Many companies today, especially the companies that provide a service based on network effect (ie social networks that become more valuable as more people are on them), focus on the quantity of users as a metric for their success. Whether it be daily active users, user retention, or user acquisitions rates, it all has to do with the quantity of their user base.
And based on that number, the company derives their value.
Historically, this method of valuing a network makes a lot of intuitive sense. In a world where many of these networks are powered by free accounts (Facebook, Twitter, Pinterest, etc), calculating the number of active users allows a company to estimate it’s earning potential based on advertisements or other media reach.
And thus we have gone to see many of the simplest apps reach exorbitant valuations based merely on the growth of it’s user base. Yik Yak, Snapchat, Slack, WhatsApp, etc have been able to reach extremely high valuations relatively recently based on these principles.
And despite the fact that they all have had impressive user growth to justify their valuations, I believe most of these to be overvalued.
I’m no expert in corporate valuation and I don’t claim to be, but as someone who has followed the happenings of the Silicon Valley closely in the past couple of years, these are my thoughts.
How a company should be valued
The value of a company, regardless of industry or product, should be based fundamentally on the value that they create. So in order to properly determine how valuable a company is, we must be able to determine how much value they create.
Of course, investors are making bets on the value that a company is going to create in order to maximize their returns, so the investing mindset is more complicated than the scope of this post.
Value is hard to measure. It generally tends to be more of a qualitative analysis rather than a quantitive. It’s clear that Facebook creates a different value than Twitter which creates a different value than Instagram which creates a different value than all the other social media platforms. And based on that value that they create, they build a community of users that use their products.
This is where knowing your user comes into play. The kind of users that use your products plays a big role in the potential future monetization of your platform. Using the pay certainty technique outlined by Ramit Sethi, determining the profitability of an idea is as simple as asking if the user has the ability and willingness to pay.
But once again, in the world of free accounts and value being based on potential advertising or other vehicles of revenue, the pay certainty technique has a little twist. If your product is being supported by advertisements instead of what users pay, you no longer become the recipient in the pay certainty equation, you become the mediator.
So what does this mean practically?
Understanding your users is important. And I say this not only in understanding their needs and desires, but also understanding how they provide value back to your company to help you grow and become profitable. If your average user is a young college student that uses your product to complain about their professor, they aren’t worth much monetarily to your company if you’re selling advertisement space to maternity products.
Thus, the value of your user base should be dependent on their ability and willingness to pay multiplied by the number of users that fall into that category. And unfortunately, many of the recent social networks that have been appearing with the intent of solving our first world problems attract a group of users that generally don’t care to pay money for the services.
As an entrepreneur, you should be working to build a network with high quality users to maximize profitability. It’s better to have 1000 people that absolutely love and evangelize your product than 100,000 people that merely think your product is cool.
“We might as well not limit our ambition, do a favor to our future self, and not limit how big you dream. Because I think if you dream realistically, it’s not a dream.” In this episode, Lakshya shares about his college experiences and starting his own company.
Show Notes and References
- Lakshya’s background (1:27)
- Lakshya’s background in finance (3:10)
- Lakshya’s experience coming to UCSD from India (8:55)
- The biggest cultural shifts moving from India to US (12:05)
- Why Lakshya started Launchora (16:05)
- How to work in remote teams (26:19)
- Stories on Launchora (29:30)
- Four Hour Work Week – Tim Ferriss (http://www.amazon.com/gp/product/0307465357)
- The Defining Decade – Meg Jay (http://www.amazon.com/Defining-Decade-Your-Twenties-Matter–/dp/0446561754)
- Disney War – James Stewart (http://www.amazon.com/DisneyWar-James-B-Stewart/dp/0743267095)
- Tipping Point – Malcolm Gladwell (http://www.amazon.com/Tipping-Point-Little-Things-Difference/dp/0316346624)
- What advice would you give to your 20 year old self? (39:27)
- What is one thing you find to be true that most people would disagree with you on? (42:30)
When I was in third grade, my friend told me that cracking my knuckles would give me arthritis.
I had no clue what arthritis was, except for the fact that it sounded scary and was probably something that I didn’t want.
Then I was scared. I had often watched my father leisurely crack his knuckles, and was suddenly terrified that he would get arthritis.
