| Name | Description | Notes |
|---|---|---|
Sustainable competitive advantage | How easy is it for someone to provide the same product or service that you provide? Are there high barriers to entry? | |
Value to the incremental customer is a direct function of the customers already in the system | Some network effect systems are stronger than others. Network effects are NOT merely economies of scale. | |
Certainty of future cash flows through e.g. recurring revenue, low churn, etc. | ||
Ease of switching to your competitors' products or services, which directly impacts customer life. | Can take many forms: technical lock-in, data lock-in, high startup costs with new vendor, etc. | |
High gross margins necessary for high cash flow. | ||
If good, higher revenues = higher profit margins i.e. increasing returns to scale. | Common in zero marginal cost businesses. Seen via marginal incremental profitability e.g. QoQ or YoY. | |
Concentrated customer base = risk. | ||
High partner dependencies = risk. | e.g. many businesses' dependency on search traffic and SEO. | |
Organic demand is free; marketing = buying new customers = less efficient and less profitable. | ||
Must be able to translate into profit e.g. own-the-market-then-profit is good; buy-the-market-without-path-to-profit is bad. | ||
Capital-light businesses are far less risky vs. those that require heavy capex | ||
High cash flow can be translated into earnings when it makes sense; earnings without cash flow is value destructive. | ||
Option to generate new businesses is preferable (e.g. Amazon with AWS = turning a cost center into a profit center) |