There are two ways to create an overvalued Internet company

Absrtact: There are thousands of new Internet startups every year, so the potential of company scale is becoming more and more important. A good product is always the most important, but a clear promotion strategy can accelerate the growth of the company. Many early VCs have started to use this problem

There are thousands of new Internet startups every year, so the potential for company scale is becoming more and more important. A good product is always the most important, but a clear promotion strategy can accelerate the growth of the company. Many of the early VCs have started to use this as a measure of investment start-ups: Will this company become an overvalued company?

In general, there are two ways to create an overvalued Internet company:

Your users have a high lifetime value, so you can spend a lot of money to get users. The General trading class and the monthly order mode of the company has a higher user lifetime value.

Your services or products have a viral spread effect and have a network effect, so you can get a lot of users cheaply, and at first you don't have to commercialize too early.

Strategy one: High user lifetime value

The high user lifetime value is different from the vertical domain, so a better way to analyze it is to refer to the user's lifetime value and the user's cost ratio. According to my experience, the company is more interesting if the user's lifetime value is three or four times times or more than the user's cost.

The top two features of high user lifetime value companies are repetitive buying habits and low user churn rates. Companies with these two characteristics are typically those that meet the day-to-day needs of users and SaaS companies that can provide differentiated core services to users.

For a VC, the difficulty of evaluating a company with a high user lifetime value is that the criteria for measuring such a company change after the scale. For example, when the most effective marketing channels are developed, the cost to users increases. And, as companies grow, the rate of user churn tends to rise. Early adopters are the most loyal to the company, and often serve as the company's brand ambassador, while those who receive it later through paid marketing channels are less loyal.

Strategy Two: The effect of viral transmission

Another kind of large-scale strategy is through the viral transmission effect and network effect to obtain more than tens of millions of users. These companies have almost zero cost to access users, but the value of each user is relatively low, and the business model is generally advertising or value-added services.

A large number of companies and Facebook firms fall into this category, such as Zynga, but the free lunch is now gone because Facebook has started to commercialize its users ' access.

More interesting is the network effect of SNS and Business Circle category (Taobao) company. If these companies can do it, they will not only get a lot of users for free, but they can also have high user stickiness and high barriers to entry for future competitors.

The purgatory zone between the two

Unfortunately, many consumer-facing Internet startups tend to be stuck between the two strategies: their users ' lifetime value is low and there is no viral contagion. Under this unfortunate combination it is hard to have a company that has valued billions of dollars.

As the consumer-facing Internet market becomes more and more crowded, every entrepreneur should think about the two-scale strategy. Too many entrepreneurs feel that users will naturally run to use their products, completely underestimating the difficulty of getting users.

Only the large-scale start-up companies can be independent, and to obtain the favor of investors. The sooner entrepreneurs think about this, the better, because it's likely to affect the product. A 100 million valuation may seem remote at first, but you have to think about the way to get there from the start.