I didn’t know what to do. Should I tell my father to quit his habit before arthritis took over his whole body and all hell broke loose? I decided against it. My friend was probably just making something up on the playground.
Besides, I knew that my father was an extremely wise man, and could probably beat my friend to a battle of wits any day. I played a game of chess with my father every weekend, and from his track record of winning every single game, I believed my dad to be invincible. He was the hero of the household that I went to whenever I had any sort of philosophical, technical, or otherwise outlandish questions.
In my freshman year of high school, one of my friends set up his own server and had his own blog running from it. I was jealous. I wanted to have a website too, but I had no idea how to do it. So I marched up to my father and demanded that he set up a server for me. He gave me a weird look at first, but then agreed. Within a couple weeks he had installed linux on an old laptop for me and I was uploading html files to a dynamic dns website.
I felt like I was on top of the world.
of course, I had no idea what I was doing, couldn’t tell the difference between PHP and HTML code, but was extremely satisfied at the fact that I did something that few other kids my age did.
My father showed me how to use wake on LAN to turn on my server from my desktop, and how I could use cd and ls to navigate around the filesystem.
A couple instances I nearly broke the server through my experimentation, and was extremely embarrassed to tell my father. I made mistakes that I had no clue how to reverse, and even hours spent on Google couldn’t rectify the damage I accidentally did to my server. When I finally approached my father again, he sighed and graciously came over to help me fix my machine.
But of course, my father got no credit when my friends were impressed by how I had my own website. I was more concerned by how much attention I could get via the internet instead of thanking my father for enabling me to set up all that stuff. Parenting really is a thankless job.
Situations like this happened over and over again, big and small, continuously through my high school career. In my junior year of high school, I built a quadrocopter with my dad doing most of the hard thinking and educating. But since I was the one with the soldering iron in my hand, I took all the credit.
And on top of that, as I progressed through my teenage years, I had more gripes about my parents than I had nice things to say. I saw all the flaws, shortcomings, and problems of my family and wondered if things would ever change. And even though I recognized that my family got along much better than some of my other friends’ families, I was still completely oblivious to what an insanely amazing pair of parents that I had.
Coming to college, I looked for father figures, mentors, and people that I could receive advice from. I found myself among an incredible group of mentors that gave me incredible advice, guiding me in directions I never dreamed possible.
But somewhere along the line, I looked back at my development through middle school and high school, and realized that my father was more present than I had thought while going through it. I thought about him setting up a server for me, and helping me to build my quadrocopter.
It’s crazy to think that I could have gone through my entire life and missed that. In fact, it makes me wonder how parents feel when their children don’t recognize the sacrifices that they make for their kids.
Ultimately, what matters is unique to each person, and I can’t make that definition for anybody but myself. But something about the human condition is most powerful in it’s ability to connect people together.
Don’t miss it.
The two common beliefs when talking about life principles is that either they are absolute or they are relative.
I’d like to suggest that most principles that are true also have opposites that are true. More often than not, they’re two sides of the same coin. Being successful has never been about fitting in with a crowd, but about standing out. Standing out in ways where you’re doing things so extreme that the people around you don’t fully understand you, if at all. It’s about doing things that are so extreme and different that no one else is doing in order to create opportunities that no one else will have.
Throughout history, the most successful and well-known individuals have always been people with extreme strengths as well as extreme weaknesses. It’s the extreme traits, not the fact that they did everything by the book, that they made something noteworthy. All the famous inventors, scientists, philosophers, revolutionaries, and entrepreneurs had someone try to talk them out of it at some point.
But on the contrary, life isn’t usually very enjoyable when things are taken to the extreme. Blending in is easier, more comfortable, and less resistant to making friends with the people around you. The entrepreneur that tries to fit in with a crowd isn’t going to get much further than everyone else in the crowd, even though they may have a better social life. Being surrounded by like-minded people is powerful, but yet limiting. And having a powerful mentor can be the best thing that’s ever happened to you.
While both of these are deeply valid points, they exist in contradiction to each other. It’s hard to distinguish when you should do something despite what an expert says, and when you should listen to what they say as a mentor figure. It’s hard to know when to stand out and when to blend in, and when to persevere or pivot.
The challenge of the entrepreneur isn’t in the risk, but understanding when to take which extreme in order to build a company that truly matters.
