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"Plating" the Perfect Investor Update
How to earn a Michelin Star in updating your investors
In recently watching The Bear, a show that chronicles the rise of a Michelin Star restaurant, and the attention to detail that goes into getting that right, I was struck by the parallels to writing an investor update and running a startup. Yes, the meal might end with a pan-seared wild duck in a Ponzu glaze, but the day probably began in a disgusting fish market. Getting to the plating is messy. With over 300 portfolio companies I’ve become something of a restaurant critic, having been to the fish market a hundred times, having seen every type of dish imaginable, every perfectly garnished plate, but also every botched recipe and missing course. I’ll be the first one to admit that being the restaurant critic is nothing at all like being the chef, and watch The Bear and you’ll have a whole new respect for what happens in the kitchen to create the perfectly cooked, timed, and plated experience we all take for granted. But just because your investors aren’t Chefs right now, they’re definitely Foodies.
And the lessons here are identical to how CEOs might “plate” an investor update.
When you go to a nice dinner party and take a seat you’ll typically find a few common items, the combination of which makes a complete set. Usually there’s a plate, a set of cutlery, a napkin, and maybe even a cute dessert fork or spoon that gives a hint at the type of treat that might be in store. When I receive investor updates, hundreds of them each quarter, I quickly scan them like I would a dinner party, looking for spoons and forks and plates and knives. “Am I at In-and-Out with a paper box and fast food, or is this a top-shelf prix fixe Omakase?” What I typically find are more like coffee table TV dinners where there’s no beautiful place setting, and half the items are missing. Most are certainly not Michelin Star plated meals with style. So how can you up your restaurant game to really win that Michelin Star with the Foodies?
Investors really want to see a 360 degree of the business so that we can better help to diagnose problems and spot leading indicators of trouble where we can call upon prior experiences to say, “hey, you might want to dig in on X, Y, or Z.” Taking the view of “Investor as Adversary” is wrong. The same way that a Chef doesn’t cower in the kitchen protecting secret sauces and refusing to demonstrate skill and receive feedback from a patron or critic who’s paid to dine in the restaurant, Founders ought to think of their investors as die-hard Foodies who are bought in believers in your cooking skills, and trying to help you get that Michelin Star. Similarly when founders say, “I’m going to send and update but I haven’t had the time yet,” don’t let perfect be the enemy of done. Yes, you might have aspirations of garnishing that perfect dish, waiting until the protein is cooked to perfection, but sometimes you have to start with an amuse-bouche, bite size hors d’oevres, little morsels to get the meal started. Start with the salad, not a main dish. Don’t get intimidated by getting the whole meal done.
Taking a CPG company as an illustrative example, let’s pretend we’re selling a beverage or a package of beverages. Typically an investor update might talk about top line revenue, maybe even multiply that top line revenue by 12 to state an “annual run rate.” If it’s not recurring revenue contractually guaranteed it’s not “ARR,” which typically stands for “Annually Recurring Revenue” that’s as good as in the bank. Top line revenue is a good first piece of information, but drilling down I’d like to know the composition of that revenue. The next metric that matters is AOV, or average order value. This way in my head I can take gross revenue for the month divided by AOV and get a sense of how many orders are being processed. What’s the concentration of buyers, is what I’m starting to want to know. Many investor updates stop here with a simple pat on the back about up and to the right annualized revenue and perhaps increasing “basket” or AOV. More nuanced investor updates may then talk about customer acquisition costs (CAC) and where these users came from, and perhaps even cohort data about the percentage of those that have come back in months two, three, four. This idea around retention is valuable because I want to know something called lifetime value or LTV. If your average user comes back 1.5 times, and the average basket size or order value is $40, then the LTV is 1.5x40=$60. I’m beginning to see a bit of the picture, but it’s still quite incomplete. I’d like to understand the composition of CAC, how that breaks down across different channels, and I’d like to know how CAC and AOV fit together into the ultimate question which is, “do we make money?”
This might seem like a simple question but it’s not. Money is not top line revenue. The question of “do we make money” requires knowing a few more things. For one, how much does it cost to actually make this beverage, so what are our COGS? If the beverage sells for $5 and our COGS are $3, our gross margin (GM) is 2/5 or 40%. What this means is that our gross contribution margin per beverage sold is $2.
But then this is when CAC comes in because if we’re spending $3 to acquire each beverage purchase, and we’re only making $2 per beverage net of COGS, we are actually losing $1 on every drink we sell. We have a “negative contribution margin.” This isn’t a bad thing, but it’s a yellow flag that highlights a lot of levers we can begin to dig into, for example 1) could we sign partnerships or increase scale such that we could bring COGS down and our gross margin up? Are there efficiency gains here? 2) can we explore new marketing channels, paid or earned, to blend our CAC down such that we can get our contribution margin on a per beverage sale positive? This tinkering can begin once we can see the full table setting and have all the tools.
Top-line revenue / annualized
COGS and gross margin
AOV and average orders per user = LTV
CAC, blended across channels
Revenue - COGS - CAC = contribution margin
Overall running a negative contribution margin might be required for some period of time, and burning cash for SG&A to run the company, hire and develop new product, is productive spend that can likely push the company forward, help launch new SKUs, expand the brand footprint, and build the platform. Running sustained negative contribution margin on a per unit basis, or having bad unit economics that do not scale, is a path to taking dollars in that only produce cents out. In the height of the bull market this strategy was fundable as an “invest in growth” strategy that was short-run negative, but as the market tightens this is becoming less fundable. Investors are looking for quicker dips into the red before coming back into the black, and the per unit economics need to start making sense. Pointing at Amazon or Uber is cute, but like comparing your startup restaurant to 11 Madison, most have a long way to go.
Sometimes it’s useful to go back to the basics and think about the full meal, and what you’re trying to cook and plate. Think about all of the components of the meal and what would give someone the full picture of your business. Some of these things will be highlights, and some will be challenges. Think of your investors as those Foodies already bought into your restaurant trying to help you get that Michelin Star. Their feedback shouldn’t intimidate, but rather help you refine and refine and refine your craft until like The Bear you’ve cracked fully into the big leagues of fine dining.
Plating the perfect dish is an important piece of the puzzle in the ultimate goal which is running a very well put together and sustainable restaurant people love. These same metaphors and parallels hold true. I can tell you that as a Startup Foodie!
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