Rethinking Corporate Valuations — With Daniel McCarthy

Daniel McCarthy, a professor of marketing at Emory University, joins Scott to discuss his research on customer-based corporate valuations, as well as the current state of public disclosures, which he argues is a total mess. Follow Daniel on Twitter, @d_mccar. Scott opens with his thoughts on Facebook’s mendacious business practices, and why he believes the company is on its last leg. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Scott Galloway?

  Support for the show comes from Northwest Registered Agent. Your business identity is everything that makes your business legitimate and professional. With Northwest Registered Agent, you don't just form a business, you start a complete foundation built for privacy, credibility, and growth. That includes registered agent service, a business address, operating agreement, domain, website, professional email, phone number, and built-in privacy. In other words, your home address, personal email, and phone number stay private. Don't pay hundreds or thousands of dollars for what you can get from Northwest for free. Visit northwestregisteredagent.com/profgfree and start using free resources to build something amazing. Get more with Northwest Registered Agent at northwestregisteredagent.com/profgfree.

• 0:49Speaker 01

  This episode is brought to you by Michelob Ultra. Good times mean competitions between you and your friends, like seeing who can throw some pigskin the farthest or rush the field the fastest. Winner gets an Ultra. Because it's not just a superior light beer, it's also giving fans superior access to their favorite sporting events. Superior is worth playing for. Visit michelobultra.com/superioraccess to enter. Enjoy responsibly. Copyright 2026 Anheuser-Busch InBev Michelob Ultra Beer, St. Louis, Missouri.

• 1:18Scott Galloway?

  Episode 106. 106, the atomic number for seborgium. 106, the text-based emergency number in Australia. Australia in 2020 kicked off the year with a billion animals, a real tragedy dying in their wildfires. Who would have known this would be the feel-good story of 2020? What do I say to 2020 and 2021? Go, go, go!

• 1:50Scott Galloway?

  Welcome to the 106th episode of the Prob G Pod. In today's episode, we're joined by Daniel McCarthy, an assistant professor of marketing at Emory University's Coezetta School of Business, who specializes in the application of statistical methodology to contemporary marketing problems. Well, that's a mouthful, Daniel. We wanted to speak with Professor McCarthy after he dropped a great Twitter thread in response to our No Mercy No Mouse newsletter post about the firm aspiration and its deceptive valuation. We discussed Professor McCarthy's research on customer-based corporate valuations, as well as the current state of public disclosures, which he argues is a total mess. I love this stuff. He described it perfectly. I'm also, like him, a birdwatcher of S1s. By the way, most interesting ones recently. Rent the Runway, who I love. I love the founders.

• 2:35Scott Galloway?

  Unfortunately, it's a shitty business, and that thing makes no fucking sense. Sorry. Wanted them to win, rooting for them. It's not working. And then Allbirds, which is trying to be like Warby Parker, except it's not. It's a shittier business with a shittier CAC. And also, as Professor McCarthy will disclose, not making the requisite disclosures. And the latest round, what's going on here? What should we talk about? What should we talk about? Clearing me this. What's in the news? I know. That mendacious fuck called Facebook. I think the company is about to live its ninth and final life. I've been predicting that for a long time. The rumors, according to Scott Galloway, of Facebook's death have been greatly exaggerated.

• 3:18Scott Galloway?

  In the latest round of Facebook's notorious splashes in the headlines, Frances Haugen revealed herself on CBS's 60 Minutes as the whistleblower who led to the Wall Street Journal's investigation into the company. By the way, if you like podcasts and you like the Wall Street Journal, or if you don't like podcasts and you don't like the Wall Street Journal, you should listen to this series from the Wall Street Journal, the podcasts and the investigative reporting they've done around Facebook. It's been really interesting. Haugen, a former product manager on Facebook's civic integrity team, handed over internal documents that revealed how the company explicitly knows that its products, one, amplify harmful content, two, let certain elite, famous people get away with behavior that would normally result in sanctions, three, depress teen girls. Well, thanks for that.

• 4:02Scott Galloway?

  And four, allow for drug cartels and human traffickers to operate. Where have they crossed the line? In my view... It's depressing teen girls. There's just, there's just a special place in hell for people who wallpaper over damage done to kids. I think Mark Zuckerberg is the tobacco company and Sheryl Sandberg is Joe Camel, trying to make it cuter for young people. Prostituting personal tragedy? Yeah, I said it. Prostituting personal tragedy to try and soften, to try and soften the damage or the perception of damage. And then their most recent individual, who is trashing his reputation for 30 to 50 million dollars a year, Nick Clegg, who says, "We are not responsible for the January 6th insurrection." Yeah, no shit. We're not saying you're responsible.