This past weekend, I had the privilege of meeting hundreds of young, ambitious millennials at the Thiel Summit in downtown Vegas. In the midst of Peter Thiel talking about finding something to believe in that few people would agree with, I found many of my peers trying to fit in with what people around them were doing. Many of the summiters weren’t taking the message as a challenge to find the unique truth to hold onto, but trying to integrate themselves into a growing community of people who believe similar things from an entrepreneurial standpoint.
Whenever I find that too many people believe the same thing that I do, I take the time to reconsider what I really believe.
I don’t do this to purposely stir up controversy (although I used to), but to identify the nuances that make what I believe in uniquely different than what most other people believe. I like to explore the extremes in order to see how far I can stretch my perspective and understanding in order to better identify how to think about things.
In fact, I find that sometimes doing the exact opposite of conventional wisdom gets you closer to your goals than following the conventional wisdom.
“Set aside a certain number of days, during which you shall be content with the scantiest and cheapest fare, with course and rough dress, saying to yourself the while: ‘Is this the condition that I feared?'” – Seneca
When it comes to talking about poverty, there is a distinction to be made. The word is generally used to talk about people who don’t have much materially, but people (correctly so) have been using poverty to describe a mindset and attitude that extends much deeper than simply what you have.
Thus, there is poverty as a mindset, and poverty as a condition.
Poverty as a mindset is a factor of believing there is never enough, that you have to desperately beg and fight to get your way through the world, and that you have to desperately protect everything that you have.
The poverty that Seneca is referring to in his work is not poverty as a mindset, but poverty as a condition. The sheer fact of being willing to give up all the “riches” that you may have for a couple days at a time is an impetus for remaining in a place of not only understanding what other people go through, but it allows you to regularly refresh your perspective on material things.
It’s a dichotomy of never settling for less than the best, but also being willing and humble enough to make it through with as little as possible and not complaining.
Mark Bustos, as introduced to me by Ramit Sethi, is a barber in New York City that spends his weekends giving haircuts to homeless people on the street. And although Bustos is a barber at one of the most high class shops in town, he takes his weekends to humble give back to the community.
Contrary to the Machiavellian leanings of writings from influencers such as Robert Greene, generosity is a deeply powerful force that is able to empower people to truly make a difference. And although I don’t disagree with Greene’s work, I find that there is a dichotomy in between having an abundant and intentional mindset while also being extremely generous and open to the things around you.
The idea of practicing poverty is one that I’ve been thinking about lately, as it’s very easy to allow your means to influence the way that you live. Just as people abstain from food by fasting, or even the “technology fast” that has been increasingly popular, choosing a regular interval to fast from extraneous things helps us to remain resourceful in the way that we approach life.
Today I have the honor of sharing a conversation I had with one of my closest friends / mentors. Brandon has been one of the biggest influences on my journey, and much of who I am today can be attributed to him.
Show Notes and References
- Brandon’s background as a child (3:12)
- When Brandon began thinking for himself (5:20)
- Education of Millionaires by Michael Ellsburg (http://www.amazon.com/Education-Millionaires-Everything-College-Successful/dp/1591845610)
- Brandon’s journey through education (7:35)
- Brandon’s learning framework (12:55)
- The 4 Hour Chef by Tim Ferriss (http://www.amazon.com/4-Hour-Chef-Cooking-Learning-Anything/dp/0547884591)
- The learning framework applied to learning piano (15:00)
- The biggest gaps between learning and education (17:50)
- Brandon’s journey after college (18:23)
- What recommendations would you give younger people? (24:45)
- Start with Why by Simon Sinek (http://www.amazon.com/Start-Why-Leaders-Inspire-Everyone/dp/1591846447)
- Ramit Sethi (http://iwillteachyoutoberich.com/)
- How to network (29:55)
- How to Win Friends and Influence People by Andrew Carnegie (http://www.amazon.com/How-Win-Friends-Influence-People/dp/0671027034)
- Never Eat Alone by Keith Ferrazzi (http://www.amazon.com/Never-Eat-Alone-Expanded-Updated/dp/0385346654)
- The Power of Habit by Charles Duhigg (http://www.amazon.com/Power-Habit-What-Life-Business/dp/081298160X)
- Habits and attitudes that change everything (33:56)
- How Brandon does his mornings (38:12)
- What success means to Brandon (40:18)