In JC’s Newsletter, I share the articles, documentaries and books that I enjoyed the most in the last week, with some comments on how we relate to them at Alan. I do not endorse all the articles I share, they are up for debate.
I’m doing it because a) I love reading, it is the way that I get most of my ideas, b) I’m already sharing those ideas with my team, and c) I would love to get your perspective on those.
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đź’ˇMust-read
👉Unit Economics and The Pursuit of Scale Invariance (TribeCap)
This article is a must-read on payback vs. LTV:CAC, and how to compute it and make it visually appealing.
When we think about unit economics we are primarily thinking about the following quantity: gm*LTV - CAC
gross margin, CAC and LTV (lifetime value).
We included gross margin in our LTV.
Payback the rule of thumb for most venture investors is to consider n<6 months to be great and n>2 years to be not so great and everything in between to be the range of normal. From an investor's point of view, shorter paybacks translate to leverage on the invested dollar because capital spent on S&M can be recycled faster when paybacks are short.
Payback is really the most important metrics in terms of acquisition, because it implies how much you can invest.
We tend to focus on gm*LTV_n - CAC which we refer to as the "unit (or contribution) margin after n-months".
First up we look at how total acquisition spend has trended and what the resulting cohort sizes were. (...) Dividing total acquisition spend by cohort sizes gives us a rough estimate for per-unit acquisition cost (...) and helps to set the context in terms of the high level growth and spend.
The folks at Theta Equity did a far more in-depth treatment of Slack at their IPO here. They ended up with a 3 year payback largely due to the superlinear shape of the LTV that I mentioned above.
Example: Insurance At scale, gm*LTV_n is something like (1-loss ratio)*k*annual_premium. Looking at Lemonade's S-1 suggests an annual premium is $183 with a loss ratio of ~72% which implies $51 of gross profit in year 1. They seem to suggest a rough CAC of ~$90 which would imply a payback in roughly 2 years.
Interesting benchmarks.
All interesting companies have LTV curves that are linear or better and thus the inferred LTV is infinite which is clearly meaningless. Hence why we focus on payback as opposed to LTV:CAC.
A brand really means to me that if you turn off your marketing engine and you're not splattering the consumer with reminders of "buy my product, buy my product, buy my product". Do they remember you? Does it last, Does it last in different cycles? Do generations associate it with feelings?
When you experience a good brand that you love, it leads to more consumption and not just necessarily of that individual product, but of everything that that brand does.
I think route to market customers and markets is critically important as you brand build, because one in 10 Americans influence the other nine and you've got to get to that one and 10 in order to build your brand momentum because if you get to the wrong 1 in 10, or you try and get to all 10 without a brand cache, you will fail.
Build a really strong network of understanding: which influencers actually influence and impact versus those that simply reach.
Build up a database of the people that you think can be that 1 in 10. You're never going to get it right completely, but with a limited budget, I've got to make sure that my million-dollar budget gives me $10 million of impact.
Oftentimes they're not famous people. What they always are is authentic.
Consumers have very good bullshit meters.
There's a reason you never see Chanel on discount, and there's a reason you never see super-premium brands like Hermes, or frankly, Apple is very rarely on discount. And there's a reason behind that, and there's a logic. If you oversaturate the consumer too quickly with the brand that you're trying to build as being authentic and iconic, it loses that luster.
👉An Interview with Brad Stone about Amazon Unbound (Stratechery)
How central Bezos is to the invention process at Amazon. [...] It always traces back to a nutty idea by Jeff on a whiteboard or in an email, and everyone scrambled to make it happen. He personally oversaw it, and he authorized the investments in it, and he authorized it when other people were unclear how it could happen.
You look at the S-team now, and there aren’t a lot of technical people on it anymore.
How to have more technical leaders?
There was a group called competitive analysis or something like that and the finance folks were in charge of it, and they would order products from competing retailers and time their delivery, and create, study, and tabulate the metrics of how good competing retailers were. Amazon is a student of the competition.
How do we study better competition? (while not making our decisions only based on competition).
For the older stuff, seven plus years, he wants to see a different kind of operating signature. He wants those businesses to stand up on their own and show improving performance.
The seven year timeframe is interesting.
đź—žIn the news
📱Technology
👉Facebook’s Metaverse Opportunity, An Interview with Matthew Ball About the Metaverse (Stratechery)
We can’t just focus on building great experiences — we also need to make sure we’re helping to build ecosystems so millions of other people can participate in the upside and opportunity of what we’re all creating.
The virtual goods economy, buying and selling skins and extra lives in those types of environments, did about $54 billion in transaction revenue last year, go back to 2015, you were at sub $5 billion.
Interesting data point about digital goods.
The overall utility of interoperability is advantageous. The fact that you don’t need to rebuild everything over and over will drive some interoperability.