• 4:45Scott Galloway?

  We're saying you're a big part of the problem that has made our discourse more coarse, that has made truth no longer a thing, that the algorithms are basically totally engineered to confirmation bias, such that if you are worried about the vaccines, we will absolutely continue to feed you information that convince you that yes, there are microchips from Bill Gates in the vaccine. Or if you believe that, oh, I don't know, I should be thinner as a 15-year-old girl that is five foot four and 95 pounds. Yeah, we'll confirm you should be thinner. Two-thirds, get this, two-thirds of extremist groups, joined by people on Facebook, the algorithms suggested those groups. And then they retreat to this, "Well, there's problems. There's always going to be problems. It's never going to be perfect."

• 5:28Scott Galloway?

  Mark Zuckerberg testified in front of Congress that the research that just came out was inconclusive, but what he saw was that there's actually a lot of very positive things about social media. Well, you know what, Mark? You were lying to Congress. You were lying to Congress, which as far as I know, is a criminal offense. Furthermore, the whistleblower, Haugen, explained how Facebook misled investors and the public about its role in violent extremism in wake of the 2020 election and the January 6th insurrection. I thought what was also interesting was that they decided... To dampen the controls that decrease misinformation.

• 6:08Scott Galloway?

  So in sum, the Zuck and Sheryl have their hands on a dial that can turn up the misinformation and rage or turn it down. And guess what? They keep turning it clockwise because the bottom line is, and this is a terrible thing about our species, but it's true, and Facebook has figured it out. Polarization is profitable. And so they will pick profits over, over decreasing the damage, showing any sort of citizenship, any sort of goodwill, any sort of concern. And what's happened here? A lot of good people at Facebook are starting to drop the dime on one another. They're starting to turn on each other, just as the Democratic Party likes to eat its own. We're seeing that at Facebook. All right, so what's next?

• 6:51Scott Galloway?

  For one, we might see a lot more people from inside the company revealing data that's worthy of the SEC and the FTC and maybe, who knows, maybe, I don't know, the FBI. Since the start of the SEC's whistleblower program in 2011, the agency has doled out more than $1 billion in awards to 207 whistleblowers. In 2021's fiscal year alone, the awards have reached more than $500 million. What does this mean? It means there's now an incentive to apply for whistleblower status because the subsequent fines, you get a share of that. I think it's like 10 to 20%. In other words, Nick Clegg, it makes sense for him to stay there and lie, and that's what he's doing. He is lying such that he can continue to clock $30 to $50 million a year. But the vast majority of people there, one, don't make $30 to $50 million, and two, have kids.

• 7:35Scott Galloway?

  Moreover, we're seeing the algebra of deterrence do its thing. What is the algebra of deterrence? Simple, simple. The probability you'll get caught times the penalty of getting caught has to be greater, has to be greater than the potential or the expected or the normalized upside. Otherwise, we would need to be in a police state, right? You might talk yourself into thinking, well, the world is unfair, I'm going to rob a bank. Chances are you'll get caught, chances are you'll go to prison. It's not worth the expected upside. What is the expected upside for big tech in this economy with regulatory overrun and a series of flaccid, neutered, spineless, sackless leadership in DC? Well, let's add the GDP of Germany to our market capitalization, which translates to

• 8:18Scott Galloway?

  a lot of new homes in Brooklyn and Marin and a lot of Teslas. And what is the probability we're going to get caught? 100%. Everyone knows of our bullshit. But there's no penalty, or the penalties are seven to 11 weeks of free cash flow that we delay for three to five years when we overwhelm the FTC and the DOJ who have not seen their budgets increase at a fraction of the escalation of budgets we provide to our lawyers who basically get in the way. I remember being in Senator Michael Bennett's office with two of his legislative aides and he said, "What would you do?" I'm like, "Well, enforce identity, remove key components of Section 230." And you saw them turn pale. And they said, "Do you realize that's inviting? That's like a whistle call for hundreds of lawyers to begin coming after you." And it was just so obvious. These are good people

• 9:01Scott Galloway?

