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0110 business model02



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  • 1. Session 6: Business Models The Bridge Between a “Good Idea” and a Realistic Financial Model of Your Business
  • 2. Session Agenda So far we’ve: started to quantify opportunities, looked at market sizing, and looked at marketing/sales strategies Now we’ll: build a template to determine if we have a real business We will do the Clear Ear Business Model, and The Clear Ear “Elevator Pitch” to convince investors we’ve got what it takes to make everyone rich
  • 3. The Business Model The business is composed of a number of different component pieces  Each of which can be studied  Each piece can be projected When all the pieces come together, do you have a “going concern” that is able to make money
  • 4. Many types of business models HW – systems HW – components / consumer SW – enterprise SE – consumer Semiconducters Semi Equipment Service providers (xSP) Consulting Restaurant Chains / Consumer Business Bio-Tech Etc.
  • 5. Each model is unique Manufacturing model  High price / low volume  Low price / high volume Sales Model  Enterprise sell  Consumer sell One time costs  Development  tooling
  • 6. Working models are visible They are the existing profitable companies They are all around us We can examine their components  COGs  Gross margins  Ongoing development costs  Cost of sales and marketing  Capital intensity, etc. You should assume that mature companies are staffed with very smart people who work hard at increasing productivity and holding costs down!!
  • 7. A startup is different Startup  No revenues  High development costs  Uncertain model, etc However, we should be able to know where we are going by looking at other companies Our models should mature into the selected models closest to our business idea
  • 8. Basic Building Blocks – Department Budget S t a r t u p  M o d e l Income Statement Balance Sheet Cash Flow Y1 Income Statement Balance Sheet Cash Flow Y4 Income Statement Balance Sheet Cash Flow Income Statement Balance Sheet Cash Flow Y3Y2
  • 9. What are the components that need modeling One time costs  Development  Tooling  brand Ongoing costs  Size of market (Including Which Segments)  Price of product  Cost of sales / marketing  Cost of product  Cost of services
  • 10. One time costs Development  Only D, no R  Too much / too long = too much risk Tooling  What is the cost/volume assumptions that make the business work Brand  Is brand recognition required  what is the cost to get it  how unique is the product  How much noise in the market Are the one time costs in overall proportion to the Venture???
  • 11. Size of market Total available market Served available market Competitors in the market If successful, how large a company could we build?  What do VC’s need to see
  • 12. Price of product What is the market elasticity  At any price, what is the market size What are prices of similar products  Can I sell for more because of feature richness, unique capabilities  Must I sell for less, how much less Can I produce this product competitively
  • 13. Cost of sales – sales model End user direct  Productivity assumptions  Usually less than ½ mature company  New hire time to productivity  Overheads  SE’s  Manager’s  Remote offices  T & E  Marketing support
  • 14. Cost of sales – sales model Channel  How many tiers?  Channel discounts  Channel sales  Marketing programs and support
  • 15. Cost of product Cost / volume curve – where do I have to be to make money? Critical components Material Lead times / expediting Scrap Product life cycle transitions
  • 16. Cost of services Competitive price of services Cost of selling services Efficiency of resources  Downtime  Training  Reusable skills Overheads
  • 17. Key Variables – Enterprise Software Company Time to market Sales Model  Product price  Cost of Sales  Sales force productivity  Channels / Channel conflict vs harmony Not important  Inventory  Product life cycles
  • 18. sales in an Enterprise SW company Overall cost per rep  Specific cost  OTE = 200  SE = 100  1/5 mgr = 60  Salary overheads = 72  T&E = 50  Other = 100  Total = $580K Productivity  Full productivity < $1 m / year  Start up quarters = 0, ½, ½, full  Corporate business planning assumption reduces individual productivity expectation by 25%
  • 19. sales in an Enterprise SW company First year cost = 580 First year revenue = 0 + 125 + 125 + 250 = 500 Planning assumption = $375 first year, 750 second year Sales costs alone may exceed revenues during start up phase!!! Rising productivity is absolutely required, and a mark of successful company / product
  • 20. Example – price vs. channel Channel % Discount (from list) % Discount W/ Volume End user 0 20 Reseller 35 40 Distributor 50 55 Binary OEM 65 75 Source OEM 85 90 Very High Volume OEM 95 98
  • 21. Key Variables – Semiconductors Intellectual Property Design integrity / design cycle Yield Design wins  Time to volume Technical lead Not important  Marketing (consumer)
  • 22. Key Variables – Consumer Electronics Brand / Visibility Channel  Channel stuffing / AR Inventory Life cycle management Service costs (perfection of finished product)
  • 23. Key Variables – xSP Cost of capital Efficiency vs. Scale Market share Not important  IP
  • 24. Key Variables – Professional Services (consulting) Productivity / efficiency  Billed time vs non-billed  Vacation, sick time, personal  Selling  Training  Practice development  Price vs Cost (salary + overheads, etc)  Typically 40% gross margin Special purpose vs general purpose consulting Development of “Practices”
  • 25. ClearEar Case Discussion Chris Dier Discussion on What Happened Based on Decisions Discussed in Session 3
  • 26. For Next Session: The Elevator Pitch Company Name and What Is My Product What Problem Do I Solve? How Big Is the Market? (I.e. How Important is this Problem) Why Is My Solution the Basis for a Sustainable Business? (Unlike My Competitors) Why Do I Have the Right Team? How Much Money Am I Raising and for What? All of This Must Come Through in About 90
  • 27. ClearEar Elevator Pitch
  • 28. Session 6: Business Models The Bridge Between a “Good Idea” and a Realistic Financial Model of Your Business