Business Models for Startups

Business Models for Startups
October 2010
SoftBank Capital – Joe Medved

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

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

Who will buy it?
Ali G’s Ice Cream Glove – Total Addressable Market
People who has hands
People who like ice cream

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

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

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

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.

Building Financial Projections

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

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

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

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

My Recommended Summary Tab
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

Summary Tab - Sample

Recommended Backup Tabs
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

P&L Tab - Sample

Revenue Tab - Sample

Personnel Tab - Sample

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

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

www.SoftBank.com
@joevc - www.twitter.com/joevc
www.JoeMedved.com

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Business Models for Startups

by Joe Medved on Oct 04, 2010

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Business Models for Startups — Presentation Transcript