  trying to do the right thing. But it was just so obvious at that moment, I realized, "Oh, my God, our government is outgunned." Nothing changes here. Nothing changes, in my view, until there is a perp walk. And I wonder, I wonder if they have poked the wrong bear. Specifically, Mothers Against Drunk Driving, the Mothers Against Drunk Driving organization, was created back in the 80s after a 13-year-old girl was killed by a drunk driver who happened to be a three-time repeat offender just out of jail. Prior to Mothers Against Drunk Driving, half of all traffic deaths were tied to drunk drivers. Think about that. Half drunk drivers. Mads efforts were so incredibly effective that by 1982, President Ronald Reagan created the Presidential Commission on Drunk Driving,

• 9:44Scott Galloway?

  which improved state educational legislative and enforcement programs and helped raise the minimum drinking age to 21. They did it really in an interesting way. They basically convinced the government to withhold funding for federal highways from states that didn't raise their legal drinking age. So what could we see here? We could see something along the lines of "MAAMS," and that is my name, or my acronym for Mothers Against Mark and Cheryl, as more and more reports come out about how much this company is negatively impacting children. Think about this. If you've known anybody, anybody, whose child suffers from some sort of eating disorder, it is literally like watching your kid, the most valuable thing in your life, kill themselves slowly, and there's nothing you can do. Imagine

• 10:28Scott Galloway?

  that horror, and then imagine that this company that claims to be a positive for society is increasing the likelihood That these young women and these girls are going to find more and more content that validates that behavior, that encourages that behavior. One in eight young girls in Britain cited Instagram as a catalyst for their suicidal thoughts. This is just, what's the word for this? Depraved. This is just depraved. And we keep talking about all the reasons around why these innovators are doing their best, or they must do better. For God's sakes, fucking enough already. Enough already. President Biden, the DOJ, the FBI, the SEC.

• 11:11Scott Galloway?

  For God's sakes, do your goddamn jobs. Do your jobs. What do we need here? Simple. We need a perp walk. Stay with us. We'll be right back for a conversation with Professor Daniel McCarthy. Support for the show comes from Nutriful, the number one dermatologist recommended hair growth supplement brand used by over one and a half million people. With age comes knowledge, patients, and for some, hair loss. Didn't say it was all good things. And for those who want to do something about it, there's Nutriful. Nutriful has formulas built for men at different life stages. They have Nutriful Men for Guys Age 18 to 49, plus the new Nutriful Men 50 and Older.

• 11:53Scott Galloway?

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• 12:32Scott Galloway?

  Support for the show comes from Vanta. As AI adoption grows, so does your company's security risks and requirements. New frameworks, audits, and vendors keep piling on, but your team isn't getting any bigger. Most compliance tools promise automation, but you're really stuck doing all the work by hand, chasing screenshots, validating controls, and playing catch-up when audit season comes around again. Vanta works differently. The regentech trust platform is built to scale with you, not slow you down. With over 1,400 automated tests across 400-plus integrations, Vanta collects evidence and monitors your controls year-round, cutting your audit prep by 82%. Plus, you can access the Vanta agent everywhere you work, whether your team is in Vanta every day or living in tools including Claude or Cursor. Want proof?

• 13:17Scott Galloway?

  Over 16,000 fast-growing companies like Ramp, Ryder, and Harvey save time and resources while scaling fast with Vanta. Learn more at vanta.com/profg and get $1,000 off. That's spelled V-A-N-T-A dot com slash prof G for $1,000 off.

• 13:48Scott Galloway?

  Welcome back. Here's our conversation with Daniel McCarthy, an assistant professor of marketing at Emory University's Goizetta School of Business. Professor McCarthy, where does this podcast find you?

• 13:59Speaker 02

  Down south in Atlanta.

• 14:01Scott Galloway?

  So let's bust right into it. Professor, can you break down what a customer-based corporate valuation is and why you think it's a more or a superior way to forecast revenue?

• 14:11Speaker 02

  Yeah, customer-based corporate valuation, to me, is just an accounting identity where we take into account the fact that all your revenue has to come from customers. Those customers had to have been acquired and retained and placed some number of orders. And so instead of kind of just looking at sales in a vacuum, you know, we just kind of build up a series of models that get us to revenue by forecasting, you know, what our future adoption is going to be, how long will customers stay, the number of orders they place, and then how much they spend. And instead of doing some sort of customer lifetime value multiple thing, which is what had been fairly popular within marketing before the work that we did, what we instead said was, hey, look, you people in finance,

• 14:56Speaker 02

  they've been doing valuation for decades. And this kind of cash flow analysis is very standard. So instead of trying to come up with our own homebrewed valuation method, let's just sit our revenue forecasts on top of a traditional financial valuation model, whether it's DCF or multiples, and just drive it off of that. And basically, that has worked out really well. Yeah, I think we can forecast revenue more accurately. But in many examples, especially with the sort of companies that have been going public these days, it allows us to really better understand whether there's a path to profitability if the company is able to continue to maintain the sort of economics that they have historically

• 15:39Speaker 02

  and be able to acquire more customers at that level of economics.

