Magic #’s

The business world is so complicated.  #’s are everywhere…

  • In social, it’s critical to understand your DAUs, WAUs, MAUs & their corresponding ratios to assess engagement
  • In SaaS, churn is one of the critical metrics
  • And so on & so forth – as the above are just the tip of the iceberg in regard to #’s

And then all of these #’s eventually have to translate to value across your financial statements, which are the ultimate determinants of what your real valuation is.

While passion has to be the driver of your process throughout company-building, you are a foolish manager if you don’t also have the ability to “put on your CEO cap” & view your business through the lens of building actual monetary value.

Great businesses catalyze from passion, but in order to achieve sustainability, must ultimately at the end of the day have the metrics that translate into $.

Here’s the rub though:  if you’re an early stage company, then becoming overwhelmed by ALL the #’s can do you more harm than good.  An early stage company that is spending too much valuable “time capital” researching public company comps & their corresponding trended P&L’s is probably not optimizing.

That’s why I think that it’s best to condense all a company’s #’s into an “order of operations” of priority, so that your focus is on the #’s that will “level you up” for the next 12 – 24 months.  Then adjust your “priority #’s” for the next set of milestones (or throughout as more information becomes available).

You need quantifiable #’s to assess your progress, as well as guide you where you need to make adjustments throughout the journey.

But there are only so many hours in the day & the human brain can only concentrate on so much before its focus is stratified across too many things in order to “execute” progress.

The above was a precursor to the point of this post which is:  I believe all companies should pick a handful of #’s as objectives to focus on, have managers communicate these #’s broadly, & with an “internally public narrative” continuously hammer home the importance of achieving them across all departments.

I call these #’s the “magic #’s” because they are the critical metrics that will “level up” the company in regard to its medium term goals.

To the above end, I will use the “magic #’s” of the internet marketplace that I am building now by way of example.  We are early stage & our magic #’s are: GMV, take rate, & buyer-to-seller ratio.

At scale, there is no question that for a marketplace, GMV & take rate are the most important.  But at our stage, it’s the last of those 3 that we are truly focused on because it relates to the daily executable process that we are focusing on right now & how it relates to our medium term goals.

The buyer-to-seller ratio is important because we need to discover the # of sellers we need to onboard in order to have sufficient liquidity to start catalyzing the “buy side” & then we need to increase both the “sell side” & the “buy side” simultaneously.

As we move across our lifeline, we then want a repeatable & highly local go-to-market strategy so we can scale across other cities in the U.S. & eventually globally.

But the point of this post is that it connects a bunch of different concepts as expressed by a handful of #’s:

  • You need to have an ultimate vision of where you see this business 7-10 years down the line & that vision has to include some practicalities, such as how you see the business ultimately monetizing or further monetizing
  • But the above is the end-game & you have to be focused on “daily/weekly/monthly victories” in order to inspire a team to get to that ultimate end-game
  • Metrics are your guides to getting there but you can’t focus on all metrics at once, nor can you as a manager communicate broadly within an organization to people with different skill sets the commandment to focus on ALL metrics at once
  • So you need to prioritize & focus on the “metrics that matter most for the medium term” & then communicate those broadly within the organization, as well as update everyone consistently on the company’s progress or lack thereof toward them

Also, it’s important to celebrate the incremental milestones on your way to building sustainable company value.  In this regard, you cannot be “binary”

  • “We’re on the journey” (a.k.a. no reason to celebrate yet)
  • And ultimately “we got there/did it” (a.k.a. aha, only now do we celebrate).

No.  Process-oriented success as judged by quantifiable measurements is just as crucial to company morale as to investor confidence.

Your magic #’s are a great way to both make sure you have metrics to evaluate company progress & to remind the team that when you hit them, you should all take a moment to reflect on the accomplishment.

What are your company’s magic #’s?



Magic #’s

“Services” Marketplace Metrics

In an internet marketplace, there is a “buy side” & a “sell side.”  The following are some important metrics to monitor for a “services” marketplace (note that if this were another type of marketplace, there would be other metrics such as # of listings etc.)…


  • What is the Total # of Sellers
  • What is the Seller Growth Rate (%), both M-o-M & Y-o-Y?
  • What % of Sellers are still active after 1 Month?  After 1 Year?
  • What are the common characteristics of the most successful Sellers?
  • What is the Average Revenue Generated per Seller?
  • What % of Revenue is generated by the Top 20% of Sellers?


