🦄 vol. 18
sash and matt chat about scalable business models and spacs
scalable business models 🚀
In last week’s feature edition, Senyo introduced us to unicorns 🦄 (startups valued at $1bn or more). If you’re not too familiar with this space, you should know that these (often debatable) billion dollar valuations are usually determined through successful funding rounds, often led by venture capital (VC) firms.
For example 🤔
In March 2021, Flutterwave (Nigerian fintech) reached a ~$1bn valuation after a successful $170m VC-led funding round. In simpler terms, a handful of VC firms invested $170m in Flutterwave for a ±15% stake in their equity, at a ~$1bn valuation. This means that Flutterwave now has the required working capital (or “runway”, as Karl likes to call it) to keep grinding away to hopefully hit its next major milestone… often to raise capital again at a higher valuation (be it through another funding round, or even via an IPO).
VCs want scale, not just growth 🤑
Investing in startups is incredibly risky because the majority of startups – whether well funded or not – often fail. But when they succeed, the returns on early-stage investments can be mind-boggling. Therefore, for VCs to really please their investors (otherwise known as limited partners) who trusted them with their money, they look to fund startups that will scale exponentially, allowing them to achieve disproportionate returns (often also within a strict time frame).
From a startup’s revenue perspective:
🏎 Growth is achieved by adding new resources (capital, people, technology or even business acquisitions) and a startup’s revenue grows as a result
🚀 Scale is achieved when a startup’s revenue grows disproportionately, with little to no additional resources
So if you’re like me and (at some stage) want to get in on the funding action, it’s worthwhile noting that VCs seem to be more attracted to certain types of (more scalable) business models…
Breaking down the business models 🤓
For the purpose of categorisation, I've simplified these into a few.
🖥 Software as a service (SaaS): Google Workspace; Slack; Notion
Charge a monthly / annual fee and grant access to all features
These businesses have monthly recurring revenue (predictability) with relatively low churn (enterprise clients) with growth generated from acquiring new customers (i.e. signing up a new business)
🎮 B2C: Spotify; Netflix
Charge a monthly / annual fee to grant access to all their content
These businesses have monthly recurring revenue (predictability), but typically experience higher churn than SaaS models (i.e. individual users who buy a subscription for a month, consume what they need / test the service, then cancel their subscriptions)
🍔 Consumption-based: AWS Cloud Storage; Shopify
Charge for the amount users consume or make commission on transactions
These businesses grow with their consumers (i.e. the more merchants sell on Shopify, the more revenue Shopify makes on transaction fees)
🛍 Marketplaces: Takealot; Amazon
Facilitate the sale of products or services
These businesses typically make commission on product sales and fees charged to third-party sellers
Don't be fooled. Each of these business models pose real challenges to overcome too, but if you're able to crack the code to any one of them, you're likely on the path to some serious scale. 📈
5/7 of Africa's unicorns are fintechs 🤯
There are obvious African macro economic factors behind this (a large unbanked population, fast growth in mobile and smartphone adoption, a growing number of Africans working abroad and sending money home, etc.). But what is it about fintech that VCs really love? 🧐
Fintech businesses generally have the qualities of consumption and subscription models. 🤝
🎮 Subscriptions: Freemium models (having a free basic offering, but charging a premium for additional value-adds / adjacent services)
This is less of a contributor to scale, but it provides recurring revenue (a degree of stability / predictability)
🍔 Consumption: Transaction fees (earning a fraction of every transaction)
This is where they really make their money. The more people use the product, the more 💰 is made from transaction fees
It's the best of both worlds: Subscription-based gives you predictability, and if you hit scale, consumption-based has no limits. It's essentially a recipe for exponential returns - exactly what VCs are looking for 🚀.
If you're wondering why your Facebook and Twitter feeds have been somewhat devoid of controversy (and a lot less incendiary), it probably has something to do with Trump's (forced) sabbatical. Having served as his primary means of communication with the world, the leaders of Big Tech decided to "deplatform" Trump after the storming of the Capitol, largely driven by Trump's tweet-now-ask-later approach.
But Trump isn't one to stay silenced... 🤐
And just like his hair as he exits Air Force One, he's popped up again. Trump announced he'd be leading a SPAC, which would house his new venture: Truth Social.
WTF is a SPAC? 😵💫
Also referred to as "blank-cheque companies", a SPAC, “special purpose acquisition company”, raises money into a public shell corporation before acquiring a business. It's most analogous to an IPO, minus the regulatory oversight and legal intricacies, and after a stormy past, SPACs re-entered the investment world with a bang. In 2020, 248 SPACs went public (a 400%+ increase from 2019), collectively raising $83B from investors, per the Hustle. Weirdly enough, they haven't been blessed with such glittery returns, with more than two-thirds of SPACs led in the last 5 years now in the red.
And Trump isn't the only high-profile individual that is leveraging their name as a means of raising capital. Sports stars, perhaps most prominently, Shaquille O'Neal, Steph Curry, Serena Williams and Colin Kaepernick, have all dipped their toes into the world of SPACs.
Back to Trump... 🤥
On opening, the shares of the Digital World Acquisition Corp., the SPAC that plans to merge with Trump Media and Technology Group and launch TRUTH Social, surged, ending the day 357% up. And despite the volatility that followed, as well as regulatory intervention, the market capitalisation sits at just over $2 billion. In simple terms, that means old Don has a massive kitty that he can now use to acquire (and then re-purpose) whatever businesses he'd like.
Funnily enough, it's evident they may need to buy some tech talent. Twitter users already managed to get access to the beta site of TRUTH Social, prior to launch, and create profiles with the handles @donaldtrump and @mikepence.
The implications 🤷♂️
Should he succeed in creating a functioning platform, it'll likely be populated by those who have come to adore Trump, and will be filled with the type of controversial (and often vitriolic) stuff that he used to tweet. What he does with that congregation of folk is anyone's guess.
But don't worry just yet. As history has borne witness, Trump hasn't always been the best operations man. One can just have a look at his list of failed ventures in the past: Trump Airlines, Trump University and even Trump Steaks, to name a few. Maybe we'll be adding this to the list soon…
if you’re looking for a primer on web3, matt loved this podcast with naval ravikant and chris dixon (on tim ferriss’ pod)
karl and sash loved this gary v interview with mark zuckerberg on how the metaverse and web 3.0 will change our lives
claude read about how the global chip shortage is ruining christmas