Value Atoms: The Growth CFO II

Somewhere between the last 409A and the next raise, your cap table quietly goes stale.

For most finance teams, equity compliance means juggling multiple vendors, stale data, and quarter-end fire drills. 

Pulley syncs 409A, ASC 718, and cap table accuracy into one platform, so audit prep becomes a quick review. Thousands of finance teams already run equity this way.

See why at pulley.com

Think back ten years, to a simpler time. Before the pandemic. Before ChatGPT. Before influencer boxing.

Frank Ocean was about to release the best album of the 2010s, Blonde, and we were still mourning the deaths of David Bowie and Prince.

I’m not saying their demise led to the decay of modern society, but it definitely didn’t help…

Blue Apron was a darling startup of that time. A pioneer of the meal-kit era; HelloFresh is the European-born version of the same basic idea.

Instead of trudging around the supermarket after work wondering what the hell to cook, Blue Apron would send you the recipe and all the pre-portioned ingredients you needed to make dinner at home:

The business exploded in growth. Founded in 2012, by 2016 it reported $795 million in revenue, and IPO’d in 2017 valued at nearly $2 billion. You can see why everyone got so excited.

The message in the S-1 was simple: we are a rocket ship and just need to do more of what we are doing. Grow customers, grow orders, and we’ll win…

Note how they hero total Orders and Customers. Repeat Orders are described as a ‘useful’ metric, but are clearly subordinated to the big, sexy growth headline metrics.

So, how did they grow orders and customers? With heavy upfront incentivization. Like, 1994 Yokozuna heavy…

They offered the first box at half price. A typical two-person box, with three recipes and six servings, was priced at ~$60, so you were getting $30 off.

A genuine bargain. You probably could not have shopped the same ingredients in Walmart for less.

But then, once the full price subscription started, for most customers it was just an expensive delivery service for basic items. One that carried all the risks of mass physical fulfillment: late boxes, damaged ingredients, warm food, missed dinners.

Most customers churned super quickly (average orders per customer were ~4).

Gross margin was reported at around 33% in 2016. That means they made roughly $20 of gross profit on a full price $60 box, before marketing and overheads. That is not a perfect contribution-margin calculation, but it is likely a fair proxy.

The problem was they also spent $94 to acquire a single customer in marketing. Customers who were - in the main - being hooked in by, essentially, cheap groceries and the trial of a novelty service.

The math was absolutely horrible.

In 2017, average revenue per customer was $245. At their gross margin, that is only about $75 of gross profit before marketing and overheads. Against acquisition cost.

And that was also…

Before fulfilment-center overhead.
Before customer service.
Before depreciation.
Before tech.
Before G&A.
Before credits and refunds.

And God forbid there’d be something left for shareholders at the end.

But as long as they had the marketing machine turned on, they could show growth in revenue and orders and a ‘promise’ it would convert to profit once they’d reached scale.

But orders and customers were not the atomic unit of value for this business.

The thing they needed to grow was repeat subscription habit customers. Everything was, or should have been, in service of finding those customers. And growing that number really was the only thing that mattered.

And sure, some people genuinely enjoyed learning how to cook new meals from scratch without needing to find a recipe, deal with the hassle of shopping, or maintain a pantry of obscure ingredients.

But that was a much, much, much smaller pool of people than the pool who would take a box of cheap groceries and novelty cooking experience for a couple of weeks given the chance.

Total orders and total customers were not irrelevant... it was worse. They were a smokescreen.

All that mattered was growing repeat subscription habit customers. Instead, the business had built the overhead and supply chain to service a much larger volume of high-churn customers enticed by novelty and cheap groceries.

It was a fundamentally broken model, and it looked ugly even on a generous EBITDA definition:

And once the public markets got hold of this thing, they crushed it.

As marketing spend came down post-IPO under the scrutiny of the public market, the true nature of the top line was exposed, and volumes crashed:

After an utterly horrible run as a public company, Blue Apron was eventually taken private at a valuation of $103 million, roughly 95% below its IPO valuation. And it had eaten ~$700M of equity investment by then.

Shame, because there was probably a nice profitable core business in there somewhere. But the path would have meant steadier growth; focused on finding habit buyers bought into the meal kit solution, and not getting distracted by costly deal-seeking transient subscribers. Yes, it would have meant a higher CAC, but an even higher LTV, a better LTV:CAC and radically lower overheads.

And a fighting chance of a profitable business…

But that would have meant chasing a very different metric (and IPO valuation).

Last week we started by defining your role in growth as CFO.

And I'm going to address it again here, because two or three people reached out to say they didn't love me saying finance people shouldn't be "driving growth”. 

The arguments were broadly "finance is more than a back-office function”. Yes, of course it is... But I'm now over 500,000 words deep into documenting the CFO role, I'd hope we've moved past those kind of surface-level platitudes into something with a bit more nuance and substance.

Growth is driven by making amazing things to sell, and then selling them well. Finance plays a crucial role in supporting that: helping identify where to grow, setting the guardrails, building the tools, pricing, costing, models, funding the plan. But none of that is driving. It's more like holding the map.