  • What is the Total # of Buyers?
  • What is the Buyer Growth Rate (%), both M-o-M & Y-o-Y?
  • What is the Average # of Orders per Buyer?
  • What is the Average Amount purchased per Buyer?
  • What % of Buyers have purchased more than once?
  • What is the time between 1st & 2nd purchase?
  • What % of Buyers whose purchase is in a different category?

Use cohort analysis to monitor both financial & engagement metrics over time.

And crucially, since marketplaces take more time to build than other types of internet businesses (due to building “liquidity”), you need to monitor the “magic #” — which is the requisite # of Sellers needed in a given geographical area (“liquidity”) to “open up” the marketplace to the “buy side.”

Ultimately, as stated in the last post on marketplaces, the 2 most critical metrics in a marketplace (especially at scale) are the GMV & take rate (the revenue line on your income statement).

And most importantly, the #1 reason to use metrics is to utilize them to optimize the business throughout its lifeline, in order to create a sustainable marketplace that provides real value for both sides of it.

“Services” Marketplace Metrics

Accounting For Engineers

The title is a cheeky way of saying: we’re not trying to make you an accountant (nor am I an accountant) but let’s demystify some of the basics of accounting finance.

First lesson — the 3 main financial statements are…

  • The Balance Sheet
    • In a nutshell:  the good stuff you own & the bad stuff you have obligations on
  • The Income Statement a.k.a. the P&L
    • In a nutshell:  what’s the overall $ coming in, what do we have to subtract from that, & so what’s left over
  • The Cash Flow Statement
    • In a nutshell:  $ in, $ out

And now some terminology…

  • Sales & Revenue are synonyms and refer to the “top line [of the income statement]”
  • Income, Profit, & Earnings are synonyms & refer to the “bottom line [of the income statement]”

Literally you memorize the above, your life changes in regard to being able to hold a conversation in regard to business.


Accounting For Engineers

The Conversion Funnel

Two terms you should know =

  • “Top end” of the funnel = the upper most portion of the marketing funnel which gets filled with prospects & leads
  • “Bottom end” of the funnel = the lower end of the conversion funnel which hopefully converts leads into customers

So if you are using social media marketing to fill the “top end” of your funnel, then your goal across marketing & sales is to then “nurture” those leads into actual converting customers.

So rather than post a picture of yet another conversion funnel, I like to think about it in the following way:  (1) order of operations  ;  (2) time commitment.

Let’s pretend we are using social media to fill the top end of our funnel.  Then the order of operations looks like the following…

Visitors from Social Media –> Prospects –> Leads –> Conversions

In regard to #2, time commitment, it’s important to understand “time allocation.”  This means that if your company has a sales team, then that sales team should be prioritizing the closing of people at the bottom end of the funnel.

People who are not ready to convert should be “nurtured,” usually by discussing with the marketing or P.R. departments so that the company can “nurture” leads down the conversion funnel.

Even if your company does not employ a sales force, the mental framework of the conversion funnel is an excellent way to understand what order to approach potential customers, especially in regard to what materials to send them & how much time to allocate to various leads, depending on how close they are to conversion.

Because time is the second most precious asset in a company next to the cash on its balance sheet, the ability of the marketing/sales/P.R. departments to both (1) coordinate together to maximize conversion efficiency  ;  (2) correspondingly maximize the allocation of each divisions’/teams’/members’ time is a crucial component to company success.

Management across marketing, sales, & P.R. must effectively put in place systems to maximize communication & efficiency in order to optimally run an operation that successfully adheres to the concepts of the conversion funnel.


The Conversion Funnel

The Objective of Social Media Marketing…

To build a community of passionate followers who care about your brand & you nurture this community over time, so they proselytize others on your behalf.

Obviously, there are other “objectives” to social media if you are merely using it for leisure.  But if you are a company or brand, then the above should be a top priority.

It’s how you fuel word of mouth (henceforth WOM) which is the ultimate boon when it comes to marketing.  Social media, when executed correctly & consistently, allows tremendous “reach,” particularly if you’re offering a product or service that people really want.

That last sentence is key.  At the end of the day, WOM will not be achieved unless your offering is truly great.  In today’s competitive world, your product or service must be excellent, or iterating on the way to excellence, in order to stand out from the crowd.

But if you’re creating, or in the process of creating, a truly “must have” offering, then social media marketing is a fantastic set of tools to explore to fill the “top end” of your funnel.