• 15:44Scott Galloway?

  So you've also written that the kind of the current gestalt in the in the corporate world is growth at all costs. And you've called that way of thinking dangerous. Are there some externalities here? Say more.

• 15:59Speaker 02

  Yeah, I think there could be an incentive. And I think this is partially being trained because of kind of the story that they've been sold and the incentives that are in place because of the venture money that they're received and, you know, what they're rewarded with in terms of valuation in future rounds. But, you know, a lot of the incentives that these companies have is Is basically just grow as quickly as you can. And you don't necessarily need to figure out the whole profitability thing right now. Yeah, well, we'll figure it out sometime down the line. But a lot of what this work has shown is ultimately what really matters is whether you're profitable on a variable basis. And that doesn't necessarily mean that you're profitable today.

• 16:42Speaker 02

  It just means that when you acquire that next customer, you're making some money. You know, that you're actually earning more in business and profits from that business than you'd spent to acquire the customer in the first place. And I think that that's the piece that that could be hard to get right. And that maybe these companies need to figure out a little bit earlier. It's not to say that, you know, companies need to to find a way to be profitable when they're, you know, spring chickens, when they're when they're really, really young. It's instead to say, yeah, they need to have that enough repeat business coming in and to not pay up the nose on paid media and things like that. So the economics are right side up and they have the ability to grow into profitability at some point in the future.

• 17:26Scott Galloway?

  So I've always thought kind of the source of truth in a board meeting is I would always talk to the CFO afterwards. And there's just some very basic questions, like what are the gross margins? Right? If we if we have negative gross margins, there's real problem. When you're pets.com and you're selling a $50 bag of dog food for 30 bucks to try and show top line revenue growth, you know, Houston, we have a big problem. And then there's, okay, how do we account for EBITDA? And what what kind of investments are we making to have those transactions, even if they're got positive gross margins? Can you give us what are kind of the two or three metrics you look at to try and do shorthand on whether this is a viable business?

• 18:10Speaker 02

  Yeah, I think the, if I had to pick a few, one would be, you know, how much are you spending to acquire customers?

• 18:18Scott Galloway?

  So CAC, customer acquisition costs as defined by what goes into that number? Walk us through, what are the inputs there?

• 18:24Speaker 02

  It should be the amount that you spend on customer acquisition relative to the number of customers you acquired.

• 18:31Scott Galloway?

  And is that just marketing? What does that include? What goes into that quote unquote cost number?

• 18:36Speaker 02

  It should be everything that drives acquisition. Yeah, so ultimately, yeah, acquisition marketing would be one of them. But, you know, for software as a service companies, if you're giving hardware away either for free or at some sort of substantial discount, companies like Toast correctly put that into their CAC as well. So actually, I would agree with with that. Anything about subsidized like onboarding expense, you know, for for new customers. Well, you know, it's not marketing, but every time you bring in a new customer, you gotta spend that money. So I would put that into acquisition expense as well, you know, because it's being spent upfront and typically doesn't repeat. Or if it repeats, it repeats at a substantially lower amount in the future.

• 19:19Speaker 02

  So to me, that's the litmus test is, do I need to spend this money every time I bring customers in? And if the answer is yes, then it should be included, even if it's not necessarily a marketing expense.

• 19:31Scott Galloway?

  Okay, so we're looking at CAC and we want to see, we want to see CAC go down as hopefully the company scales, gets awareness, product gets a good word of mouth. We'd like to see CAC headed down. Do you, I'm finding the CAC is going up because as across many of the sectors I deal in, online education where effectively there's so much money being raised in the venture markets, that money ends up on Facebook or Google, which drives everyone's CAC up. What are the trends you're seeing around customer acquisition?

