Spectacles and $SNAP's $20B Valuation

Some quick numbers:

2016 Revenue: $515M (up about 6x year over year due to artificially restricted advertising revenue prior to 2016)

2016 Expenses: $919M

2016 Operating Loss: $404M

To justify a $20B valuation, the market is suggesting that, at some point in the future, Snap would need to generate financials that look something like this (assuming no discount for risk/time):

Revenue: $10B

Operating margin: 20%

Operating profit: $2B

P/E multiple: 10x

Growing revenues and profits by about 10% / year each

I don’t see any way Snap’s current business can achieve these numbers. Revenue needs to grow 20x, and margins must expand dramatically. I won’t dive into cost structure in this blog post, but let’s think through how Snap could grow revenue 20x.

Snap’s revenue is a function of two numbers: number of users, and average revenue per user (ARPU). In order to achieve 20x growth, Snap needs grow both of those metrics 4–5x. Let’s look at each figure.

User Growth

Snap’s user growth came to a near stop after Instagram launched a direct clone called Stories in September of 2016:

Snap’s daily active users grew just 3% in Q4 2016. At its current growth rate, it will take Snap 47 quarters = 141 months = 11.75 years to grow its user base 4x. It’s possible that growth could accelerate in the future, but given the law of large numbers and fierce and unrelenting competition from Facebook — read this excellent anecdote from a Snapchat influencer — this seems unlikely. Snap’s first earnings report as a public company will be telling. User growth will be, by far, the most watched number.

ARPU

Next let’s look at Snap’s ARPU growth. See the gray line in the chart below from Stratechery. ARPU is the grey line plotted on the right-hand axis.

ARPU, the grey line, is growing quickly. By looking at this graph, one can see how ARPU could grow 4–5x in the next few years, maybe more.

However, there is some fundamental limits at play that’s not visible in that line. ARPU is a function of time spent in the app. The more time people spend in Snapchat, the more ads Snap can show them. This is significant because there’s a fundamental maximum ARPU since Snap is competing for a fixed pool of time. People still have to eat, work, etc. so there’s a natural limit to ARPU.

This begs the question: how much time do users spend in Snapchat today compared to other social networks, and how will that number change over time?

Facebook just reported that users spend on average 50 minutes per day (United States only) across the Facebook apps — Facebook, Instagram, Messenger, and WhatsApp — and that this number is growing. It’s up from 40 minutes in July 2014. However, it’s premature to suggest that Snapchat will follow a similar usage model. Even by July 2014, Facebook’s core application had effectively saturated the US market, with more than 80% of US adults on Facebook. It’s seems very likely that the growth in time spent in app per user was driven not by the early majority, but by the late majority and laggards (see below chart below from the famous book Crossing the Chasm about how to think about which customers are adopting a given product).

Facebook doesn’t breakout usage by time-driven cohort, but intuitively, this makes sense. Among my millennial peers, I don’t think usage has grown by 50% in the last few years. But I can certainly see that Facebook usage has indeed grown among my mother’s and grandmother’s peers. 2 years ago my grandmother didn’t have Facebook. Now she’s on it every day!

Moreover, Facebook’s reported daily engagement numbers include Instagram. Had Facebook not purchased Instagram, Facebook’s aggregate numbers likely would have dipped as millennials have largely abandoned Facebook for Instagram and Snapchat. So there’s real risk to Snap that the innovators and early adopters may not maintain their engagement in the future.

My point is this: as Snap grows its user base, it’s unlikely that the early and late majorities will spend as much time in the app as the innovators and early adopters. That means it’s likely that Snap’s average time spent in app per user is likely to decrease, which will be a significant strain on Snap’s total ARPU. Facebook was able to buck this trend, but that’s because Facebook purchased Instagram. Snap has no guarantee that its users won’t migrate elsewhere, or that it’ll be able to purchase its analogous Instagram. As Snap grows, they’re likely to find that the next 150M users simply will not use the app as much as the first 150M users.

In summary: Snap’s current business doesn’t justify a $20B valuation. Snap’s user growth has nearly stopped, and although ARPU is growing at a healthy rate, there are very real risks that could slow or stop ARPU growth. And to top it all off, Snap isn’t offering voting rights to public market investors, which should discount the stock price further.

