
Unicorns vs. Donkeys: Handy Guide to Distinguishing - brunorsini
https://medium.com/@abhasvc/unicorns-vs-donkeys-your-handy-guide-to-distinguishing-who-s-who-f1b30942b2b6
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stanleydrew
Interesting exercise. I'd like to see the justification for the "3" on the
right side of the equation though. Does anyone know where that came from or
have a reference?

A lot of the estimates are really bad and completely ignore sensitivities due
to assumptions, especially with CAC in the denominator which can have a
massive effect when the range of ratios offered in the article is 0 < r < 3.

The difference between a LTV / CAC ratio of 2 and 3 is 50%. If CAC is assumed
to be $3000 when the ratio is 2, then it only needs to drop by 33% to $2000 to
get the ratio up to 3.

The author appears to consistently guess at CAC and then completely ignore the
fact that a slight shift in the right direction would quickly put a company
back in unicorn territory.

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austenallred
At the end of the day it's all hand-wavy bullshit. You don't actually know
either of those numbers with exactness if you're _in_ the company, let alone
if you only guess by looking at it from the outside.

What this type of analysis turns into is, "I like this company, so I think
their LTV would be very high."

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robzyb
What's badly needed here is a sensitivity analysis.

For example, he lists ZocDoc's CAC as in the range $1k to $10k.

If it's $1k then their LTV/CAC = 4.8 (wow good!)

If it's $10k then their LTV/CAC = 0.48 (wow horrid!)

The author chose $3k, seemingly arbitrarily.

There's nothing wrong with arbitrary assumptions in general, but in this case
a lot more scrutiny is needed before we judge if its a unicorn or donkey.

~~~
vlasev
When dealing with numbers that span orders of magnitude, it may be better to
use the geometric mean (sqrt(1x10) approximately 3), not the usual mean ((1 +
10)/2 around 5). Just my guess.

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robzyb
I would argue that's no better.

I would say: When dealing with numbers that span orders of magnitude, and the
result is very sensitivity to those numbers, you need to obtain more
information in order to make a better estimate.

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code4tee
Interesting exercise. One can nitpick some of the math and assumptions, but
the message is directionally correct.

The problem too many of these so called unicorns have is that there's not much
in the way of real fundamentals supporting their lofty valuations. The
valuation is largely based on hype. A lot of these companies valued at
$1billion + may realistically only have a value of a few million based on
their fundamentals.

In once sense that doesn't matter. If you're an early investor in such a
unicorn you only need to convince some sucker to buy your shares while the
hype is still hot. However, one needs to be a total fool to not understand
that in such a game the music always stops playing at some point and someone
is left holding a bag full of worthless $#&!.

The early players in this game have long since cashed out and are on a nice
beach somewhere. The challenge for today's 'unicorns' is that they're starting
to venture into nightmarish territory for businesses... i.e. massively
overvalued without the fundamentals to stop a free fall. The number of recent
tech IPOs where shares have plunged 50+% shortly after floating (or were
forced into a recent big down round) are a strong sign that the market's
tolerance for hype-based valuation is disappearing quickly. For those
companies in that boat it's quickly going to become a game of put up or shut
up. The solid business will survive but the rest will implode or be sold for
pennies on the dollar in a fire sale down the line.

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MrQuincle
I think according to this analysis unicorns don't exists...

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robzyb
Y'know, I'm not __entirely __uncomfortable with that conclusion...

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kriro
I haven't checked how the magical 3 is arrived at but assuming it's reasonable
I think a more valuable exercise would have been to hold the 3 constant and
plug in the values you're most sure about and then speculate about the missing
variables. For ZocDoc with its 1-10k CAC range you could then speculate if
they could reach the CAC that would lead to the magical >3.

So basically I think it's more valuable to use this as a tool to check if you
think a startup can realistically optimize towards the >3 or if that is futile
(see how they can influence LTV and CAC respectively) instead of trying to
"rank" startups by plugging in LTV/CAC if you're not sure about them.

Interesting read either way.

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meesterdude
I was a little questioning of why it was 3, but it isn't an unreasonable ratio
after some thought: 1 would be borderline absurd, 2 could work but might not
work with your operational costs, and 3 should represent a reasonable return
on investment.

There is probably a closer, more precise number, but 3 is a decent number to
use; if you're looking for businesses that generate a lot of revenue from
customers, without spending a lot to acquire them or serve them; it works out.

Otherwise, great article and I will definitely be keeping this in mind in my
own project. When I did the math it came out to 8.4, so I've got more wiggle
room in the CAC than I thought.

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eleusive
Like others have mentioned, I'm very interested in how the author arrived at
the ratio of '3'. At the very least this ratio doesn't take into account how
capital intensive a company is, since fixed costs seem to be what's left (my
understanding could be wrong here depending on which definition of 'margin' is
being implied here).

Wouldn't this imply that a company with a lower ratio that is not very capital
intensive would have a higher "corrected ratio" than a company which is much
more capital intensive (or even simply has a higher cost of capital)?

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ph0rque
Reminds me of this: [http://pbfcomics.com/253/](http://pbfcomics.com/253/)

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moron4hire
So are we supposed to ignore that unicorns aren't real and that donkeys are
useful pack animals?

I mean, say I show up on a farm looking for work and you tell me there is a
cart of manure to haul somewhere, and then conditionally tell me that either
A) I'll have a donkey to do the job, or B) I'll have a unicorn. Option B
sounds more like I'm doing the job by my lonesome.

~~~
lmm
Donkeys have a certain level of usefulness but very little growth potential.
They can be productive and modestly profitable but they don't belong in a
high-yield portfolio.

~~~
moron4hire
Except, what little growth potential they have is infinitely more than that
possessed by a mythical beast.

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retube
The ratio of 3 may or may not be correct, but the specific analyses here are
absolutely worthless as at least one of the model inputs for each example is
just pulled out of thin air. He could be out by an order of magnitude.

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golergka
What if the service has potential to drive LTV, but intentionally refuses to
monetize in order to increase audience satisfaction and growth?

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brey
unless I'm misunderstanding, isn't this double counting the costs? wouldn't
the margin (revenue-costs / revenue) already take into account the cost of
acquiring customers?

in their example, 52% margin and a $400 CAC:

    
    
      LTV/CAC = 0.25 years x $2160/year x 52% / $400 = 0.70x

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robzyb
> wouldn't the margin (revenue-costs / revenue) already take into account the
> cost of acquiring customers?

Not necessarily. The word "margin" is very ambiguous because it could relate
to many different types of margins.

In this case I think its safe to assume that "margin" meant the difference
between the customer's price and the direct cost of supplying that particular
unit of product, ignoring overheads.

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brey
ah, yes, good point. if margin only includes cost of production, that's valid.

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apapli
Great article. Keen to see how it applies to Xero and Shopify. I'll bet they
are donkeys too.

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hayksaakian
i'd be interest in his analysis of popular YC companies, AirBNB for example

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sjg007
Airbnb has network effects which effectively drive CAC towards zero.

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andycroll
I'd say _that_ is a hell of an assumption. The travel industry depends hugely
on efficient PPC advertising with companies at any serious size.

This has been true of all three travel startups I've worked at. AirBnb may
well have great brand recognition but I'd be amazed if they can acquire
customers for zero.

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GFischer
Anecdotally, they do have some very strong direct/organic traffic based on
word of mouth and brand awareness (that doesn't mean zero CAC of course)

I don't know where this derives its data from, but it seems to support it:

[http://www.similarweb.com/website/airbnb.com#overview](http://www.similarweb.com/website/airbnb.com#overview)

