markets & business models

The Evaporation Theory Part 2: Government and Taxes


Think about it–up to 40% of your earnings seemingly evaporates from every paycheck! Last year, we published the first part in our Evaporation Theory, a living thesis on where the trail of money disappears and, thus, where we should look to invest into companies realigning the relative stack and extracting disproportionate economic rent. Then we talked about insurance and our investment in Embroker. Today, we discuss a second route–governments and municipal finance.  


First, we must congratulate Jase Wilson and the team at Neighborly on raising their significant Series A (you can also read about the raise in Fortune magazine, here). We’re honored to partner with Drew Oetting and Joe Lonsdale of 8VC, who have supported the team and mission almost as long as Bee. Big thanks to them for also believing in the mission.

It’s been an amazing ride so far, and kudos to the Neighborly team for sticking to their BHAG (big, hairy, audacious goal) of changing the face of municipal finance. Oftentimes startups move fast, break things, and ask for permission later. Not in this case. The team had to go straight in the front door and spent three years building towards their first municipal offering.  

When we first met Jase, he told us all a story about how the Golden Gate Bridge was built during the Great Depression. Residents of San Francisco flocked to the courthouse steps to bid live on bridge bonds. They were voting to tax themselvesto build this iconic structure to nowhere, hoping that the tolls and general obligations from taxpayers would cover the cost and ongoing maintenance for the next 100 years. They literally raised their hands and were issued pieces of paper in exchange for turning over their hard-earned dollars.  Direct infrastructure investment at its purest.    

“Municipal bonds were the original impact investment.” -Neighborly Founder and CEO, Jase Wilson

Now, we’re not overly fond of governments-as-customers. They are slow to procure, make oddly distorted purchase decisions, and are plagued by waste.  But they offer a huge market and are ripe for technological upgrades.  Municipalities spend a lot of money on technology, and the US municipal bond market alone is in the $Trillions.  

And, finally, it’s worth keeping in mind that governments and bond finance are industries which distinctly lack younger people working on forward-thinking solutions. If the majority of civil servants are approaching retirement and ingrained in older modes of thinking, then an upcoming generation will more likely usher in fresh systems with entirely new opportunities. Whatever the reasons, there is a sense of change on the horizon when it comes to how municipal bond-making happens.   

At Bee Partners, we continue to be bullish on this greater path, but will be cautious about the velocity a startup can achieve from inception. Data aggregation and transparency will surely play stronger roles, and our communities will be more functional places as a result. All this to say, there’s plenty of room for innovation across all aspects of government and municipal finance, and definitely across the routes mapped out by our “Evaporation Theory!”

The Fallacy of Decreasing CAC


On the occasion of Blue Apron’s IPO and Ben Thompson’s discussion around CAC, (apologies for the paywall, but it’s worth it) we want to highlight the importance of understanding customer acquisition cost (CAC) both at any given time, and over time. Just as important as customer lifetime value (LTV), an accurate understanding of CAC provides a crucial snapshot of key performance indicators of performance over a longer trajectory. This will inform company strategy as businesses enter and scale into new markets and demographics.

From there, LTV/CAC as a combined metric is one of the best indicators of a company’s ability to achieve sustained growth. We find this to be most crucial after a company has experienced the hockey stick exponential revenue growth when the growth percentage change (delta) begins to flatten. In the parlance of the adoption lifecycle, this would be the moment around the “early majority” phase. Put frankly, for early stage companies, it’s all about growing revenue. For later stage companies, it is about sustainable growth and controlling costs. Of course, even getting to maturity is rare and impressive and should be celebrated. But the ability to reach consistent, increasingly profitable growth determines long-term success.

The Fallacy of Decreasing CAC: the misperception that as the company grows and awareness increases, customers will grow organically and establish an increasingly sustainable CAC.

Take, for example, a company that provides on-demand laundry pickup and drop-off. The initial customers will most likely be more affluent and tech-savvy, work long hours, and live in an environment like an apartment building with suboptimal access to their own laundry machines. Once this service launches, it will naturally attract a) those who are looking for this type of solution and b) those who are already using a more manual pickup/drop-off service. Both types of customers might be attracted through advertising or through word of mouth; they will find and adopt the service quickly, and the company will get over the early-adoption chasm.

