Software Developers Don't Always compute COGS
A client was considering an investment in a startup that claimed to have developed a groundbreaking approach to web search, delivering real-time results by scraping the web at query time. While the technology was impressive on the surface, our due diligence process uncovered a critical flaw in their business model.
Our analysis of their financial projections revealed a bug that significantly underestimated their cloud computing costs. Once we corrected the model and removed the assumption of ongoing cloud credits, it became clear that the company's unit economics were unsustainable. The high cost of their real-time scraping technology meant that they would operate at a loss until they reached a massive, and likely unattainable, scale. Based on our findings, the client decided to pass on the investment, avoiding a potentially significant loss.
This case highlights our ability to look beyond the hype and conduct rigorous, data-driven analysis of a company's fundamentals, guided by an understanding of compute costs. Our expertise in financial modeling and cloud infrastructure allowed us to identify a critical flaw that was not immediately apparent. By providing our client with a clear-eyed assessment of the company's prospects, we helped them make a prudent and informed decision.