How can one justify a $20B valuation for Snap?

Innovation at Snap

Directly from Snap’s S-1:

“We invest heavily in future product innovation and take risks to try to improve our camera platform and drive long-term user engagement. Sometimes this means sacrificing short-term engagement to introduce products, like Stories, that might change the way people use Snapchat. Additionally, our products often use new technologies and require people to change their behavior, such as using a camera to talk with their friends. This means that our products take a lot of time and money to develop, and might have slow adoption rates. While not all of our investments will pay off in the long run, we are willing to take these risks in an attempt to create the best and most differentiated products in the market.”

Snap has introduced a panoply of well-regarded features over the years: stories, face and location filters, memories, discovery channels, etc. Their track record in product innovation has been superb:

All of these features have been designed to drive engagement in the current line of business, which ultimately exists to increase time-spent-in-app, which drives ARPU, which has natural limits as discussed above. These innovations have been great, but within the confines of the current business line, Snap is going to push up against natural ceilings that will ultimately suffocate growth.

Snap is asking investors to bet on its ability to innovate its way into revenue. The product that could most likely justify Snap’s $20B valuation is Spectacles.

These are exactly what you think they are — sunglasses with a camera that automatically upload to Snapchat by connecting to your phone via Bluetooth. That’s it. The functionality is intentionally limited.

The Massive Market Opportunity For Spectacles

Apple CEO Tim Cook recently told the media:

“I regard [augmented reality] as a big idea like the smartphone. The smartphone is for everyone, we don’t have to think the iPhone is about a certain demographic, or country or vertical market: it’s for everyone. I think AR is that big, it’s huge. I get excited because of the things that could be done that could improve a lot of lives.”

Global smartphone revenue is about $420B. The CEO of Apple is suggesting that the opportunity in AR is on the order of $400B. Many tech pundits think the market opportunity in AR could be even larger than that.

What’s The End State For Augmented Reality?

The end-state for desktop computing was achieved in the early 1900s: a folding laptop with a screen, keyboard, and trackpad that control files and applications using a virtual desktop metaphor. The end state for smartphones is a multi-touch piece of glass with a grid of icons and a rich notification system.

The likely end state of augmented reality, in raw hardware functional terms, is conceptually simple: a set of glasses or contact lenses that can render any virtual 2-d or 3d object or text in 3-dimensional space, with or without physics that interact with physical or virtual objects. If you were wearing legit augmented reality glasses, you should be able to blend the virtual and physicals worlds seamlessly… or not if you wanted to “break” the laws of physics J.

But we’re a long way away from this dream. Although the rendering engines and computer vision are rather mature, we’re still years away in terms of packaging all of this in a sleek glasses-like form factor. The primarily bottlenecks are battery and heat dispersion (CPU/GPU can be offloaded to the cloud, and 5G should be fast enough for real-time, cloud-driven computer vision).

To be clear, I can’t forecast the details of how an augmented reality OS should work. How should Google search results appear, how should you navigate them, or how should you read a CNN article versus a Kindle book? I don’t know. But I can say with confidence that the augmented reality OS of the future will have to incorporate everything outlined above as those are some of the key experiences that are unique to augmented reality glasses.

The details of how an augmented reality OS should work are incredibly complex — far more than desktop or mobile computing. With an effectively infinitely large canvas and almost no restrictions, there are far more ways to deliver a crappy user experience. This actually works in Snap’s favor. I’ll touch on this more in a bit.

Snap’s Path To AR Dominance

Controlling the underlying OS will be paramount to capture value. As users look around and interact with the world, the OS vendor will dictate the rules in which applications and cloud services can interact with the real world and the user.

To capture any material part of the $400B that Cook is forecasting, Snap will need to control the underlying operating system on which the glasses function. There are two ways Snap can do this: manufacture their own glasses and bundle their own operating system- a la Apple — or offer an OS to other manufacturers — a la Microsoft and Google. They could in time transition from one model to the other; just because they’re manufacturing their own hardware today doesn’t mean they have to in the future.

In short, Snap faces an extremely tough battle in which they are both under resourced and in which they must catch up on many fronts. But they may have one strategic, “ladder-up”, path that could allow them to vault past the competition.

