
LTV is not an absolute: LTV is a highly variable prediction based on highly variable inputs that are prone to change and error.
LTV variables “tug” at each other: Every variable is interdependent. Raise price = increased churn. Grow faster via marketing = Higher SAC, etc.
Growth becomes a grind: Acquisition costs expand linearly with revenue growth.
Purchased customers underperform organic: Word-of-mouth customers usually provide higher conversion rates, lower churn, ahd higher NPV.
CAC money could go towards customers: Instead of spending money acquiring low-value customers, give that money back to your current customers (better product or lower prices)
LTV obsession creates blinders: Companies obsessed with LTV focus only on dollars spent instead of marketing creativity. Why? Because they worship the formula.
Tomorrow never arrives: LTV values almost never come to fruition. Remember, it’s a highly variable prediction based on highly unpredictable inputs.

Favorite Quote: “Some people wield the LTV model as if they were Yoda with a light saber; “Look at this amazing weapon I know how to use!” Unfortunately, it is not that amazing, it’s not that unique to understand, and it is not a weapon, it’s a tool. Companies need a sustainable competitive advantage that is independent of their variable marketing campaigns. You can’t win a fight with a measuring tape.”

November 13, 2012: Our Most Recent Marketplace Investment, DogVacay From Los Angeles (Link)

Summary: DogVacay is an online marketplace connecting dog lovers with pet owners that want an alternative to the prison-like atmosphere of most dog kennels. The company scored highly on its 10 Digital Marketplace Factors list (see next post below) and averaged an A- rating on each factor. Rover (ROVR) is currently in the process of buying DogVacay as of this writing.

Favorite Quote: “DogVacay’s six-month ramp and current monthly gross transaction revenue are very reminiscent of the very best of our previously funded successful marketplaces. From out perspective, DogVacay is a winner in the making.”

November 13, 2012: All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces (Link)

Summary: Benchmark loves investing in marketplace businesses. These businesses require “natural pull” on both the supply and demand sides of the marketplace. The good news is that each pull gets easier with each incremental buyer/seller added to the marketplace. Here are Gurley’s 10 Factors For Evaluating Online Marketplaces:

New Experience vs. Status Quo: Is this marketplace exponentially better than the alternative?
Economic Advantages vs. Status Quo: Does the marketplace provide positive economics for both buyers and sellers?
Opportunity For Technology to Add Value: Does the marketplace technology actually enhance the customer value proposition?
High Fragmentation: High buyer and seller fragmentation is great because it signals a large TAM.
Friction of Supplier Sign-up: Friction of supplier sign-up is a barrier to entry for established marketplaces, but a tough hill to climb for new entrants.
Size of Market Opportunity: Combine TAM analysis with likelihood of online adoption/marketplace success
Expand The Market: Features and capabilities may expand a company’s initial TAM, thus expanding the reach originally thought possible.
Frequency: All else equal, the greater the friction the better the marketplace.
Payment Flow: Being part of the payment flow is better than not being part of the payment flow.
Network Effects: Can the marketplace provide a better experience to customer n+1000 than it did to the first customer?

Like any formula, it’s not a catch-all list. But it’s a great filter to use when assessing online marketplaces.

Favorite Quote: “It is also important to realize that finding a great opportunity is only a start, and this analysis could easily mislead one into underestimating the critical role that execution plays when it comes to marketplace businesses.”

December 26, 2012: Favorite Longreads Of 2012 (Link)

Summary: This post lists Gurley’s favorite long reads of 2012. You can check them out here:

Favorite Quote: None.

April 18, 2013: A Rake Too Far: Optimal Platform Pricing Strategy (Link)

Summary: Take rates are a vital part of an online marketplace’s business model. Get it right and you grow like wildfire. Get it wrong, and you’re dead. Gurley’s idea of a “perfect” marketplace model is one with high volume transactions combined with modest rake (say 10-15%). The danger of charging an exorbitant rake is it opens the door for competitors to undercut your fees.

Favorite Quote: “High volume combined with a modest rake is the perfect formula for a true organic marketplace and a sustainable competitive advantage. A sustainable platform or marketplace is one where the value of being in the network clearly outshines the transactional costs charged for being in the network.”