• 20:01Speaker 02

  Yeah, I tend to see the same thing. I'd say that the big area of exception is probably with extremely networked businesses. You know, if you're a platform or a marketplace, then growth itself is creating utility for people on both sides of the platform. And so you may have looked at a platform like Uber or Lyft in the early days and said, you know, well, this isn't really for me because it's going to take 20 minutes for a driver to come here or something like that. But you know, once the network gets bigger, then suddenly it becomes all that more enticing, both for the riders and the drivers. So just empirically, we've seen CAC moving down, not necessarily a whole lot, but some at some businesses like that.

• 20:46Speaker 02

  As you move outside of heavily networked businesses, I think we see exactly the same thing, that in general, in the early days, you know, a lot of the business, a lot of the new adoptions that are coming in are through organic and through word of mouth or referral. And as you start raising those venture rounds and you start really trying to drive growth, you kind of have to move into these more scaled marketing channels like Facebook and Google, and they're just more expensive. And you have this, I think, second dynamic that if someone hasn't been acquired for a while, like the fact that they haven't is telling you something. Like you have to push a bit harder to get up through the door. Yeah, that's going to cause your CAC to move up.

• 21:27Speaker 02

  So yeah, so in general, there's a lot of things that just tend to push CAC upwards over time, which is why I think it's extremely relevant to keep track of, even if a company's not that old, because you probably want to assume that if anything, it's going to be getting worse.

• 21:43Scott Galloway?

  So I've actually found you on Twitter and you had put out a thread in response to our newsletter post on aspirations or the firm aspirations, what we felt were deceptive valuations, where you explained how the company is participating in what is the, quote, "financial equivalent of medical malpractice." I immediately noticed that. And so I began, you know, I said, who is this guy? And I found that you're co-authoring research with my colleague, Aswath Damodaran, and I mean, like, okay, this guy obviously knows his stuff. Can you share what your takeaways were looking at aspiration, the firm, and how it was reporting its profitability and customer acquisition?

• 22:29Speaker 02

  Yeah, it's a great question. That's kind of what I keyed in on. So obviously, everything that you had correctly said about adjusted EBITDA, I looked at that and said, damn, that's really bad, no pun intended. But then I saw that LTV to CAC chart and I just was astounded. I almost felt nauseous. Yeah, because holding inside everything about CAC, which, you know, I wouldn't be surprised if they're understating it, the LTV to CAC figures that they provided were extremely optimistic. You know, so they basically implied marketing return on investments at between 700 and 1100%. And just empirically, you know, most companies that are doing a pretty good job are more like 200%. So, warning

• 23:14Speaker 02

  bells. I looked down into the footnote and they basically laid out, thankfully, the assumptions that kind of drove that number. And, you know, one of them was basically that their retention is assumed to be astoundingly good. So, yeah, they had no financials at all, but they said, you know what, we're going to assume 5.6% annual churn in the first year, and then 2.6% churn every single year after that.

• 23:43Scott Galloway?

  So lower churn than Netflix or Amazon Prime. So you're more likely to hold on to your aspiration debit card. You're more likely to cancel Netflix or Amazon Prime than stop using your aspirations debit card.

• 23:53Speaker 02

  That's exactly right. More likely to hold on to them than than your Peloton bike. And so their own calculation worked out to something like an average customer lifetime of 18 years. And that's just way longer than almost any other company I've ever done any work on.

• 24:15Scott Galloway?

  Coming up after the break.

• 24:18Speaker 02

  Yeah, we just had Warby Parker and Allbirds drop their prospectuses, both digitally native vertical brands, both selling through, you know, direct channels and through stores. Both disclosed contribution profit, but Warby Parker deducted store-related expenses and Allbirds didn't.

• 24:38Scott Galloway?

  Stay with us.

• 24:43Scott Galloway?

  Support for the show comes from Vanta. As AI adoption grows, so does your company's security risks and requirements. New frameworks, audits, and vendors keep piling on, but your team isn't getting any bigger. Most compliance tools promise automation, but you're really stuck doing all the work by hand, chasing screenshots, validating controls, and playing catch-up when audit season comes around again. Vanta works differently. The Regentic Trust platform is built to scale with you, not slow you down. With over 1,400 automated tests across 400-plus integrations, Vanta collects evidence and monitors your controls year-round, cutting your audit prep by 82%. Plus, you can access the Vanta agent everywhere you work, whether your team is in Vanta every day or living in tools including Claude or Cursor. Want proof?

• 25:28Scott Galloway?

  Over 16,000 fast-growing companies like Ramp, Ryder, and Harvey save time and resources while scaling fast with Vanta. Learn more at vanta.com/profg and get $1,000 off. That's spelled V-A-N-T-A dot com slash prof G for $1,000 off.