The Objective of Social Media Marketing…

What’s an Internet Marketplace?

It’s a type of e-commerce site that acts as a “middleman” between those looking to sell a product/service & those looking to buy a product/service.

In the public markets, examples of marketplaces include Amazon, eBay, Alibaba, & Etsy.

In the private sector, examples of marketplaces include Uber, Airbnb, Lyft, & Instacart.

What a digital marketplace does is eliminate friction & engender trust in a sector(s).  Also, a key defining characteristic of a digital marketplace is that it usually handles some, if not all, of the transaction process between the sell side & the buy side.

A deep dive on marketplace metrics is a few posts unto itself, but the two key metrics to discuss right off the bat are:  (1) Gross Merchandise Volume a.k.a. ‘GMV’  ;  (2)  Take Rate.

  • GMV = total $ transacted through the marketplace in a particular period of time
  • Take Rate = the % of the transaction that the marketplace “takes” in fees

So if you are a digital marketplace, in your P&L, your “top line” (revenue/sales) is actually your take rate, NOT your GMV.

To repeat, GMV does NOT equal revenue!

The pricing model of a marketplace is one of the most critical factors in both its defensibility & sustainability.  If you charge too much, you leave yourself open to be overtaken by a lower-cost competitor.

In summary, marketplaces are some of the most exciting businesses being built in technology these days.  The proliferation of mobile globally & the consumer demand for instant gratification are a perfect “soup” for the marketplace model to flourish.

Above being said, it’s crucial for investors to understand that in contrast to SaaS businesses or social networks, digital marketplaces take more time to build & see results from.  We can dive deeper in a future post as to why this is, but it has to do with building marketplace “liquidity” (need enough sellers/buyers).  And executing liquidity requires a very thoughtful approach on the part of the marketplace.




What’s an Internet Marketplace?

What film studios do…


At their core, film studios are distribution mechanisms.  When you hear people talk about “production, financing, distribution,” the most important component of that equation is the distribution element.

In the current paradigm of Hollywood, there exist numerous financing entities that do not have distribution capabilities, from vehicles set up by high net worth individuals to pooled groups of capital created by former fund managers who are now penetrating the Hollywood ecosystem.

But the key takeaway when you think of the “majors” (Disney, Fox, Universal, WB, Paramount, Sony, & perhaps we even include Lionsgate now as the “7th major”) is that they are distribution apparatuses.

I’ve trafficked with people ranging from senior execs in production departments to talent representatives, who literally fail to understand the most crucial component of the matrix that defines either (1) the companies they are working for ; (2) the companies that handle their or their clients’ work.

Indeed, wikipedia defines “film distribution” as “the process of making a movie available for viewing by an audience” …This is about as clear as mud.  As my lawyer friends would say, that sentence is filled with “loaded terms” — ‘what process’ ; ‘making a movie available’ etc.

So what exactly is “distribution?” Here’s how I suggest thinking about it:

  • The actual architecture (whether physical or digital) through which studios show (“exhibit”) their intellectual property to consumers, who then part with their $ for the ability to experience said films
    •  Drilling deeper, it involves maximizing revenue through a series of exploitation channels (see a movie at a theatre, watch it on DVD, etc.)
      • These channels have historically occurred in a set “order of operations” which are specifically designed around…
        • Time & Exclusivity (theatrical release comes before the DVD release for example & later on in the lifeline for example, HBO is the “exclusive” home of a specific franchise film for a certain # of showings)
          • Because of differentials in time, there are different pricing structures (pay for a ticket at the theatre, or wait later & see it “free” on TV)
            • Ultimately, distribution aims to maximize sales by creating a matrix of opportunities for consumers to actually consume

In summary, film studios are essentially venture capitalists who make a limited number of investments per year (‘n’ # of films) & then seek to maximize value through what has historically been a pretty set ecosystem in regard to the extraction of said value.

This science-meets-art of extracting maximum value from content is the ultimate goal of distribution.  And it’s what the studios have historically had an iron-clad grip on, which separates them from say an independent financing entity or a production house that just produces.

The interesting thing about all of this is that with the rise of the internet, that aforementioned ecosystem is becoming less “set” as technology infringes upon every aspect of the film landscape.  And the conversation revolving around the changing technological landscape is by far the most fascinating in regard to the distribution ecosystem.  But that is a conversation to be continued another time…

What film studios do…