identifying butter experiences
It’s been over 2 years since I started angel investing and while I’ve always had a deep knack and enjoyment from trying new products and betting they will exist for the forceable future, being a successful investor is so much more than ‘build something people want’. I figured if I’m good at picking products that people enjoy using and using myself that also can reach profitability, how they reach profitability matters as much if not more.
The contrary in itself isn’t true either. I’ve seen plenty of products that have become dominant forces in their verticals that are not loved by their users. Ultimately it all comes down to capital efficiency; how much is a product or service worth and what does it cost to build and distribute it. Macro economics such as the cost of capital largely impacted by interest rates, barriers to entry constructed through regulation all play a major role to what is the underlying unit economics.
All companies that go public when aren’t doing well can be acquired at an attractive rate via private equity. It’s an interesting thought exercise as there is no set valuation and returns are simply the delta between the price equity ratio of the market values and your value of that share at a point in time as well as the entry and exit points during the lifecycle of that company. This is why its’ said, it’s often not enough to be right, others have to be very wrong as when the price is baked into the market price there is no delta.
So what factors demolish your chances of winning even if the company does do well? Luckily there are only two that matter and they’re both in the term sheet; the price you get into the round and the liquid preference stack. If the stacking order is constructed in such as way that future investors can change the rules after the game begins, the house always win.
So what about finding products that bring joy? Those that deliver smooth as butter experiences. Luckily a lot of those are priced in a business KPI such as churn rate, payback period and CAC. Obviously, identifying these metrics when the product hasn’t existed is downright unattainable so picking things early that can’t track these stats but can be derived from the usability is a competitive advantage.
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