• 25:51Speaker 01

  This episode is brought to you by Michelob Ultra. Good times mean competitions between you and your friends, like seeing who can throw some pigskin the farthest or rush the field the fastest. Winner gets an Ultra. Because it's not just a superior-like beer, it's also giving fans superior access to their favorite sporting events. Superior is worth playing for. Visit michelobultra.com/superioraccess to enter. Enjoy responsibly. Copyright 2026 Anheuser-Busch InBev Michelob Ultra Beer, St. Louis, Missouri.

• 26:21Scott Galloway?

  In your most recent research with ASWAT, you write that the typical profile for the kinds of companies that go public and the kinds of investors they attract has shifted. Tell us more about the biggest disruptions that you see changing the initial public offering ecosystem.

• 26:37Speaker 02

  Yeah, a lot more of the companies today, they kind of follow a similar playbook that they're growing really quickly, but a growing proportion of them are not profitable.

• 26:48Scott Galloway?

  Right.

• 26:49Speaker 02

  But actually, they might be, you know, as old or actually even older than the median company from 10, 20 years ago. So it's not that they're super young companies per se, but more just that they have not been focusing on generating any sort of profitability yet. And so one of the big questions then is, you know, how can we disclose the right data to better understand that type of company, especially when we take into account the fact that, you know, a lot of the people who are now participating in company IPOs are retail investors, you know, with the advent of Robin Hood. And that's just a different set of disclosures than what would have been appropriate, you know, 20 years ago.

• 27:32Speaker 02

  And so, yeah, so basically, the sort of recommendations that we were giving were really tailored to that sort of environment that they're in right now.

• 27:42Scott Galloway?

  And I mean, I think it's now 70% of companies going public aren't, are unprofitable, or something crazy number. And the last time it was anything resembling that, it was in, you know, of course, 1999. And if companies are older and yet still not profitable, you know, the dog wagging the tail here is the markets. It seems to me that companies and management strategies just kind of go where the money is. And it seems like the markets, kind of based on Amazon and Netflix, I would argue, have said, we want growth and profit. Okay, that'll eventually come as long as you keep growing. And the market is listening almost, almost to a fault. Isn't it the end of the day, the market said, let's replace

• 28:26Scott Galloway?

  profits with vision and growth?

• 28:28Speaker 02

  I think it's definitely the case that investors will give a pass to a lot more companies that are making no money today. And I think A lot of the work that I've been doing has been to to really kind of triage those money losing companies into these are companies that are just going to continue losing money. And there's not really as much of a hope for future profits versus those where at least they're getting enough incremental repeat business that, you know, if they can keep it up for a while longer, there is there is actually value there.

• 29:03Scott Galloway?

  Yeah, you've also you've also argued that IPO related disclosures have become more bloated and less informative. Walk us through why you think that is and how we can fix it.

• 29:15Speaker 02

  Yeah, it's the lawyers. So yeah, if you take the example of Apple and Microsoft, huge companies at the time that they were IPOing, but you know how long their prospectuses were? It was about 70 pages for both of them. If you go to like Uber and Airbnb right now, it's like 300, 350 pages and they have these really, really long, you know, risk profile sections where they talk through every possible thing that could drive them out of business. And sure, you know, that's a I guess they need to have it in there to cover their ass. But ultimately, are we learning anything from that? Probably not. And if you're a professional investor, I think you have the ability to kind of sort your way through

• 29:58Speaker 02

  all the garbage, you know, to find the nuggets of, you know, that all the little diamonds that are hidden in there. But especially if you're a retail investor, are you really going to wade through 350 pages? You're probably not. And if even if you are, you're probably not going to be able to really parse a lot of the cherry pick disclosures that they've put in there to kind of sell themselves in the best possible light.

• 30:23Scott Galloway?

  And thinking about remedies, could you do could the SEC, for example, establish a set of accounting standards and also nomenclature? We need you to report EBIT to this way. We need gross margins to be this formula. And also, basically prohibit, you know,

• 30:41Scott Galloway?

  Community-based EBITDA. No, that's a no-no. You can't have that in an S1 or EBITAM. Could they do that? It feels to me like there needs to be actually some regulation around nomenclature.

