Tren Griffin+ Your Authors @trengriffin I work for Microsoft. Previously I was a partner at Eagle River, a private equity firm established by Craig McCaw. I am on the board of directors of Kymeta. Jan. 13, 2020 1 min read + Your Authors

This is how you do unit economics analysis. For a shareholder it requires detective work. It isn't a number or ratio you look up on a web site. The business itself has the data, including cohorted data. Both should do sensitivity analysis and use a margin of safety on variables.

Even if you only buy index funds, this unit economics analysis is an essential part of understanding any business (eg a food truck or SaaS). This process let's you know whether you are creating value. This valuation approach should be taught as part of every business curriculum.

The unit economics process is about determining:

What is the capacity of the business to generate cash flows?

What is the expected growth in those cash flows?

How uncertain are those cash flows?

You take expected cash flows and you discount them back to their present value.

My Twitter follower Carl Spackler asks

"Hey Tren, how about a little something about moats, you know, as part of the effort?"

A moat reduces uncertainty about future cash flows. If you have a moat "competitive advantage period" is longer, so you've goin for you, which is nice!

25iQuiz: What unit economics variable should have the greatest margin or safety due to uncertainty?

I prefer to use margin of safety re uncertainty like Buffett does instead of altering the discount rate

If you have read the links I sent recently you should know the answer.

You can follow @trengriffin.


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