Apple is obviously working on augmented reality in earnest per Cook’s comments. It’s been widely reported that Apple has had hundreds of engineers working on AR and VR for some time.

Google obviously is as well with the recent launch of Daydream VR. Google also likely has the best computer vision experts, datasets, and algorithms on the planet.

Microsoft has been working on this for about a decade. The first real implementation is the Hololens.

The same can be said of Facebook and its acquisition of Oculus, along with its recent full-frontal assault against Snapchat AR filters and lenses. And again, Facebook has extensive image and computer vision data and expertise.

These companies will invest 10–100x the resources that Snap has to commercialize augmented reality in pursuit of hundreds of billions of dollars of revenue.

Snap is not only out-resourced, but they must also play catch up. Although they’ll likely fork Android, which is open source, for basic OS components, Snap doesn’t have anywhere near the level of cloud services footprint that Apple, Google, Microsoft, and Facebook do. Snap will need to build foundational cloud service APIs that tech giants have been building for 5–10 years such as maps, identity, authentication, etc.

Snap’s Ladder Up Strategy

But Snap does have one major asset that the giants lack: a more clear ladder-up strategy to get there. What is a ladder-up strategy? From Stratechery:

Netflix started by using content that was freely available (DVDs) to offer a benefit — no due dates and a massive selection — that was orthogonal to the established incumbent (Blockbuster). This built up Netflix’s user base, brand recognition, and pocketbook

Netflix then leveraged their user base and pocketbook to acquire streaming rights in the service of a model that was, again, orthogonal to incumbents (linear television networks). This expanded Netflix’s user base, transformed their brand, and continued to increase their buying power

With an increasingly high-profile brand, large user base, and ever deeper pockets, Netflix moved into original programming that was orthogonal to traditional programming buyers: creators had full control and a guarantee that they could create entire seasons at a time

Each of these intermediary steps was a necessary prerequisite to everything that followed, culminating in yesterday’s announcement: Netflix can credibly offer a service worth paying for in any country on Earth, thanks to all of the IP it itself owns. This is how a company accomplishes what, at the beginning, may seem impossible: a series of steps from here to there that build on each other. Moreover, it is not only an impressive accomplishment, it is also a powerful moat; whoever wishes to follow has to follow the same time-consuming process.

Amazon has pursued a similar strategy as they built out the Everything Store, and AWS.

Amazon started off by selling just books because books were easily shippable, easy to search for, and because shipping was slow and readers would be ok with slow delivery of books vs other goods. The next categories were CDs, DVDs, VHS, and video games because they fit the same general criteria. As Amazon built its logistical and server infrastructure, it systematically moved into one new vertical at a time: shoes, kitchen appliances, etc.

By the early 2000s, Amazon had built such a massive server capacity for the holiday season that they had massively under-utilized server assets for 85% of the year. So they began selling that excess server space in the form of Amazon Web Services, which is today far more profitable than Amazon’s retail operations although AWS is about 13 years younger than Amazon’s retail business.

It would have been impossible for Amazon to launch as the Everything Store on day 1. And it would have never made sense to build out a data center as large as Amazon’s just to rent out server space back in the early 2000s. Amazon has continually laddered up.

Back to Snap. Snap knows it’s under resourced, and materially behind its competition in raw technological development. But Spectacles could offer the unique ladder-up strategy that could help it control the augmented reality glasses market.

There are a few steps between Spectacles and the end-state of AR. It makes sense that these will progress through the lens that Snap CEO Evan Spiegel has described: as a camera company.

2016/2017 Spectacles — capture video on the glasses. Manipulate, share from the phone.

Another layer — add a transparent screen that just layers Snapchat-like geo and face filters (possibly other broader “life” filters) into Spectacles. Move some basic image/video manipulation functions from the phone to the glasses.

Another layer — hand detection / finger control / ring control for more rich interactions with filters.

Another layer — full blown general purpose computer vision in which you can manipulate and interact with any digital object in a physical world.

The layers I’ve described are vague, but give you a sense for how the product could evolve. However Spectacles end up evolving, they’re likely to be extremely camera focused. Spiegel has repeatedly described Snap first as a camera company, not as an ephemeral social network.