• 30:53Speaker 02

  I couldn't agree more. That's one of the big things that we're trying to work to establish. Yeah, I think that for some measures, it's easier than others. But even for the ones where it's a little bit difficult, I think having very clear guidance as to what the spirit of the disclosure is supposed to be, and then requiring the companies to provide more basis for how they're going about the calculation, that is definitely something that they can do. You know, we just had this example come up. This will sound like a quibble, but, you know, contribution margin. Well, that's important. You know, we need to know of that revenue, how much is flowing through into variable profit. And, you know, we just had Warby Parker and Allbirds drop their prospectuses,

• 31:37Speaker 02

  both digitally native vertical brands, both selling through, you know, direct channels and through stores, both disclose contribution profit, but Warby Parker deducted store-related expenses and Allbirds didn't. And the question is, well, okay, you know, as the business grows, as you bring in more customers, you're probably going to need more stores. Your store-related expenses are probably going to go up. Yeah, it's just kind of, it makes it non-comparable and highly confusing to do the sort of adjustments that we need to, to actually be able to compare companies like that.

• 32:10Scott Galloway?

  So Warby is doing it correctly and Allbirds, which in my view is, doesn't have the same points of differentiation, is not doing it correctly. They're saying that they're excluding things to inflate contribution margin that they should be including.

• 32:25Speaker 02

  I think so.

• 32:27Scott Galloway?

  So, and just along those lines, I was watching, I love Warby Parker. I buy a ton of their stuff. But then I look at the valuation of $6 billion. And I think I just have a difficult time justifying that valuation as a multiple of revenues and multiple profits. It just strikes me as just this consensual hallucination between the markets and what is a really nice brand. And by the way, I love Warby Parker. I just don't think it should be worth, I don't know, what is it, like 20 times revenue. It's trading at what social media platforms used to trade at.

• 33:01Speaker 02

  I know.

• 33:02Scott Galloway?

  It just seems just crazy town. You are sort of, I think of you almost like a phlebotomist or somebody who takes blood from a company and examines and says, okay, high cholesterol levels, or I don't know what the right analogy is, but can you talk to me about a couple of companies that you think, okay, their customer acquisition costs, which is sort of your domain, are so strong. In other words, they're able to acquire customers because of the differentiation of the product or how efficient their market is at a really good number, which is a good forward-looking indicator for the company and the stock. And then cite some other public companies where you say they are playing kind of sleight of hand with their customer acquisition reporting and it's a negative forward-looking indicator. Can you give us any examples of companies that you like based on these metrics you look at and other firms you're worried about?

• 33:47Speaker 02

  Yeah, one that we like, actually, you mentioned Warby Parker. They actually, they do a pretty good job of bringing in customers and not spending up the nose for it. And so actually, I feel exactly the same way that you do about them, that we did this deep, deep analysis on them through my company, Data Equity Partners. And we basically concluded that the fundamentals are pretty strong there. They're making a lot of money when they acquire users. They spend about 55 bucks to acquire customers, higher than what they disclosed because they had an issue with how they defined CAC. But even at $55 CAC, they're still making money off the very first purchase on a contribution margin basis.

• 34:32Speaker 02

  So they get all their money back on day one. They get a bunch of repeat business in future years. I'm a customer of theirs too, as is my brother and my wife. So yeah, we're all big fans. And you can see it in their repeat purchase figures, that year after year, they get about 25% of what people initially spent when they were first acquired, up to four years out, without really any sign of slowdown, which is, that's really quite nice. So. They're able to bring in customers cheaply. They're able to monetize them well over time. And even when you take a pretty conservative stance on contribution margin, yeah, they're making good money on those sales. So that's really healthy. Does it justify a $6 billion valuation? No, in my opinion.

• 35:17Speaker 02

  But is there a real underlying value there? Most definitely, yeah, I would say yes. The flip side would be companies like, yeah, I had done this. The work that really kind of got me started in this category was on Blue Apron. And I think they were a perfect example of

• 35:36Speaker 02

  a company that they were doing a pretty good job of managing their CAC back in the early days. But then in the run up to the IPO, I think they really felt compelled to show growth measures that they thought would win them a higher valuation in the IPO. And basically what ended up happening was marketing spend went through the roof. Acquisitions went up, but not that much. And so CAC just went up like crazy. It went from like $50 to like $130. And they went upside down. And some of those issues, I think, could have been avoided if they had a more, you know, steady as she goes approach to managing their growth.

• 36:17Scott Galloway?

  Have you looked at any of the OTT, the streaming guys, at their customer acquisition and what it says about their offerings?