May 20, 2013: Grubhub And Seamless: Effecting The Elusive Private-Private Merger (Link)

Summary: Private-Private mergers don’t happen often. This is due to three main reasons:

Structural Challenges: Private companies sport complex capitalization structures, flooded with common stock, warrants, preferred shares, and potentially debt financing. Merging all that is tough.
People Challenges: Egos clash over titles, roles, and responsibilities. It’s easy for both companies to think like it’s “us versus them” instead of as a team.
Investor/Founder Mindset Challenges: Founders tend to think about their personal stakes in their individual companies, instead of as a portion of a greater whole.

Gurley ends the post by highlighting that most mergers fail not in the acquisition phase, but in the implementation phase. Integration is challenging, especially when it’s a “merger of equals.”

Favorite Quote: “The only way around this is to reverse your way of thinking. First, you have to focus on the dollar value of your new stake in the combined company instead of focusing on the specific percentage. Even in a 50/50 scenario, each ownership stake is half what it once was. Assuming the deal is accretive, this should be “no-brainer” math; your new stock in the combined company is worth more than it was before.”

July 17, 2013: Transitioning To A Mobile Centric World (Link)

Summary: Mobile smartphones are changing the way companies are formed, generate revenue, and create value for stakeholders. Companies built for the mobile landscape have clear advantages against incumbent, browser-based players. Gurley offers ten tips for those that want to play in the mobile sandbox:

Design takes a greater role: More constraints (bandwidth, screen size, etc.) equals a better user experience.
Feature depth is limited: Consumers want a “one-click” experience that solves their problem quickly and efficiently.
Development complexity is a reality as we transition: A phase-change from browser to mobile means companies might need to develop multiple iterations of apps and experiences for the web, the smartphone, or on Android and iOS.
HTML5 is a head-fake: Real apps won’t require browser feeds or load pages. Don’t fool users with redirections to internet-based searches.
SEO non-presence is hugely consequential: No SEO leads to cleaner app designs and user experiences. However, it comes at the cost of a start-ups most easily accessible customer acquisition strategy.
The core concept of “search” is in transition: On the browser, everything starts with search. On the smartphone, everything starts with apps.
A locked-in mobile app user is worth more than a desktop user: There is greater friction when downloading an app, signing up for an account, etc. So the ones that do it really want to use the product/service.
Customer acquisition techniques are shifting: Without SEO tactics, startups must find other ways of capturing customers.
Payment could be a new platform battleground: Whoever delivers one-button payments will win.
Platforms are still evolving: iOS and Android are dynamic platforms evolving to compete against one another.

Favorite Quote: “The biggest losers will be the web incumbents who do not understand the rules of the new road, or the consequences of missed execution. Anyone lost in the desktop world who fails to appreciate the criticality of the mobile-first mindset is subject to demise.”

October 2, 2013: Conversion: The Most Important Internet Metric Of All (Revisited) (Link)

Summary: Conversion is a function of customer acquisition and customer optimization. Most companies spend all their time on customer acquisition without considering optimization. Gurley notes that doing this is like buying gasoline without knowing (or caring) about a car’s fuel efficiency. The better way? Focus on efficiency before buying a bunch of fuel. Anyone can buy fuel, but not every car is fuel efficient. Finally, small improvements in conversion lead to massive ROIs and increased cash flow.

Favorite Quote: “Tiny moves have huge financial consequences which almost seem magical or unfair. You can build a similar model for your own business, and put in the inputs as you see fit, but you will not find another single area in your business where small improvements will have such a powerful impact.”

October 17, 2013: Stitch Fix: Reinventing Retail Through Personalization (Link)

Summary: Stitch Fix (SFIX) leverages personalized data to deliver a superior customer experience, and a better business model. Personalized data allows SFIX to custom order designs, which increases inventory turns. Additionally, customers refine what they want over time, leading to a better experience, and thus greater usage. Benchmark led the $12M Series B.

Favorite Quote: “By building products to order rather than inventory, Dell’s inventory turns, capital efficiency, and ROIC were dramatically better than the competition. And due to falling competent prices, Dell’s inventory turn advantage also contributed to a gross margin advantage. Dell’s product offering advantage, building to custom order, simultaneously created a business model advantage.”

