Users vs. Topline vs. Bottomline

When you are building a company, you do it in line with the targets you set, taking into consideration the vision you have of the market on which you activate – at present, and a couple of years from now, when you will have to monetize that business.

Ouch, what a complicated sentence I wrote; not even I understand it when I reread it. Let us try and elaborate on it a bit: when you start a business, you must know – at least in part – what you want to do. You already know what you want your product to do; you know the competition and the market on which you operate. And – in general, you, the founder, the technical man – have already made the product. And your young colleague – the friend who handles sales – comes to you with the question of the day:

How do we sell? Cheap or expensive?

Time to philosophize a bit: Basically, what you are interested in (if you read this blog 🙂 ) is to build a company as quickly as possible and make it as valuable as possible. And you have to figure out what brings value in your field – now and two/three years from now: the number of users, the value of sales or the profits? I would rename this post “The connection between the exit strategy, the maturity of the market and the sales policy”.

1. The number of users. It is a valuation that is specific to new markets, to business models and products which have not yet matured and which people/investors have not figured out yet how to really evaluate. People have absolutely no idea how these businesses will be monetized in the future, but they all hope that if you have many users, you will succeed in doing something with them in the future. 10 years ago, this valuation method was specific to mobile phone companies, internet providers and, nowadays, social networks. The valuation of the company is made by using multiples of the number of users (for instance, Facebook hopes to obtain 75 USD per user). The main idea here is “if you have them, they will pay”, paraphrasing the famous “if you build it, they will come”.
2. Top line – turnover. When that business begins to take shape, the number of users is not sufficient for an accurate valuation. Investors are not so aggressively willing to be present in this game, and they look more closely at how healthy the business is. They are still interested in being there, they would like to invest, but they want to see some clients paying too. There is still no interest in profitability. The main idea is that if you have revenue, you can always cut down costs and become profitable. The valuation is made by using multiples of the turnover and this is characteristic, for instance, of electronic stores in developing countries. In India last year, multiples were of 10x (a store that sold merchandise worth 100m USD was valued at 1 billion). In less than 12 months, the market matured and the multiples (for good websites) fell to 1x. The less successful websites (with more modest increases) began to die because they no longer found “sponsors” (see Flipkart’s purchase at 0.1x Revenue of Letsbuy).
3. Bottom line – EBITDA, or profitability. It is specific of mature businesses, in which there is no such thing as an unconditional willingness on the part of investors to invest. Investors will invest/buy only if they see profits. And then the value of the company will be 5x-10x. This is the case for eCommerce companies on mature markets and telecoms today.

This is where the answer to the sales person’s question and the importance of the founder’s vision are hidden.

1. No doubt it is important to position yourself in a business that is as groundbreaking as possible, to manage to prove that you are doing something that others have never done before, and so – although you don’t know how yet – you will find a good method to monetize. Because, well, you clearly have access to millions of potential clients. The difficulty here is that you have to convince others that this is the case 🙂 . But if you manage this, then basically you are only interested in having a huge number of users. And so you want to “sell” or “give away” the products (services) as cheap as possible, even for free. The important thing for you, in this case, is to find the financing needed to support yourself (you are not interested in profitability), to keep a small loophole so that in the future you can bring revenue and profits, to manage to explain to people how good it is to have users even if they don’t give you much and, of course, to manage to collect millions of users, even if for free.
2. If you are in the second case, you are very much interested in the turnover. You don’t really want to sell at high prices, and you don’t really want high markups and margins. You want sales, sales and sales. You will make discounts over and over again, you will sell even at a loss if appropriate (not out in the open, but by giving back-rebates in the form of marketing funds – BTW, you understand now why some multinational companies hide your commissions in the form of back-rebate: someone up there is paid according to turnover, and marketing funds go in another table 🙂 ). Special prices, low prices – but not for free, very aggressive and expensive marketing (marketing companies are your ideal clients!) – these are the instruments you are looking at.
3. If you are in a mature business, valued as a multiple of EBITDA, then you should definitely take care of profitability. You need to keep costs under control, people’s efficiency is important both related to sales and to the resources they consume. Margins are a must, and you will set high prices for your sales person. You position yourself as such, you cut costs and you become profitable.

Now, no doubt this is pure theory. If you are an entrepreneur and you can’t find someone you can convince to invest in you, then either you’re wrong with your business plan or you must make it on your own and become profitable at the first try (bootstrapping) :-).

In any case, you cannot not know what strategy you apply. Because you can’t do it all – number of users, revenue and profit altogether. Pick one, stick to the plan and you will probably be successful.

(English version by Teodora Popescu)