Business Models for Startups

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  • 1. Business Models for Startups
    October 2010
    SoftBank Capital – Joe Medved
  • 2. Overview
    Assessing Your Business Model
    Define your product or service
    What problem does it solve?
    Who will buy it and how will you reach them?
    Are the economics viable?
    Building Your Financial Projections
    Focus on core revenue and expense drivers
    Review cash need under various scenarios
    Determine your funding options
    SoftBank Capital – Joe Medved
  • 3. What is your product or service?
    Develop a succinct definition
    Investors are often ADD, so keep it simple
    If available, a demo is the best description
    What problem are you solving?
    Is there a real market need?
    Solicit blunt advice from potential customers
    SoftBank Capital – Joe Medved
  • 4. Who will buy it?
    Ali G’s Ice Cream Glove – Total Addressable Market
    People who has hands
    People who like ice cream
    SoftBank Capital – Joe Medved
  • 5. How will you acquire customers?
    Determine your customer acquisition cost
    Drive users via advertising, marketing & PR
    “Viral” is typically icing, not a primary strategy
    Sell in person, over the phone, or self-serve?
    Consider cost of customer support and churn
    Maintaining existing customers should be cheaper than acquiring new ones
    SoftBank Capital – Joe Medved
  • 6. How will you monetize?
    Who will pay for your product or service, your users or third parties targeting your users?
    How will you charge – pricing and structure?
    Consider long term pricing trends
    Due to network effects, supply costs, competition
    Determine average customer life
    SoftBank Capital – Joe Medved
  • 7. What does it cost to run your business?
    How will you build, sell and support your product or service?
    Who will you hire and when?
    What are your infrastructure, services and other operating costs?
    Consider variable vs. fixed components
    SoftBank Capital – Joe Medved
  • 8. Are you building a viable business?
    Review long term unit economics + fixed costs to gauge profitability
    Defining and implementing a monetization strategy day one may not be possible, but consider the potential options long term
    The world’s most beautiful product or service is useless if customers will never pay enough to cover costs
    You will get a better exit price if you’re not for sale. Build an independently sustainable business.
    SoftBank Capital – Joe Medved
  • 9. Building Financial Projections
    SoftBank Capital – Joe Medved
  • 10. Your Projections Will Be Wrong
    And that’s okay
    Nothing will go exactly to plan
    You just need guidelines, for understanding your near term cash needs, and long term potential value
    SoftBank Capital – Joe Medved
  • 11. How far out should projections go?
    Different schools of thought, though most investors will expect 2-3 years, with more detail over first 12-18 months
    Investors want to know how far their funding will take the business. Early focus will be on expenses.
    Building a 5+ year plan is a hard ask, but you can guestimate your potential market penetration and resulting revenue at that point if necessary
    SoftBank Capital – Joe Medved
  • 12. Basis for assumptions
    Base drivers on something you can reference
    Pricing based on target customer feedback, competitor rates, tangential services
    For compensation metrics, talk to recruiters or use online resources like CompStudy.com
    Interview service providers for real estate, IT, legal, accounting and HR cost estimates
    SoftBank Capital – Joe Medved
  • 13. Build a Model From Your Core Drivers
    Allow yourself to easily sensitize the drivers
    Tie variable expenses to revenue where possible
    Add comments to row labels with basis for assumptions
    This is rarely seen but will lend credence to your estimates and make investor diligence easier
    Review the growth trends for each line item
    Are the trends rational?
    Margins in Year 2 probably shouldn’t exceed Google’s
    SoftBank Capital – Joe Medved
  • 14. My Recommended Summary Tab
    SoftBank Capital – Joe Medved
    Display quarterly #’s for Year 1, annual for Years 2 & 3
    Start with key dashboard metrics, such as # of users, paying customers, units sold or partners
    Show P&L, breaking out significant revenue and expense line items
    End with headcount for an expense barometer
  • 15. Summary Tab - Sample
    SoftBank Capital – Joe Medved
  • 16. Recommended Backup Tabs
    SoftBank Capital – Joe Medved
    P&L
    Top line revenue through detailed expense line items
    Revenue
    Total addressable customers and market penetration
    Incorporate avg. customer life and churn if applicable
    Have pricing assumptions that can be sensitized
    Tie revenue growth to corresponding increase in sales staff, channel partners, customer acquisition, etc.
    Personnel
    This is likely your biggest expense item
    Break out your hires with base, bonus, benefit and raise assumptions that can be sensitized
  • 17. P&L Tab - Sample
    SoftBank Capital – Joe Medved
  • 18. Revenue Tab - Sample
    SoftBank Capital – Joe Medved
  • 19. Personnel Tab - Sample
    SoftBank Capital – Joe Medved
  • 20. How much funding do you need?
    Sensitize your estimates to determine need
    What if revenue takes 6-12 months > expected?
    Optimize your return potential
    Consider how much outside capital required, if any, to reach significant valuation milestones
    Milestones vary by sector. Advisors with sector expertise can provide significant insight here.
    Target friends & family, angels, VCs, or bootstrap
    Raise capital from a source with aligned expectations
    Plenty of great companies have been bootstrapped
    SoftBank Capital – Joe Medved
  • 21. Conclusion
    Scope out a killer product or service
    Assess whether it will yield a viable business
    Build a guideline model based on core drivers
    Raise capital from an appropriate source
    Build and exit your business
    Repeat
    SoftBank Capital – Joe Medved
  • 22. www.SoftBank.com
    @joevc - www.twitter.com/joevc
    www.JoeMedved.com
    SoftBank Capital – Joe Medved