It’s likely that in the early days, glasses will be inferior to smartphones for most computing tasks that smartphones currently perform: reading, messaging, capturing images/videos, sharing content. It’s very clear that Spectacles today are just focused on the latter 2 jobs.

Similarly, although the iPhone was a general purpose computing device, it launched as just a really nice phone. Apple could never have forecasted how people would use apps like Instagram, Uber, Flipboard, or any of the myriad games. They key was getting the general model for touch and mobile computing in front of people, and iterating from there and unlocking more value over time through software and hardware tweaks. Spectacles are taking the same evolutionary approach. Get the product out there with a very specific use case — capturing and sharing videos — and iterating from there.

This is problem that the other tech giants have. Apple needs to find 1–2 super compelling use cases to drive people to purchase their glasses. Perhaps that use case is capturing images/videos and sharing them on any social network other than Snapchat. Recall that this was one of a few things Google really emphasized with Google Glass. And that’s exactly Snap’s opportunity — people share many more images/videos on Snapchat than any other social network due to the fundamental nature of the app (camera first, not text first, ephemeral) and network.

Google Glass faced exactly this problem. Although the device was broadly capable, it wasn’t excellent at anything, and because it looked strange, consumers never wore it. Snapchat really understands the image/video capture use case better than anyone, and will optimize smart glasses around that first, and then add general purpose compute later. I spent a long time thinking about consumer applications for Google Glass, and watched hundreds of people try on Glass for the first time. By far, the most compelling use case for most people was frictionless image capture. Snap has a massive lead on this front, and will likely double and triple down on it to pioneer the smart glasses revolution.

$SNAP, The Call Option On Spectacles

If Snap nails Spectacles and can control the augmented reality OS for a significant fraction of the market, $20B will be a bargain. But if it can’t, it’s going to take Snap a long time to the achieve financial performance necessary to sustain a $20B+ valuation.

In the interim, the most important number to watch is user growth. If user growth doesn’t re-accelerate, it seems extremely unlikely that Snap will ever grow its audience to be large enough to justify its current valuation.

Republican Game Theory In The Age Of Trump

The Michael Flynn situation is bad. Really bad.

This post will outline Paul Ryan’s game theory on whether to investigate the Flynn situation further and the implications on the Republican party.

Vox provides a good summary of the facts. Here’s the quick version:

1. In December, during the transition, Flynn had conversations with the Russian ambassador to the US. Flynn told Russia that Obama’s Russian sanctions — the sanctions for interfering with the US election — would be revisited.

2. The NSA has for a long time eavesdropped on phone calls with foreign ministers. Flynn never tried to claim ignorance about or illegality of the NSA’s surveillance mandate.

3. Private citizens cannot negotiate with foreign ambassadors. This is a federal national security law.

4. You could argue the negotiations themselves weren’t that big of a deal. That’s probably true, but it doesn’t matter. The Russians knew that Flynn violated a major national security law. The Russians could have used this to blackmail him. Democrats and Republicans alike are outraged because Flynn voluntarily put himself in this situation.

5. In January, VP Mike Pence asked Flynn about his phone calls with the Russians, and Flynn assured Pence that Flynn didn’t break the law. As more information leaked and the press demanded answers, Pence told the press that all phone calls were lawful.

6. About 3 weeks ago, then Attorney General Sally Yates informed the White House that Flynn had violated national security laws.

7. About 1 week ago, Trump was asked about the situation and claimed 100% ignorance.

8. The Washington Post finally verified all of the details as information continued to leak, and hours after reporting the whole story, Flynn resigned Monday night February 13th.

9. Just hours before Flynn resigned, Trump’s senior advisor, Kellyanne Conway, was on national TV saying that Flynn had the full faith and confidence of the President.

Moreover, Flynn is the 3rd senior Trump aide with close ties to Russia to lose his job over Russian ties. The others, Paul Manafort and Carter Page, stepped down during the campaign. At this point, it’s impossible to argue that Trump’s team hasn’t been in active conversations with Russians for months, perhaps years. Since US intelligence agencies have universally condemned Russia for years — long before the 2016 election — Democrats are rightfully calling for substantial investigations.