However, moving to the next tier of customers, who will be less apt to adopt the solution, poses new challenges. As the laundry company expands to new markets, it may find, for example, more apartment buildings with built-in washers and dryers. As a result, its network density diminishes and drivers deliver fewer units per trip. Fixed driver costs will be the primary eroder of profit per delivery. Further, this next tier of customers that the service must attract is likely to a) have less discretionary income, b) experience higher onboarding friction (they’re less tech savvy), and/or c) work shorter hours, making them less likely to be seeking an on-demand solution. In a very short time frame, CAC doubles or triples, and customer yield drops. Advertising becomes less effective and the adoption rate per dollar spent drops since eventually you are going after tier 2, 3, and 4 customers. Inevitably, churn increases (people only use the service with initial discount offers, then stop). This is the heart of the Fallacy of Decreasing CAC.

When evaluating CAC, it is crucial to be thoughtful about: 1) the mechanics of how customers are currently acquired, 2) what’s keeping them engaged, 3) what the current user base looks like and how big that market is, and 4) the biggest hurdles and pain points for future customers and how to get them to join. To clarify our thinking, we’ve identified the types of businesses that are likely to have decreasing CAC:

Market network effects (Tradesy) 

As the network grows on the supply side (sellers), the service becomes more valuable to customers and more people use the service. The more customers on the platform, the more valuable for even more sellers, and both sides flock to the platform.

Reputation and premium brand (McKinsey, Bain, BCG)

As you gain a reputation as the best-in-class in an expensive or exclusive vertical, customers will seek you out. It might even be seen as a negative signal to have advertising at all. For example, you rarely see ads for the most expensive and prestigious restaurants.

Drastically decreasing pain, instead of increasing pleasure or providing a marginal improvement (Kayak)

Calling a number of airlines or going through a travel agent is time-consuming or expensive. A service that eliminates the need for either of those will quickly attract customers (though will also attract competitors).

Solutions that customers are already searching for and need (ChargePoint, Twilio)

If there are no charging stations for electric vehicles, then the value of having an EV is reduced. Consumers will be looking for chargers. If ChargePoint starts to expand, customers will gladly pay for their service and businesses/cities will get value for setting up the infrastructure.

In evaluating and interviewing companies, the crucial questions we ask are:

-What is the roadmap for getting to decreasing CAC?

-Is your business naturally set up to decrease CAC?

-Who is your first core customer and what do you predict for LTV, CAC, and churn? How does that change for your second-tier customer?

As a pre-Seed fund, Bee Partners doesn’t expect Founders to have the perfect answer. BUT they should be thoughtful about how to achieve decreasing CAC without saying something vague like, “We’ll succeed by word of mouth.” As we see with financial projections, it’s not a question of whether the answer is correct, but of proving deep consideration about how your company can continue to grow 3-5 years from today. Founders that show this kind of reflection will be better prepared to understand the ups and downs of user adoption and, instead of panicking, will have a plan in place upon reaching various stages.

When Timing is the Critical Path: How Founders can Identify that a Market Network is Primed for Development

Written by Shantanu Mittal


Market Networks have been studied and defined in great detail, most notably by James Currier of NFX Guild.  (pro-tip:  If you don’t know what a market network is, read James’ post before continuing on.)
Here at Bee Partners, we have been at the forefront of investing in market networks through early investments in companies like TradesyBuilding Connected, and Vacatia, and have even seen other marketplaces in our portfolio transition towards a more market-network like approach.

I was introduced to this concept when I first joined Bee and am fascinated by its power to help startups achieve scale so quickly.

But how do market networks get started in the first place? What changes can trigger the creation of a market network? The answer, in my opinion, is a change in the power dynamic between the buyer and seller creates the perfect ground for a market network.

This is an insight that became clearer  when I applied  the market network concept to the healthcare industry. The healthcare ecosystem is a complex network with payers, providers, patients and pharma companies. A lot of health IT investment has gone into improving the ease and efficiency of each of the individual stacks in the ecosystem. But a huge opportunity exists in new market networks that connect these stacks. Traditionally in the healthcare industry, power has been concentrated in the hands of providers and payers. However, with millennials focus on disease prevention and transparency of health plans, we are seeing a dramatic shift in the power dynamic towards a patient centric model.

Figure 1: Number of Registered Studies Over Time


Startups have already started to take advantage of this shift in power dynamic through new market network concepts that focus on the consumer. We are seeing new market networks to help patients find the right doctors and health plans. The focus is on consumer convenience and transparency.  Market networks have created tremendous value and this shift to a consumer driven healthcare model has only just begun. With new trends like Telehealth and democratization of genomic data, we can expect to see a continued evolution of market networks in healthcare.