January 24, 2014: On Bubbles … (Link)

Summary: How can you tell if you’re in a bubble? Gurley offers an interesting heuristic, which he calls the “Discounted Risk of Employer Profitability” Theory. The theory asks the question: What percentage of employees in Silicon Valley are working at profitless companies? Replace “employees in Silicon Valley” with “publicly traded companies” and you have another great lens at which to determine if we’re in a public markets bubble.

Favorite Quote: “An employee’s decision to work for a company that is losing money is an implicit decision to discount risk. If the macro environment changes, that company is under much greater stress than one that is profitable.”

March 11, 2014: A Deeper Look At Uber’s Dynamic Pricing Model (Link)

Summary: Dynamic pricing lives inside every pure marketplace business. Dynamic pricing allows supply and demand to clear a market. Take Uber for example. Surge pricing occurs when demand outweighs supply. To counteract this, Uber raises prices for rides. Higher prices incentivizes more drivers to join the supply while concurrently decreasing the demand for rides. This is important because without dynamic pricing, most cities would have no available drivers during times when people need drivers most.

Favorite Quote: “Without a price increase, Uber’s unfulfilled rate would skyrocket, and most customers would be left without a ride. With dynamic pricing however, the variable Q on the graph is further to the right than it would be without. More absolute rides are fulfilled precisely because supply increases.”

May 28, 2014: HackerOne: A Superior Solution For Solving Web Vulnerabilities (Link)

Summary: HackerOne is another classic Gurley marketplace investment. HackerOne matches companies that need to identify web vulnerabilities with hackers that know how to find such vulnerabilities. The marketplace perfectly incentivizes both communities (companies and hackers). Hackers make money by finding and alerting companies to vulnerabilities. And companies gain a clearer understanding of where/how they can improve their web security.

Favorite Quote: “HackerOne is a true win-win, researchers are rewarded for their unique skills, and companies are able to identify vulnerabilities in a way that limits repercussions for their users.”

June 18. 2014: Disrupting Finance From Above: Wealthfront (Link)

Summary: Wealthfront helps consumers become long-term investors through automated investing in various ETF funds. Wealthfront is just one of many examples for potential consumer financial disruption. Gurley mentions three other examples, including:

Credit Card Fees: US fees can be 4.5x as higher than Australia
Checking Account Competition: Free checking accounts are becoming less favorable
ACH Payments: For some reason, it still takes 72 hours to transfer money “electronically”

Gurley also visited China and met with leading Chinese internet companies. Nearly all of them are implementing some form of banking/payments.

Favorite Quote: “Wealthfront just hit $1B in assets in a little over 2.5 years, and there are many reasons to believe that the path to $10B will be easier than the path to $1B. A longer track record and larger assets under management will build increasing trust. Soon, you may see Americans directing their paychecks directly into Wealthfront.”

July 11, 2014: How To Miss By A Mile: An Alternative Look At Uber’s Potential Market Size (Link)

Summary: Gurley disagrees with Aswath Damodaran’s estimate of Uber’s TAM ($100B) and potential market share (10%). Let’s start with the TAM assumptions. Disrupting companies expand existing TAMs by providing a “radically different experience”, thus bringing new customers/applications into the TAM. Finally, Gurley argues that network effects and increasing returns to scale will drive >10% market share, mainly driven by: quicker pick-up times, increased coverage density, and increased utilization.

Favorite Quote: “The funny thing about “hard numbers” is that they can give a false sense of security.”

January 30, 2015: Uber’s New BHAG: UberPool (Link)

Summary: UberPool is a Big Hairy Audacious Goal. It requires complex transportation algorithms to match drivers with not one, but many riders taking a similar path. However, the rewards for getting this right are incredible. UberPool lowers prices for riders because they “share” the cost of the Uber ride (between their pick-up and drop-off). Additionally, this comes at no extra “cost” to the driver, since they’re already on that route. Finally, UberPool gives Uber a foot in the door in the massive global logistics market.

Favorite Quote: “It is hard to imagine a world where Uber riders do not want faster pick up times and lower price points. Uber is 100% committed to leveraging its scale and volume to deliver ever lower prices for consumers … UberPool is the natural evolution of this journey, and obvious BHAG candidate for 2015 and beyond.”