Even if you don’t believe all of the above to be true, or that it’s exaggerated, or overblown, Flynn’s resignation is an admission of guilt, and a gauge for the magnitude of the situation. Why else would he resign after 3 weeks on the job? He knew he was done for, and decided not to drag out the fight.

So the question is, what should Paul Ryan, Speaker of the House, do? Broadly speaking, he has three options:

1. Openly condemn Trump, start a rigorous investigation, and fan the flames.

2. Say lots of nice things about Trump, that Trump is great, that there’s some law or technicality that says Congress must investigate these sorts of matters as a standard practice, and that he’s sure the outcome of the investigation will be benign.

3. Say that there’s nothing to worry about, choose not to start an investigation, say as little as possible, move on, and tell everyone to focus on the traditional Republican agenda.

Ryan chose #3.

His decision signals that he’s concerned about the outcome of the investigation and the impact the Republican party. Indeed, the outcome could be catastrophic.

So how bad can “bad” be in practice?

Let’s map out a scale of bad things that could happen, from worst to best, for Republicans:

(Note that the House can impeach the President with a simple majority, but the Senate requires 2/3 to remove the President from office. Currently Republicans control the House 239–193 and theSenate is 52–48.)

1. The investigation definitively concludes Trump and the administration broke multiple national security laws, and Republicans in both houses of Congress cave and impeach and remove Trump from office. Although Ryan surely prefers Pence in the White House over Trump, this move would likely rip the Republican party in half or perhaps a 1/3–2/3 split between Trump’s base and mainstream Republicans. This would be an unmitigated disaster for Republicans. It could take a decade to recover. This situation is extremely unlikely though. Congressional Republicans have repeatedly demonstrated that they are ok with Trump’s constitutional violations (see the Emoluments clause of the Constitution). It feels inconceivable today that 19 Republican Senators would cave.

2. The investigation definitively concludes Trump and the administration broke multiple national security laws, and the House impeaches Trump, but the Senate doesn’t remove him from office since the 2/3 barrier is so high. Democrats, in a state of fury, would likely show up in unprecedented numbers for 2018 midterm elections and take both houses of Congress with significant majorities, but almost certainly not 2/3 in the Senate (only 1/3 of the Senate is up for reelection in 2018). Democrats in Congress would immediately try to remove Trump in 2019 for any number of constitutional violations. Even if Democrats get to 60 in the Senate in 2018, Republicans could still comfortably block a Trump removal, and likely would to maintain party unity. Democrats would investigate Trump incessantly in 2019 and 2020 and likely find more wrongdoing, but probably not enough to break Republican ranks. In an unlikely but bizarrely best case scenario, this could even create a window for another Republican Presidential candidate in 2020.

3. The investigation definitively concludes Trump and the administration broke multiple national security laws, but Ryan chooses not to impeach Trump. Although the pressure on Ryan would be immense, he’s already signaled that he’s ok with Trump violating the Constitution. The net outcome would look a lot like #2 as Democrats go to the polls in 2018 in a state of fury.

4. Ryan simply chooses not to investigate, probably loses control of Congress in 2018 because of Trump’s erratic behavior and Republican’s already slim control of both houses. Democrats stonewall Trump for 2019 and 2020, but the Republican party escapes relatively unscathed. They recognize their present opportunity is unique and try to push through as much as of their agenda as possible before 2019.

5. The situation turns out to be completely benign, and Trump and Republicans stick it to Democrats for being trigger happy with not-fully substantiated allegations.

Ryan thinks he has a real shot at #4. I do too. But even if #4 doesn’t happen, the next most likely are #3 and #2, which are bad but not terrible outcomes for Republicans.

The Ultimate Lie

There’s been one common theme throughout Trump’s campaign: that the political establishment in Washington is corrupt, and that he as an outsider can “drain the swamp.” Trump’s final campaign ad is the perfect distillation of this message.

There are many lies contained in this ad. But by far the most salient lie is that Trump somehow represents any notion of change or that Trump is an outsider in any capacity.

Donald Trump is only an outsider in the sense that he has never held formal political office. Beyond that, he is no more an outsider than Hillary Clinton or any of his Republican rivals from the primaries.

