Common Cents @josephthia: Recent Episodes
Joseph Thia
Building startups from zero to hero in Southeast Asia from someone who has been there but not quite completely done
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What is UX?
UX is not something that was newly coined or invented with the advent of digital businesses and startups.
The official Wikipedia definition is:
User experience is a person's emotions and attitudes about using a particular product, system or service. It includes the practical, experiential, affective, meaningful and valuable aspects of human–computer interaction and product ownership.
Source: Wikipedia
Now that is what I call saying a lot without really saying anything. Sorry Wikipedia!
However the concept of UX has really been around for a while, we merely have to think back to our offline experiences whenever we queue to buy movie tickets at a cinema, check in and out of hotels, move through immigrations at an airport etc.
Credits: Google
My own layman interpretation of the domain of UX is broader and anchored by design thinking which itself is an application of First Principles Thinking.
UX is the optimisation of the user’s journey (both digital and physical) towards achieving their goals and motivations with the least amount of friction, from the user’s perspective.
A Common Cents definition
Key takeaways from the podcast
For this episode, I have Edmund who used to lead Product Design back in Traveloka and Sweet Escape as our guest. I learnt a fair bit about Product Design from him while we were collaborating together on a major product development project in Traveloka back in 2017.
An element that most UX and Design Thinking literature out there don’t cover is the friction or tension between Product Design teams and business objectives. As with other Product related domains, the most important aspect is learning to say no and stakeholder management. During our discussion, Edmund shared some of his learnings in helping his team strike a balance with business objectives and acting as a counter balance to leadership’s ambitions.
Empathy sits at the core of UX and Product Design and again, customer centricity is a key pillar in creating products that your users love. However, a good product does not always make a good business (i.e. pre reforms WeWork) and Product leaders need to be cognizant of both the macro operating environment and the company’s strategic objectives.
Edmund also shares a non conventional view of where Vision ranks in importance vs the Team, Process and Analytics. We have been taught by mainstream media profiling tech moguls such as Steve Jobs that Vision is the most important factor behind great products. On the contrary, a high performing team with a repeatable and sound process is likely more critical for success.
For example, it makes a lot of sense (and cents) to focus the ideation - prototyping -test phases on validating or invalidating your “Most Risky Assumptions” rather than chasing an airy-fairy vision that is sold to investors (oops?).
Tune in to the episode for more nuggets of wisdom derived from Edmund’s experience!
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Listen now | What makes a brand and how do you go about crafting quality content consistently?
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Listen now (57 min) | Why do some investors skip third party due diligence and some investors engage in very deep due diligence? How much is too much vs the stage of fundraising?
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How did Company X get a 9 digit valuation in 2 years?
Recently, I was part of a Mentor for Hope panel to answer the audience’s questions around the fundraising process beyond Series A. The title above was one of the questions that came out, click on the link above to find out what the panelists have to say about that.
Source: Dilbert
A sense of bewilderment, frustration, curiosity was mixed within the audience’s questions, some of which I will like to share below:
How do VCs value companies that are loss making?
Do unit economics only matter at Series B?
Can you raise Series A with a proof of concept?
How important is the team Pre-Series A vs Post Series A?
How much does key-man risk impact fundraising?
The consensus from the panel is that VC valuations are more of a product of the negotiation process (or art) rather than science. To sum it up in one line and to remind the audience of who VCs are:
VCs value you at the point where they can both get into your round and “expect” to make money on exit down the road
Simply put, if a VC writes a cheque for US$10 million at a revenue multiple of 8x, they expect to at least 3x that US$10 million net of dilutions from future rounds and decreases in revenue multiple as the company approaches a liquidity event.
To illustrate, see below for an example with arbitrary numbers.
And this is how the VC’s cash on cash returns are impacted by revenue growth rates and exit multiples.
If a VC’s targeted return is at least 3x, you will need to convince the investor that your revenue growth rates are sustainable while maintaining sound contribution margins so that your revenue multiple does not get compressed.
As a company gets closer and closer to late stage, revenue multiples start to normalise towards public valuations. In the public markets, a rule of thumb is companies with lower contribution margins and/ or high fixed cost structures get lower revenue multiples.
An unintended side effect of high revenue multiples for early stage funding
Raising early stage funding at high revenue multiple implies that management is under the hook to maintain high revenue growth rates in order to maintain its attractiveness for future fund raises. If revenue growth is sustained by burning cash for market share, then it all depends on the attractiveness of the space and whether there have been precedents of peer companies crashing and burning. If there are, such as in the case for co-working, revenue multiples will undergo a huge compression across the space. Companies who have raised at high multiples in the past are then caught in a catch 22 where they cannot raise without a down round to continue fueling their bloated unit cost structures.
Moral of the story is to be clear on why you are fund raising and what you will use the funds for. Also be very clear on your company’s levers for both growth and profitability and to not over-reach no matter how tempting it is when liquidity is sloshing.
The valuation of your company is but a number and is no way a validation of yourself and your business. Building a solid business, rallying like-minded people around a purpose that you are passionate about to create value is the most important goal.
Let’s be clear about that.
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