Epic, for example, has continuously purchased companies, and over the past two years, every time they do that, they cut their store fees by 50%. For the most part, when you’re buying multiple different services from Epic, even though they are obviously different, they net back part of the fees. So for example, you pay 5% for Unreal, you pay 12% on Epic Games Store. Those are obviously different services, but if you use both, you pay only 12%, you don’t pay 17%. You essentially get Unreal for free or 5% off. This combines against all of their assets, so we see enormous effort in terms of what they are acquiring in order to make it easier for developers to build the Metaverse with tools.
👉Square Buys Afterpay, Network Effects, Apple and the Cost of Time (Stratechery)
That network effect didn’t come cheap, of course: the all-stock deal’s implied purchase price of $126.21 AUD ($29 billion USD) is a 31% premium to Afterpay’s Friday stock price, and is nearly 20% of Square’s market-cap.
Surely it would have been much cheaper for Square to build its own BNPL service (like PayPal has)?
Perhaps, but the real cost of doing that would have been time. BNPL is not only taking off now, it is also drawing the attention of some very large competitors.
Interesting analysis of why Square decided to spend 20% (!!) of its market cap for a key acquisition
🏥 Healthcare
👉Cityblock Health. The Vertically-Integrated, Value-Based Arbitrageur Fixing Healthcare (Not Boring)
It’s Medicaid and people who are dual-eligible for Medicare and Medicaid. Cityblock Health works with some of the most at-risk, medically complex, lowest-income people in the country to deliver comprehensive care that addresses the tangled web of root causes that leave them coming back to the ER time and again, and leave taxpayers footing the ballooning bill.
Focus on the less served. How would you do that in France? Ping me if you have good ideas!
Approach that’s as vertically integrated as it gets. [...] Cityblock is taking a holistic, vertically integrated approach, addressing the medical, mental, and social needs of its members, treating them like whole people.
It has physical clinics, teams full of primary care providers, pharmacists, psychiatrists, therapists, geriatricians, social workers, and other care providers on staff (with equity and Slack access), and a growing tech team building custom tools to scale Cityblock’s approach to millions of members.
Understanding their members:
In their flagship Brooklyn market, the average member:
Has 8-10 diagnoses at any given time
Is on upwards of 12 medications
80% don’t live with nuclear family members in the same household (low social support structures)
20% are housing insecure
Almost all have experienced trauma and/or other behavioral health challenges
How they go and find members:
On July 3rd, the team hit the streets to find them. For some, they only had a name or an address. They knocked on doors. On the second day, Independence Day, they saw their first member. He was an older gentleman, in his eighties, living in the basement of his family’s home in East New York. He was blind, didn’t have medications, was living in a “dark cave,” and hadn’t seen his healthcare provider for years. The team did a three hour comprehensive assessment, right there, in the basement. They told him they could help, and they asked him to opt-in to working with Cityblock. He did.
They hire “Community Health Partners” from within the communities they serve. They give them lots of latitude to get the job done. Community Health Partners build a direct relationship with members. They give them their cell phone numbers. Members don’t deal with “Cityblock,” they deal with “Joe,” a person from their community who’s on their side.
it’s cheaper, and more effective, to take care of people upstream than to deal with the consequences downstream.
“There’s an extreme emergency medical safety net, and almost no social safety net.” The government is willing to spend almost anything to keep a person alive when they come into a hospital, but is much less willing to spend the money it takes to address the issues that lead to their hospitalization in the first place.
It puts together cross-functional Care Teams each responsible for about 1,000 members. Care Teams include pharmacists, physicians, therapists, social workers, Community Health Partners, geriatricians, and more. They’re all employed by Cityblock. They all have equity in the company. They work together on Slack and in Cityblock’s own system, Commons.
They schedule appointments, they facilitate payments and handle insurance paperwork.
80% of Cityblock’s visits happen in members’ homes, because they’re more difficult to engage and it’s important to meet them where they are. The best way to make sure someone shows up to an appointment is to bring an appointment to them.
They make sure their members are getting all the treatment they need, and not paying for treatments they don’t. When disaster does strike, and a member ends up in the ER, Cityblock’s network gives team members a real-time feed of admissions.
Low tech to be sure to serve their members:
First, Cityblock tried asking members to access telemedicine appointments from their devices, but they didn’t all have devices. So Cityblock sent them tablets, but they didn’t all have reliable internet. Ultimately, Cityblock hired paramedics, rented cars, and told members, “Call us. We will be at your door in 90 minutes.” And they were. Paramedics showed up to handle members’ needs on-site and connect them with doctors for telemedicine consultations.
Some members use a beta version of a Cityblock app for telehealth consultations over video or text, but many still choose to text their Community Health Partner directly.
Data from its first cohort suggests that Cityblock members have 20% fewer hospitalizations.
No-show rates dropped from 50% to 5% (the power of showing up to members’ homes)
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Thank you for the City Block reference. Very useful! Floris