If the Washington elite have willfully ignored electorate’s will in favor of rich elites economic interests, we have no reason to believe that Trump will act differently. Consider:

  1. He attends the same parties as the Clintons.
  2. He inherited an organization worth approximately $200M.
  3. He would have been better off investing in index funds rather than running the Trump Organization. He could have made more money from his wealth than from actually working.
  4. He names everything he touches after himself. This is one of the defining characteristics of the elite class.
  5. He lives in a gold-plated penthouse of one of the tallest buildings in Manhattan.
  6. He started a foundation in his own name, and asked for donations from others, and then spent that money on himself. That’s exactly the corruption he accused the Clinton foundation of.
  7. He used legally dubious mechanisms to avoid paying taxes for over a decade.
  8. He has stolen from thousands of contractors — most of whom were poor or middle class.
  9. He defrauded thousands of people who paid to learn from him.
  10. He’s been involved in over 3,500 lawsuits. This number is simply so staggeringly large that the only viable explanation is that he’s screwed over thousands of people whom he’s worked with.
  11. He cheated on his 1st wife with who would become his 2nd wife. And he dumped his 2nd wife to marry a model who is 24 years younger than him. Trump has no interest in his family or children, only in sex with beautiful women.
  12. While he was wearing a microphone, he bragged about how he could sexually assault women precisely because he was a celebrity.

How many middle-class men and women in this country have had the privilege to live a Trump-like lifestyle? Exactly zero. Trump has been a privileged, arrogant, insider who leveraged his money, power, and connections to detriment of those around him. He is the quintessential definition of insider.

Trump has made it clear that there’s only one thing he cares about in life: Donald Trump. At no point in his 70-year life has he shown a genuine, prolonged, material interest in helping or supporting anyone other than himself and his immediate family. Instead, he has gone out of his way on thousands of occasions to take advantage and harm those who were less fortunate and less capable than himself.

Yet, Trump presented himself as the only option that can help the common man from the tone-deaf Washington elite. And the media simply regurgitated Trump’s story and treated it as fact when his narrative couldn’t have been anything further from the truth. Trump positioned himself as anti-establishment. The media utterly failed to highlight that the entire foundation of Trump’s campaign was baseless and false. But Trump kept on repeating his story, and the media and the electorate came to believe that Trump somehow represented change when in fact nothing could be further from the truth.

In the weeks since Trump won the election, we can already see that Trump never intended to drain the metaphorical swamp. He is filling his cabinet with long-serving, establishment Republican figures. I understand it’s impossible to appoint 1,200 outsiders into the federal government in two months. But Trump is appointing establishment Republicans to most of the highest cabinet positions:

Chief of Staff — former RNC Chair Reince Priebus.

Defense — General James Mattis — a former general who was active in the 2003 Iraq Invasion. Congress actually has to give him a special pardon to serve.

Treasury — Steven Mnuchin — a former Goldman Sachs executive.

Health and Human Services — Tom Price — a six term congressional Republican.

Commerce — Wilbur Ross — a billionaire investor who has repeatedly bought out companies, fired staff, and milked the companies for profits.

Attorney General — Jeff Sessions — a Republican senator who was rejected for a federal judge role because he said that the KKK was better than marijuana.

Head of CIA — Mike Pompeo — a congressional Republican who has investigated Hillary Clinton over half-a-dozen times and found nothing of substance.

Transportation — Elaine Chao — wife of Republican Senate Majority Leader Mitch McConnell, and Labor Secretary under George W Bush.

Trump is in no way draining the swamp. He is not acting in the interest of the middle class. Instead, he’s appointing his friends and loyalists into positions of power, and preparing to give himself and the elite class of the US huge tax cuts while gutting the social safety net for the poor and lower-middle classes. He is actively trying to enact policies that will be detrimental to his base: the white working class.

By virtually every measure, now is the best time to be alive in the history of the world. This has been noted by many, including Warren Buffet and President Barack Obama. The Internet has dramatically expanded educational opportunities for everyone; people have more time to enjoy leisurely activities than ever before; medicine is saving more lives than ever before; humanity is on a path to automate almost all physically back-breaking work; globalization is lifting billions of people out of poverty.