February 25, 2015: Investors Beware: Today’s $100M+ Late-Stage Private Rounds Are Very Different From An IPO (Link)

Summary: Late-stage private companies face little-to-no scrutiny on their financials. Meanwhile, IPO companies require auditors, bankers, lawyers, oh, and the SEC to verify financials. Additionally, late-stage privates can misrepresent critical financial positioning/revenue information (reporting gross revenue instead of net revenues, etc.). Finally, late-stage private companies flush with new cash are incentivized to extend profitability far into the future, resulting in sustained operating losses.

Favorite Quote: “The very act of dumping hundreds of millions of dollars into an immature private company can also have perverse effects on a company’s operating discipline. The only way to use the proceeds of such a large round is to take on massive operating losses.”

May 4, 2015: …Be Like Dave (Link)

Summary: Dave Goldberg was the founder of LAUNCH Media, CEO of SurveyMonkey, and husband to Facebook COO Sheryl Sandberg. Goldberg died tragically in 2015 while on family vacation. Gurley’s post reflects on what Dave was like, and why we should be like Dave. Most notably, Dave had a huge heart, immense patience, killer humor, and was an incredible listener.

Favorite Quote: “Most importantly, Dave showed us all exactly what being a great human being looks like. In a post this weekend on Facebook, Jason Calacanis succinctly noted “He was a better friend, a better husband, a better father, a better leader, and a better person than all of us — and we knew that.””

July 7, 2015: In Defense Of The Deck (Link)

Summary: Jeff Bezos is notorious for hating PowerPoint, and instead, preferring written memos. However, Gurley offers six reasons why good presentation decks are impactful to investors:

Importance of Narrative: Presentations allow founders to tell the story of their company and show investors why their company is a great investment.
Controlling The Cadence: A well organized presentation creates flow/tempo and guarantees that you make chronological arguments.
Numeracy: Presentations should have numbers, regardless of where a company is in its lifecycle.
Storytelling Never Ends: Start-ups are always selling themselves to customers, investors, employees, and prospects. This is much easier to do with a structured/prepared presentation.
The Process Itself Is Useful: Presentations allow everyone in the company to get on the same page on every important topic.
Be Like Steve: The best presenters (Steve Jobs, Elon Musk, Jeff Bezos) all leverage the power of a great presentation deck.

Favorite Quote: “The great storytellers have an unfair competitive advantage. They are going to recruit better, they will be darlings in the press, they are going to raise money more easily and at higher prices, they are going to close amazing business developer partnerships, and they are going to have a strong and cohesive corporate culture.”

Years: 2016 – 2019

April 21, 2016: On The Road To Recap: (Link)

Summary: With valuations at all-time highs, Gurley notes that a fundamental “sea-change” in the investment community has taken place. This change affects all parties involved: founders/employees, VC firms, and investors (LPs). In fact, Gurley highlights five reasons why more money causes more problems in the VC space:

Record high burn rates
Companies operating far away from profitability
Excessively intense competition (driven by cheap capital)
Delayed or non-existent liquidity for employees/investors
Rise of “Shark” or “Vulture” investors

Favorite Quote: “The very best entrepreneurs are relatively advantaged in times of scarce capital. They can raise money in any environment. Loose capital allows the less qualified to participate in each market. This less qualified player brings more reckless execution which drags even the best entrepreneur onto an especially sloppy playing field. This threatens returns for all involved.”

December 18, 2017: “Customer First” Healthcare (Link)

Summary: That consumers are steps away from the purchase decision makes healthcare a costly and painful experience. Patients wait for hours, have no idea what anything costs, yet must personally negotiate with insurance companies if things go wrong. Luckily, things are changing. Gurley highlights seven trends shaping a more “customer first” healthcare system:

High-Deductible Plans: Consumers become more cost-conscious as they bear a greater portion of their healthcare costs.
Growing Coinsurance: Same as the first reason.
FSAs/HSAs: Healthcare spending vehicles like these allow patients to think more like shoppers, because it’s their money.
Narrow Networks: Consumers can opt-in to lower premiums with the trade-off of a small service provider network.
Rise of Urgent Care: Patients receive as good (if not better) service for basic healthcare needs without the added complexity of visiting the ER or hospital.
Growing Use of CRM Tools: Front-office tools provide better customer experiences, which patients will expect going forward.
Internet Websites/User Generated Content (UGC): 77% of consumers use online reviews before picking a doctor. It’s also a great way for service providers to promote/advertise their low costs on things like medical exams, sports physicals, etc.

