Ethan Agarwal | Hustle Con 2018

Ethan Agarwal

You just popped in at kanye west get right for the summer workout tape and ladies if you follow these instructions exactly you might be able to pull you a rapper a nba player hey everyone I'm ethan thanks a lot to the hustlecon folks for having me before we get to what I'm supposed to talk about it's 5 ish you guys have been sitting all day we're gonna stretch everyone get up I'm gonna do it with you get up get up get up get up everyone get up alright you're gonna put your hands up you're gonna grab your left wrist with your right hand and you're gonna lean over to your right side hold it for 5 yeah the opposite side of me 5 4 321 switch hands we're gonna go the other side 54 feel it on your right side 3 2 1 let go grab your hands behind your back interlock your fingers and lift as high as you can you're gonna open up your chest and ideally hit the person behind you for 5 four three 21 that's it thank you sit down alright so let me grab my clicker so for those of you who don't know aptiv is an on demand audio fitness product our members pay $99 a year for unlimited access to a large on demand content library we have 22 categories of classes over 25 100 classes and we release 40 new classes a week we try to remove barriers from fitness so we don't think that it should be about you know how much money you can afford to spend or how close you live to a studio or some fancy new equipment so we focus exclusively on audio content our trainers motivate you they guide you through workouts and we have everything from treadmill to strength training to rowing to boxing and we've grown quite well we launched the business 3 years ago we have raised a little over $50,000,000 we announced our series c just 2 days ago which is a $22,000,000 round we had thank you we had to invest this time this time we raised money from some strategics so we had amazon disney and warner music invest in the company which is an exciting vote of confidence from some key players in the space so we launched the business 3 years ago and we grew beautifully we did $5,000 of revenue in november of 2015 and 1,700,000 in july of 2017 so that's a 24% compounded monthly growth rate over that.

Ethan Agarwal

Which is cool the problem with that level of growth is that growth is very expensive and the problem with expensive growth is that you burn an obscene amount of money so we realized that we were burning a little over $2,000,000 a month and in july we burned july of 17 we burned $2,400,000 and you know burn is an interesting thing that's been talked about a lot because it's very relevant and important there's sort of the tactical challenges with burn right which is you're actually running out of money you have to pay people you have to pay for things etcetera but if you ignore the tactical problems with burn the real problem is that you're losing control of your company you're losing control of the thing that you want to build because if you're constantly burning money you're constantly raising money and if you're constantly raising money you're at the whim of the investor community you don't get to have the say that you wanna have on the product that you're building a product is a perspective those of you who are founders are building a product because you have a perspective on the way that the world should be and if you're a high burn company you will inevitably lose control of that perspective so we asked ourselves how do we stop the burn and there's typically 3 options associated with reducing burn the first one is layoffs I wasn't gonna do that I I love my team they're they're fundamental and crucial to everything that we do there's there's simply no way I was gonna lay off my team to to save the cash burn it's it's not something that would be fair to them fair to the business or fair to the members the other option that some people suggested was to slow down our acquisition spend you know we're we're a young company many of you are founders you have young companies I think that the number one piece of leverage the highest.

Ethan Agarwal

Of leverage that any of us have against whoever the large behemoth is in the space that we're trying to disrupt is speed that's the highest. Of leverage that any of us have and if we slow down our acquisition spend that means we slow down our growth that means we lose speed and if you lose speed you're giving up everything so I wasn't gonna do that either we asked ourselves is there some kind of third magical solution that we're not thinking of or that you know people haven't advised us about or that we don't read about and we realized fortunately that there was and that was to fix the working capital position of the business so let's talk about working capital for those of you who don't know what it is working capital is basically looking at the cash inflows of the business and the cash outflows of the business and what you wanna do is set yourself up such that you have a positive cash balance between the money that's coming in and the money that's going out and a lot of people don't talk about it you know especially in the start up community it's not something that's a topic of conversation we sort of see an invoice that's due and we pay it out or we book some revenue and we don't really care if it comes in 5 10 15 30 60 days that's absolutely the wrong way to think about your business the cash position of your business the inflows and outflows will determine the success of the product you're trying to build it literally is the amount of control you have in your product and I know that sounds I don't know dramatic or or or bullshitty or whatever but I promise you the more control you have over your cash position the more control you'll have on your product and ultimately that's what you're there for that's what you wanna build so we're a subscription business we generate lifetime value of a member and so we said how do we improve our working capital and it was either through increasing the lifetime value of the member and receiving the and or receiving the money earlier so to increase the lifetime value of the member we sell our products online but we also sell it through the ios and android app store and as anyone who does this knows it sucks because you have to pay 30% to android and apple to do that so when I say cltv up there I'm talking about the contribution lifetime value which is net of merchant fees and net of any cost of goods sold it's your gross margin basically so we could improve our merchant fees which would mean that we would sell it on web instead of through apple or android so on web we pay 2.7% on apple or android we pay 30% so that's a 27.3% savings like that number 2 is we can increase our conversion so if we increase the frequency and the rate of conversion we're increasing our cltv and last was to actually improve the retention of our members from year 1 to year 2 year 2 to year 3 etcetera which increases the lifetime value so that was on the cltv side then we said how do we receive the money earlier there was a couple of options there number 1 was to explore alternative pricing options so we're a subscription business we char well before this we charged $10 a month for unlimited access to all of our content and that $10 a month price.

Ethan Agarwal

We didn't really test into it we sorta you know it felt right but we realized that maybe we should be testing into it a little bit more so we explored alternative pricing options including an annual plan and we now have an annual plan that's a $100 a year you pay that upfront and we change the price for a monthly to $15 a month so what we realized is that it's more valuable for us to receive a $100 upfront than $15 over 12 or or a $180 over 12 months broken down in $15 increments because of net present value because of cash flow because of working capital so depending on how your businesses work depending on your pricing schemes there may be a meaningful discount which is worth it to get the money upfront that was the case for us the other option for us was financing structures so for those of you who receive money through ios and android you typically receive it 45 or 60 days later so we tried to see can we finance those receivables to receive the cash sooner so what we realized is the the summary of all of this is that we needed to sell annual subscriptions on the web so how do we do that the first thing that we did is we built out a robust engineering team dedicated to the web product the second thing we did is we said why don't we actually make the web product our primary focus from a traffic perspective so any ads any marketing any partnerships that we did instead of sending people to the app store let's send them to the web where again we pay a significantly lower merchant fee the third thing we did is we said why don't we make the web our website a place that people actually wanna come for great experiences for great content as opposed to just making it you know a a sales page where we're just trying to convert people as much as possible why don't we actually make it a really exciting place to be despite that we also said let's continue testing the share out of it to make it a really great sales page so we did a lot of ab testing a lot of iterations on pricing fortunately the result of all of this work is that we went from burning $2,400,000 in a single month to actually being cash flow positive 7 months later and this to be quick okay I just realized that gif is totally wrong we're not throwing out money that's not the message I'm trying to show here we're supposed reverse it's supposed to come in we're we were started receiving money it was positive by the end of that he looked cool doing it I I okay you can do this if you focus on the working capital situation of the business and it took a lot of work from our team to do it but it completely changed the control that we had on the business it can it we we control it now we control our cash position which means we control the product and the perspective that we have I hope this is helpful for you guys for those of you who are founders or entrepreneurs I know the cash stuff cash balance management is really challenging so I hope this is helpful feel free to find me on linkedin or my twitter handle which is right there thank you