• 36:23Speaker 02

  It's a great question. I have not. My understanding is they don't disclose a whole lot about their CAC. So a lot of the data that we'll see on social media, it's typically coming through alternative data firms. And so, yeah, for one, there's concerns about just how representative that data is. But, you know, I'm not aware of the major OTT players ever actually disclosing what their CAC is. And if you go to companies like Netflix, it's so sad, they used to actually disclose customer churn. Now they don't even disclose that. You know, so we really are flying completely blind in terms of SEC disclosures.

• 37:02Scott Galloway?

  Flying completely blind, I think that kind of summarizes the market right now. Daniel McCarthy is an assistant professor of marketing at Emory University's Goizetta School of Business, who specializes in the application of statistical methodology to contemporary marketing problems. In 2015, he co-founded Zodiac, a consumer-focused data analytics firm that was acquired by Nike three years later. He then co-founded Seda Equity Partners to make customer-based company valuation more accessible to firms. His research has been featured in Harvard Business Review, the Wall Street Journal, Fortune, and The Economist. One of his research specialties is customer-based corporate valuation, valuing contractual and non-contractual companies from the bottoms up by valuing their customers. Professor McCarthy is actively pursuing research in data privacy, digital marketing,

• 37:46Scott Galloway?

  and other applied statistical topics related to inference and prediction. He joins us from his home in Atlanta. Professor McCarthy, thanks so much for this. Keep up the good work. I really appreciate you having me on.

• 38:07Scott Galloway?

  Algebra of Happiness. So this is great news that brings me joy and reward. The University of California has announced that over the next decade, or actually the next eight years, pretty much, they're going to add 20,000 seats for students by 2030, the equivalent of a new campus, to help meet surging demand. UC Board of Regents Chair Cecilia Estelano and UC President Michael V. Drake emphasize that UC must increase numbers of graduates, undergraduates, faculty, and staff without sacrificing its teaching and research quality. This is, it's wonderful. Overdue, but it's still wonderful. And there's a narrative out there that's really dangerous. And the narrative is, oh, you don't need college, and that college sucks.

• 38:51Scott Galloway?

  And granted, we need to have more on-ramps to middle-class life with apprenticeship programs. I get it. I think a lot of this is frustration, though. And it's frustration that your kid does everything right and doesn't get into a good school and ends up at a second-tier school paying hundreds of thousands of dollars and then can't get a good job but is stuck with a lot of debt. I think people are rightfully really angry. At the education industrial complex that has become drunk on luxury, drunk on exclusivity, and I think some great immunities are kicking in. First, Forbes announced that it was going to start incorporating the percentage of kids with Pell Grants at a university as a means or an input into the ranking. And that's wonderful because it basically says a university's role in society is to lift people up. That's the whole fucking point.

• 39:36Scott Galloway?

  And of course, Berkeley shot to number one, and the rankings are unfairly and dangerously important because kids pick brands, but that's a good sign. I mean, essentially, colleges become the domain for two cohorts. The children of rich people who have tutoring, who have friends. I get calls from all the time. Nudge here, nudge there, get their kid in, who's a great kid, but there are other great kids not getting in because their parents don't have rich friends who are connected at these universities. And then the second cohort is freakishly remarkable, people who peak at 17. A lot of us don't peak at 17, and that's okay. That's okay. UCLA used to be about getting, they said that if you had over a 3.1, if you were in the top third of your class, you were guaranteed admission to a U seat.

• 40:21Scott Galloway?

  That is no longer true. We need to return to that. This is wonderful. We need hundreds of thousands of new seats across the University of Florida, University of Texas, Michigan, University of North Carolina, fantastic system. This is the upward lubricant. This is the needed churn in our society. This is America when we say to young men and women raised by middle income and lower income people that if you're good at what you do and you want to go to college, you're going to get your shot. You're going to get your shot. So I am here speaking to you today because of the generosity and vision of the Regents of the University of California and taxpayers in California. And I'm just, I'm just very happy and very thankful that the good people who are on

• 41:06Scott Galloway?

  the board of the University of California Regents or the Regents of the University of California have said, we need to return to our roots and make America about acceptance, not just exceptionalism. This is a wonderful move. Thank you, University of California. Thank you, California taxpayers.

• 41:22Scott Galloway?

  Our producers are Caroline Shager and Drew Burrows. Claire Miller is our assistant producer. If you like what you heard, please follow, download and subscribe. Thank you for listening to the Prof G Pod from the Vox Media Podcast Network. We will catch you on Thursday.

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