Favorite Quote: “In many ways, we have the worst of both worlds. Our system, which is the highest in the world as a % of GDP, has the illusion of a free market and the illusion of a regulated market with the apparent benefit of neither.”

April 19, 2018: The Thing I Love Most About Uber (Link)

Summary: The thing Bill Gurley loves most about Uber is the freedom it brings to its driver-partners. Drivers decide when to work and how long to work. No other job allows this type of freedom. Imagine emailing your boss saying, “I’m working 3 hours tomorrow, taking Monday off, working 16 hours Tuesday, and then taking the next four days off.” Uber brings freedom and a chance to make a real difference in the lives of its drivers. Whether it’s a single mom providing for her kids, or a retired veteran looking for ways to save for a vacation.

Favorite Quote: “Driving with Uber reverses the way we have been trained to think about labor. Instead of making labor conform to management’s notion of a ‘job,’ Uber hands control to the worker. You do not have to make your life fit the needs of your job; you can make the job fit the needs of your life. Just how revolutionary this notion is has not, in my opinion, been adequately understood.”

February 27, 2019: Money Out Of Nowhere: How Internet Marketplaces Unlock Economic Wealth (Link)

Summary: Online marketplaces allow anyone to create money out of nowhere. Well, not “nowhere”, but from things like idle free time or unused assets. The internet allows individuals to create money ex nihilo because it flattened the world, eliminated information asymmetry, and reduced geographic relevancy. Gurley mentions three types of online marketplaces: Exchange of Goods, Sharing Economy, and Exchange of Labor. Each of these marketplaces has one (or many) themes:

Increase wealth distribution
Unlock wasted potential of assets
Better match of specific workers with specific opportunities
Make specific assets reachable and findable
Allow for increased specialization
Enhance supplemental labor opportunities
Reduce forfeiture by enhancing utilization

If I had to guess, I bet Gurley would coin Online Marketplaces as “The Eighth Wonder of The World”

Favorite Quote: “Fortunately, the rise of the Internet, and specifically Internet marketplace models, act as accelerants to the productivity benefits of the division of labour AND comparative advantage by reducing information asymmetry and increasing the likelihood of a perfect match with regard to the exchange of goods or services.”

Years: 2020 – 2021

August 23, 2020: Going Public Circa 2020; Door #3: The SPAC (Link)

Summary: SPACs are a third option in a company’s toolkit to go public (after conventional IPO and a Direct Listing). There are four distinct benefits to going public via SPAC merger:

SPACs have a lower cost of capital versus standard IPO
SPACs have access to primary capital (better than Direct Listing)
The company has significantly more control over valuation, price, etc.
SPACs are a much faster way to go public (can go public in 2 months)

Gurley notes that SPACs are a legitimate way to enter public markets. Over time, the “SPAC-stigma” will reside and we’ll see more high-profile companies choose SPACs over traditional IPOs and/or Direct Listings.

Favorite Quote: “It’s worse than being “moronic,” it is financially illiterate. It is hard to imagine how anyone can suggest this [traditional IPO] is a good idea with a straight face. And it is increasingly hard to understand how a board of directors can legitimately exercise their fiduciary duty, while subjecting the company to such a structurally backwards approach.”

June 3, 2021: Customers Love Free Stuff … But That’s Not Your Problem (Link)

Summary: Gurley’s latest blog post is yet another lambashing of traditional IPOs versus Direct Listings (DL). In short, going public via DL is better than the traditional IPO because you avoid paying investment bankers a ~20-38% average cost of capital (i.e., the one-day IPO pop). Direct Listings pose two critical advantages over traditional IPOs. First, DLs use blind order-matching systems to allow supply-and-demand to determine price and allocation. Second, DLs are open to any investor, not just the fraternity of investment bankers. Finally, DL doubters should be asked two questions:

Why would you NOT use supply and demand to determine price and allocation?
Why wouldn’t you open public offerings to all interested parties?

Favorite Quote: “I have never seen an investment bank offer a “pop” dial to a company’s ad agency, but if you want to boost company morale I suggest giving cash directly to your employees versus using that cash to fund a marketing giveaway for brokerage clients.”

There you have it! A complete and exhaustive summary of every Bill Gurley blog post ever written. Like I mentioned before, writing this piece was like receiving an MBA in venture capital, online marketplaces, and early-stage investing.