Do not believe that Trump is the solution to America’s problems or to very real plight of working class. He doesn’t give a damn about you, your family, or this country. On thousands of documented occasions, he has made it clear that he only cares about himself.

Trade Shows Are War

Note: this post is applicable to trade shows, conferences, symposiums, and other cross-company gatherings.

Last week a first-time founder asked me about getting ready for a trade show. The summary of our conversation was:

Trade shows are the ultimate zero-sum game.

Whether you attend a trade show as an individual scoping out a new industry, as a startup breaking into a market, or as an established industry player, you have a single goal: monopolize the time and attention of your targets to maximize the probability of continuing the conversation after the event.

I generally deplore zero-sum thinking. In the world of startups and technology, I always want to expand the pie rather than fight over a fixed pie. But trade shows are a weird, backwards universe. You’ll spend copious amounts of money and time and you will not close any business or recruit any candidates at the event. None. Therefore your goal is to maximize the probability that your targets want to speak to you after the show so you can actually make something happen.

It’s important to recognize that at a trade show, every single person, piece of signage, video reel, coffee station, workshop, afterparty, etc is your competition. Everything and everyone are competing for the fixed amount of attention that your targets could otherwise devote to you.

Make no compromises in taking as much of their time as you possibly can. Trade shows are war for time and attention that masquerade as civil discourse.

Here are some implications of this lens:

1. Trade show time is precious. Therefore, you need to be on your A game at all times. Therefore, do not drink. Trade shows, either directly, or indirectly through after-parties, hand out what amounts to effectively unlimited alcohol. Do not waste your time getting drunk. You have cooler friends back at home you can get drink with. If you drink, you will talk to less people than you otherwise would have, you will be sloppier in your conversations, and you will not be on your A game the next day.

2. About a month before the event, identify everyone who will be at the show that you want to meet with and coordinate explicit meeting times and places with them. Naturally, you’ll want to meet with them somewhere where you can control their attention. Do not try to meet with your targets in your booth or at a location in the exhibit hall. The exhibit hall is effectively raw anarchy: a state of unmitigated entropy. There is simply too much noise and too many other people vying for your target’s attention on the show floor. As a startup, you likely won’t have the budget or staff to justify have a private meeting room in your booth or to rent out a private suite near the exhibit hall. So instead, meet your targets just outside the exhibit hall, or in a food area. Anywhere that’s easy to find and that has less stimulation than the show floor.

3. I suspect that > 50% of trade show attendees are scrounging for battery cables by 6pm. Turn off all non-essential services on your phone to maximize battery life. Get an external battery pack if necessary. Don’t let your phone’s (lack of) battery distract you from your targets.

4. 50–90% of the people you meet will not be worth your time and attention. Put those business cards in one pocket, and the valuable business cards in another. In the evening, after not drinking, write custom follow ups to each person whom you care to do business with. Make sure to remark on your specific conversation so they know it wasn’t a mail-merged email template. Do not expect a response the next day. In your note, make sure to let them know that you’ll reach back out to them ~2 days after the end of the show, and do exactly that. Do not be afraid to email them multiple times after the show. Your only goal at the show was to get follow ups after the show, so you better damn well make sure that you do.

5. Do anything you can to be memorable. Anything. Trade shows are stimulation overload. Within three days of leaving a trade show, no one will remember what your booth looked like, or even what you looked like. Most people will just remember the hotel they stayed that and some particular events they attended (e.g. a workshop or an after party). The average attendee likely speaks with over 200 people at an event. Of those 200 people, that attendee will likely remember five of those people. Do whatever you have to in order to be one of those five. Unique and tasteful attire is solid, but do more. Have a unique opening. Memorable business cards. An amazing pitch. Whatever. It. Takes.

Understanding The Sales Funnel

B2B Sales pipelines are more telling than most people realize. In this post, I’ll outline how to think about sales funnels, and the implications of the sales funnel on the rest of the business.

What are the stages of the sales cycle?

There are five stages that prospects go through during the sales cycle. These stages will be referenced a few times in this post.

What should a sales pipeline look like?