Another major area of healthcare that is frequently overlooked in the health IT ecosystem is the drug development network. Here too we see a potential for market networks between pharma companies that develop new drugs and hospital sites that have the ability to conduct clinical trials. And recently, we are starting to see a change in the power dynamic in this network. The number of trials being conducted has gone up exponentially in the last 10 years (see Figure 1), but the number of trial sites has not increased to such a degree. This change in supply and demand has led to clinical trial sites now gaining more power; Florence Healthcare is in the process of capitalizing on this emerging opportunity. Florence started off as a workflow software tool for the clinical sites, but saw this change in power dynamic happening and soon evolved into a market network connecting clinical trial sites with pharma companies willing to sponsor trials.  Florence solves the biggest problems at the clinical edge of the network, and by freeing those bottlenecks, helps the sponsor side too.


Florence Healthcare recently announced a $1.7M raise from leading investors including Bee Partners, Bessemer Venture Partners, Dartmouth Angel Fund and FitBit VP Will Crawford. Since launching in January, usage of Florence’s SaaS tool has grown over 150% month over month.  Ahead of the funding, Florence secured agreements with some of the biggest institutions in drug and device development: UCSF, Mt. Sinai, and Sloan Kettering’s PCCTC Cancer Research Center.

We are excited about increasing our exposure to the healthcare industry through a market network, and are thrilled to be supporting Andres GarciaRyan Jones, and Michael Kassin, MD, and their team at Florence.  For more details on Florence’s recent success, click here, and if you’d like to connect with the Founders, please let us know!

The “Evaporation Theory” & Where the Trail of Money Disappears: Insurance

written by Garrett Goldberg

At Bee Partners, Michael and I pride ourselves on being pragmatic investors at the earliest stages of venture creation. Invest in Founders with deep market insights solving specific business problems. If the enterprise pain is not acute enough for the developed solution to be able to extract significant, ongoing economic rent, it’s not for us. Perhaps oversimplified, but valid nonetheless.  It would then make sense that we must understand where this economic rent is continually being extracted (perhaps disproportionately), and invest along those highways into innovative, technology-enabled, disruptive businesses. I call this my “Evaporation Theory” – a living thesis on where the trail of money disappears and thus, where we should look for businesses to support.  


Given Embroker’s recent Series A financing, and CB Insights’ recent Future of Fintech Conference and subsequent blog post about the future of the insurance industry, it seems appropriate to start with Insurance. Our new friend Brendan Dickinson of Canaan Partners recently penned a great article on how and why there are specific opportunities in insurance today. We wholeheartedly agree with his assessment, and were looking in the space to begin with because it’s an obvious road to….where? How many insurance checks have we all cut, seemingly into oblivion?  

Yes, we know this money comes back around to those who need it the most at crucial times. Since the Enlightenment in Europe (or well before, if you want to go there), risk has been distributed among the masses in order to protect the acute loses of the few. Seems fair. But someone is extracting money from this cycle of commerce. Also seems fair as they administer the service. But given the level of information flow, transparency, and technology we now enjoy, can’t we temper this cycle to lower the costs for all?

However, if this was easy, the large carriers and brokers would be innovating from within. It’s difficult to navigate to true innovation given the constantly changing legal and business landscapes.  Users are frustrated by entrenched data systems that obfuscate true coverage or make it difficult to understand the “what ifs”.  When products get so complicated (like insurance policies) and people struggle to really understand them, there’s a heap of potential value lost on both sides – buyers and sellers – by under or over buying.

Lastly, there’s even the thought that insurance is an industry that distinctly lacks younger people working on forward-thinking solutions. If the majority are approaching retirement, it should more urgently usher in new systems with entirely new opportunities. Whatever the combination of reasons, there is a sense of change required.   

At Bee Partners we continue to be bullish on this mighty road, whether it be brokerage, risk assessment, underwriting, or adjustment.  Perhaps more accurate and timely data collection could lower system costs or time to reimbursement? Or, an aggregation of big data analyses could bring clarity to the underwriting processes of both current policies and emerging insurance needs. All this to say, there’s plenty of room for innovation across all aspects of insurance, and definitely across the highways that make up our “Evaporation Theory”!