Scale multiples. Idea selection filter.
Jawwad Farid
Founder. Actuary. Computational Finance. Enterprise Risk. Professor of Practice.
I taught the valuation and financial modeling boot camp to founders for 7 years. I have been a?serial has been?for much longer.
Beyond the models we built, I have often wondered if there was a missing model that could have, should have, would have, led to different choices.
In the investment world there is a simple idea. Sector allocation is more important than company selection. Or so says return attribution.
Is there something similar in the venture world?
In 2021 we run a series on valuations and financial modeling as part of an instructor led cohort and put a?play list around those lectures.
This year we asked a different question.
What if there is a different way of evaluating businesses, ideas and models.?A founder friendly one.?One that bakes in selection filters on day one, so you only commit to ideas that have a higher scale potential. After all you only have a handful of shots to take in your life as a founder.
We named the concept scale multiples. Pick and invest in ideas that have higher scale multiples. Use that as an idea selection filter. Save yourself the heart burn.
The concept is simple and is based on two key ideas.
One.?Acquiring customers is expensive. Sell to them more than once. Pick businesses where that (repeat purchase) is possible. Walk away from those where it is not.
Two. Segment selection is key to your success. Pick segments that are growing and will continue to grow. Pick products that are tied to the growth story of your segments.
Not exactly rocket science?
Here is a play list of five videos that help explore that theme, just as we explored the valuation model building theme last year.
The 5 episodes focus on ground work and thinking a founding team needs to do before they even open up an Excel spread sheet.
Total travel time. 50 minutes. 5 lectures.?Ep 1. 17 min. Ep 2. 15 min. Ep 3. 6:45 min. EP 4. 4 min.?Ep 5. 7 min.
Episode I — Scale Multiples. 17 min
As founders we often struggle with conventional financial valuation models. We get distracted by the many assumptions it takes to run through financial statements. Investor conversations get side lined as we try to explain how we will disrupt a market in the easiest of terms.
Is there a simpler, more founder friendly, valuation engine which is easier to explain and easier to understand.
We start with the concept of a customer centric valuation model called Scale Multiples. Rather than looking at Discounted Cashflows (DCF) and Free Cash Flows (FCF), we walks through a simpler two parameter engine that cuts to the bone of valuation models.
The two parameters? Number of customers?and?Life Time Value (LTV)?of customers.
In Episode one, we walk through the framework and illustrate mechanics using a simple example and close by answering an important question — what do investors want from a financial model?
The stylized example we use to illustrate the framework? How would you disrupt and grow the life insurance industry 10x in 10 years in Pakistan?
What would be your vector of attack and how would you explain that model to your investors, partners, and employees, assuming they didn’t have a PhD in Corporate Finance.
Episode II — Customer Centric Valuations. 15 min
In Episode II we look at core elements of the customer centric valuation (CCV) framework.
Lifetime Value (LTV) estimation, segment selection, growth dynamics, product design, monetization, traction, reach and valuations.
Episode III — Origins. 6 min
3 ideas and 20 years as a serial founder to identify why the stories we start writing end the way they do.
If there are any lessons future founders could take away from that discussion? A list of tweaks and hacks that would change how those stories ended.
Build businesses intimately linked to the growth arc of your customers.
Pick segments that are growing and will continue to grow.
A natural incentive to convert and monetize your product because of that link.
Segments you can reach, access and influence through channels you control.
Episode IV — Lifetime Value of an Amazon customer.
What is the lifetime value of an Amazon customer? I placed my first order to Amazon in 1996. My last order was a few weeks ago. Over 22 years how much value have I generated for Amazon as a loyal repeat customer?
Think about this for a second. Amazon spent an enormous amount on building loyalty and trust across their customer and client base. What did that get them?
How much is a 20 year customer association worth to a vendor or a business?
We take a short 4-minute look at a model that answers this question. The model is Lifetime Value (LTV) of a customer and episode 4 introduces a simplified, crude stylized example.
Episode V - Valuation Drivers for founders.
Two common valuation models
How long will the current cycle last?
How many cycles have we seen in 20 years?
What drives valuations?
What drivers do we control as founders?
Bonus 60 second specials
60 seconds to higher valuation - https://youtu.be/Q4he0Jx-tgU
60 seconds to higher valuations – 2 simple rules - https://youtu.be/JcFHMHexxL0