There are, broadly speaking, three shapes a sales funnel can take (on a # of customers basis; you can see some odd shapes if you track projected deal size throughout the lifecycle of a deal): Conservative, moderate, and aggressive.

Why these names? What makes one of these graphs more conservative than the others?

Let’s look at the same graphs, but from the perspective of a single deal that’s halfway through the sales cycle. To analyze the “sales funnel” for a single deal, let’s examine the ratio of the size of top of the funnel to the size of the bottom of the funnel. The smaller the ratio — or in other words, the “tighter” the graph — the more likely that deal is to close.

It’s obvious which of these models is most predictive for a deal that’s halfway through the sales cycle. The conservative model of course! Companies that have a sales funnel that looks more like the aggressive model really don’t know what the probability of closure is for a given deal because it’s not clear how fast the graph will turn in towards the end of the sales cycle.

What can a sales organization do to optimize towards a conservative sales funnel?

Qualify, qualify, qualify!!! It’s pretty difficult to over-qualify deals in the early days. SDRs don’t necessarily need to do all of the qualifying. The larger the ACV, the more information will be needed to really understand if a customer is a right fit for your solution. While a deal is still in Recognition, AEs and/or SDRs should be qualifying as much as possible.

As one point of reference, during my tenure at Pristine, our close rate on a # of customers basis from Determination to close was 93%. On a $ basis, the close rate from Determination to close was actually over 100% as we had under forecasted almost every deal in the earlier stages of the sales cycle. To be fair, we didn’t have any direct competition. We competed against the status quo, so bake-offs and price-based competition weren’t major factors that impacted the sales funnel conversion rate towards the end of the sales cycle. Obviously, competition will dramatically reduce conversation ratios at the end of the funnel.

The larger the ACV, the more conservative the sales funnel needs to be. This makes sense so that the company can accurately forecast and achieve its quarterly revenue targets, but also because the amount of work required on a deal increases exponentially as a deal progresses through the sales cycle. As a general rule, each stage of the sales cycle takes 10x more work than the prior stage, except Acceptance. It’s imperative to qualify as much as possible as early as possible to maximize the efficiency of the sales organization.

Why is it important to optimize towards a conservative sales funnel early?

Developing a sales process that results in a conservative sales funnel requires tremendous discipline and is a strong indicator of general operational excellence. A startup with a conservative funnel knows how to identify, qualify, and close customers in a systematic way.

There are also logistical reasons to optimize towards this early. Changing the shape of this funnel gets harder as sales organizations grow. Processes become more rigid; coordination, training, and re-training become more challenging; egos grow, etc. For example:

In a 100-person sales organization, it’s going to be much more difficult to change the shape of the curve than in a 10-person sales organization. In a 100-person sales organization, making changes at one step of the funnel will require upstream and downstream changes in the rest of the sales organization. A lot of people will need to be retrained, comp plans restructured, team shuffled, etc. In a 10-person sales organization, the CEO and VP Sales can gather the entire sales organization in one room, walk the whole team through the gap in the sales funnel, how it’s going to be addressed, and discuss the implications for each individual over the course of a few hours.

Lastly, a conservative sales funnel makes a startup a generally healthier and predictable business. In almost all cases, CAC increases as a startup scales. Why? Because as startups pursue growth, they inevitably adopt less efficient customer acquisition channels than those used in the earliest days. Moreover, as a startup grows, competition inevitably does as well, which will drive down close-rates at the end of the funnel, dramatically driving up overall CAC. In some cases, once a brand is established, CAC can decrease as the brand itself draws in the customers, but it should be assumed that CAC will never decrease until there’s material evidence to the contrary.

If you assume that CAC will always increase or perhaps eventually flatten out, the importance of optimizing towards a conservative model becomes even more important. The more variable the cost per lead at the top of the funnel, the more variable the CAC will be at the bottom. This variability will increase the more aggressive the sales funnel is. To maintain a healthy LTV / CAC ratio, it’s imperative to arch the sales funnel inwards towards a conservative model early in a startup’s lifecycle.

Note: I’m a huge fan of Insight Squared for sales funnel reporting and analytics. It makes visualizing and understanding a company’s sales cycle simple. I’m sure there are other tools that are just as good, but my experiences with Insight Squared have been superb.