Stickiness

It is possible to classify companies in three dimensions:

1) B2C / B2B

2) Tech Enabled / Tech

3) Transactional / Continued Services

Naturally, the largest companies in the world are B2C. After all, there are 7.9 billion people that need to eat, to be entertained, to communicate, to use banking services, to improve health, etc. on a daily basis.

Typically, B2C companies are marketing intensive, promotion sensitive, and price-elastic. Since gross margins are low (because competitive advantage usually stems from cost minimization and customer experience and not from technology differentiation), scale is important. In addition, swings of customers’ preferences can easily change the fate of B2C companies (for the good or for the bad) in a short time span.

In turn, Fabrica Ventures focuses in B2B-Tech-Continued Services companies, which enjoy a completely different dynamics:

* First, in order to prosper, B2B companies need an addressable market of many good companies, and that’s why B2B companies usually thrive in the US – not surprisingly, given the small size of the Bovespa (less than 380 companies totaling a market cap smaller than Amazon’s), there are only two services-related B2B companies in the top 100: Totvs and GPS

* The mere scrutiny and selection standards of a procurement process attest on its own the quality of a B2B offering and, thus, of a B2B startup

* B2B-tech companies typically enjoy high gross margins, 60% to 80%, because most of the offering costs are sunk in R&D — that’s why tech startups need lots of R&D-oriented capital and why scaling up is so critical in order to benefit from the marginal income of each sale

* And due to their high gross margins, by stepping on the sales brake-pedal, they can rapidly improve the cash flow, whenever the wind blows to the wrong direction

* Lastly, the subscription-based model (“as a service”) brings revenue stickiness and low attrition – a decision to change a software, for instance, is not a small thing for a company; the switching costs are inevitable high

Conclusion

In the present moment of market shake-up, B2B-Tech-Continued Services startups have been the ones with the strongest valuation stickiness.

As expected, Fabrica Ventures investment thesis is sticking together.