It matters for three reasons:

Everyone has a job to do, and that’s wonderful.

Anyway… I've said my piece. 

If you do still have questions on this, you can submit them into my Mailbag here.

So, this week, we are going to revisit what exactly you should grow, and how you might do that.

The textbooks (especially the finance ones) don't teach us to think about growth the right way.

They take operating profit and break it down. Profit into revenue and cost. Revenue into volume, mix and price. Volume into its levers; more customers, more volume per customer. Or some variant for your business.

And it's not that the tree is wrong, it’s more that it quietly leads you to the wrong place…

Two reasons. First, it ignores the interdependency between the branches; the answer almost always lives in some combination of factors, not in any single one. Second, the top-down math gives every branch equal billing, so you work down the biggest numbers, not the most important ones.

Run Blue Apron through this kind of tree and you only get to the problem when you look at the relationships between the branches…

Revenue growing. Orders growing. Even repeat orders, in absolute terms, probably growing too. And marketing % of sales eventually falling over time too.

But for their business model, the only number that mattered was the the rate at which a new order became a repeat one. If, instead, they’d built a business focused on minimizing churn in the first 3 months, I bet, they’d have built something much better, more durable, and ultimately more valuable.

Another way of looking at this is through the Atomic Unit of Value, or Value Atom for short. It's the unit of volume in a business that, if grown properly, will unquestionably result in more long term value and a healthier business.

Think of it less as a billing metric or SKU and more as a mental model for long-term, durable, good-quality growth.

Blue Apron treated total orders as its Value Atom. It should have been something like customers with three months of uninterrupted subscription; the point at which a trial-chaser has become a habit.

Some other examples:

The art, of course, is identifying the right one. Once you have it, your Value Atom becomes your North Star, and you can build the whole business behind it.

But a North Star pulls everything along with it, including all manner of second- and third-order consequences.

Imagine if Airbnb had set out to grow listings instead of nights booked. The marketing and engineering budget would pour into the supply side. Hosts would flood in, occupancy would collapse, guest experience would rot, and the marketplace would wither, despite looking huge from the outside.

This is where you really can make a difference as a CFO, by helping the business find the right Value Atom… But how?

The trick is to get as close as possible to the problem your customer is actually trying to solve. The best Value Atoms are a unit of that; the problem the customer came to you to solve, not the thing you happen to ship:

Get this right and powerful things happen: your interests and your customers' start pointing the same way. 

And by lining up what you're trying to grow with your customer's problem, you create a causal link between your ability to profit and the number of times you solve that problem. How much profit each one throws off (and how to measure it in cash) is next week's job.

So, that’s the key. And here are four guiding principles to pressure-test a candidate Value Atom once you've got one:

You won't get a clean sweep, this isn't a perfect science. The unit that moves earliest is often the hardest to prove causally; the one closest to real activity might be the messiest to attribute.

My experience is that when you find it, everything falls into place. If it doesn’t feel quite right, it probably isn’t right.

If your business has more than one atomic unit of value, which is entirely possible in large, diverse organizations, it raises an interesting question about your strategy and your ability to grow efficiently.

Sometimes that's perfectly fine. You might simply have two or more genuinely separate businesses under one roof, each with its own Value Atom, each growing on its own terms. Nothing wrong with that.

The warning sign is when it's supposed to be one business, but the atoms aren't compounding together. 

A good business usually has a flywheel, where growing one unit makes the next one cheaper to grow. If you've got multiple atoms pulling in different directions and no flywheel binding them, growth just gets more expensive and less efficient than it could be.

So, with a Value Atom defined, the crucial dynamic becomes, of course, growing the numbers of ‘atoms’ quickly, efficiently and profitably.

I think about this in ten flavors:

I’m going to finish up this post with some notes on inorganic growth. I’ve written extensively about M&A in the past and my view is well documented: M&A is used for growth far more often than it should be, and there are usually better ways to grow.

To explain, remember there are five key types of M&A:

You can also think about each of these in relation to the Value Atom:

So when you look at any deal as a source of growth, get to the nub of it. Which flavor of growth does it actually buy you? Will it get you there more efficiently, more profitably, or more quickly than growing it yourself? And, crucially, is that advantage already baked into the price?

Because M&A always comes with baggage. Transactional baggage. Integration baggage. And what you might call perimeter baggage: the thing you actually want is usually wrapped inside a bigger blanket of things you don't, and those can quietly drag your growth.

That's the depth you need to get to before you weigh a deal against the organic alternative.

Now, let’s make this tactical for you:

Too often businesses grow slightly the wrong thing. The unlock is finding your true atomic unit of value, the thing your customer actually came to you for. Grow that, and profit follows, because you've tied your success directly to theirs.

Next week, we put numbers to the theory: the real economics of growth, how to tie it to the P&L, and what it actually costs to grow.

:::::::::::::::::::::::::::::::::::::::::::::::::::
:: Thank you to our sponsor ::
:: Pulley ::
:::::::::::::::::::::::::::::::::::::::::::::::::::

If you enjoyed today’s content, don’t forget to subscribe.

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.