In this session, we look at business models, financial projections, forecasting, and look at special considerations when operating a hardware startup with significant tooling and inventory costs.

1. MIT Entrepreneurship and
Maker Skills Integrator
Making Money! Part 2
June 2018
Elaine Chen

2. DE3: How does your customer
acquire your product?

3. More on awareness generation
• 2 things to think about
• Who is your customer? And
therefore, where do they get
information?
• How much does it cost?
(COCA)
3
• Online marketing
• Organic traffic
• SEO / SEM
• “Re-targeting”
• Facebook Ads
• Google Adwords
• Email campaigns
COME SEE US FOR
MORE INFORMATION
• Inbound v traditional
• Brian Halligan & Dharmesh
Shah: “Inbound Marketing”
• Spear versus net fishing

4. Step 13: Decision Making Process
What is the process with which each person in the DMU
arrives at a “BUY” decision?
4
Deter-
mine
Need &
Catalyst
to Action
Find Out
About
Options
Analyze
Options
Acquire
Your
Product
Install
Use &
Get Value
Determin
e Value
Pay Buy More
Tell
Others

5. Decision Making Process: IPhone
5
Deter-
mine
Need &
Catalyst
to Action
Find Out
About
Options
Analyze
Options
Acquire
Your
Product
Install
Use &
Get Value
Determin
e Value
Pay Buy More
Tell
Others
“Mom, my
phone
broke.”
“Helen, do
you like
your
phone?”
“The
iPhone6 is
on sale!”
“Here’s
your
iPhone 6”
“OK
every-
thing is
restored”
“Helen
I’m on my
new
phone!”
“LOVE my
phone!”
“OK I guess
we are
keeping it”
“Sabine
the
iphone6 is
fine”

6. Decision making process: Industrial Automation
6
Deter-
mine
Need &
Catalyst
to Action
Find Out
About
Options
Analyze
Options
Acquire
Your
Product
Install
Use &
Get Value
Determin
e Value
Pay Buy More
Tell
Others
Productivity
initiative
analysis
Analyze
alternat-
ives
Attend trade
show
Arrange on
site POC
demo
Install trial
unit, staff
training
Paid
beta
Go /
no-go
PO issued /
fulfilment
Next 4 units

7. A sidebar on Kickstarter
Source: Art of the Kickstart+ THE LONG TAIL

8. Who is your customer?
8

9. Business models, pricing etc

10. Osterwalder on biz models
10
“Business mode generation” – Alexander Osterwalder & Yves Pigneur

11. ”FREE” is not a business model!
Because, statistics
11

12. What are some products / services you use…
• … and how do you pay for it?
12

13. It’s really very simple
13
Transactional Subscription Ad-based

14. Anything can be made recurring
14

15. Common wisdom
• Simple is beautiful
• Ad based alone is practically uninvestable
• One-and-done is bad
• Vastly cheaper to keep making $ off an acquired
customer than to keep having to acquire new customers
15

16. In class exercise: Propose a biz model for
your venture
• How do you get paid?
• Who pays you?
• How often do they pay you?
• Do a sniff test to see if there are similar things they
already pay for. Does it smell good?
16

17. Sharing!
17

18. Now let’s get straight to the $
• Money you make
• Less money you spend
• Less taxes you pay
• = Money you keep
18

19. 5 year pro-forma simulation
19
Pro-Forma 5-year P&L Wearable Connected Device Plus Subscription
® ConceptSpring 2016
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue
Revenue $186,000 $1,887,000 $37,490,250 $86,492,200 $100,793,760
Cost of Goods sold (COGS) $75,000 $500,000 $6,000,000 $13,750,000 $15,000,000
Gross Margin ($) $111,000 $1,387,000 $31,490,250 $72,742,200 $85,793,760
Gross Margin (%) 60% 74% 84% 84% 85%
Expenses
Engineering 608,002$ 1,804,765$ 3,244,340$ 3,867,661$ 3,954,261$
Marketing 45,000$ 378,000$ 1,102,170$ 1,514,155$ 1,649,320$
Sales and Service 10,000$ 223,500$ 947,875$ 1,653,841$ 1,870,006$
Finance, General and Administration 45,002$ 118,002$ 417,540$ 423,566$ 429,923$
Total Operating Expenses (OpEx) 708,003$ 2,524,267$ 5,711,925$ 7,459,224$ 7,903,510$
Operating profit (aka EBIT)
Earnings Before Interest and Tax (EBIT) ($597,003) ($1,137,267) $25,778,325 $65,282,976 $77,890,250
Tax
Corporate tax (e.g. 40%) ($10,311,330) ($26,113,190) ($31,156,100)
Net income (aka Profit)
($597,003.40) ($1,137,266.80) $15,466,995.24 $39,169,785.70 $46,734,149.82
Whatyoumake
Whatyouspend/payintaxes
Whatyoukeep

20. What to figure out first
20
Pro-Forma 5-year P&L Wearable Connected Device Plus Subscription
® ConceptSpring 2016
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue
Revenue $186,000 $1,887,000 $37,490,250 $86,492,200 $100,793,760
Cost of Goods sold (COGS) $75,000 $500,000 $6,000,000 $13,750,000 $15,000,000
Gross Margin ($) $111,000 $1,387,000 $31,490,250 $72,742,200 $85,793,760
Gross Margin (%) 60% 74% 84% 84% 85%
Expenses
Engineering 608,002$ 1,804,765$ 3,244,340$ 3,867,661$ 3,954,261$
Marketing 45,000$ 378,000$ 1,102,170$ 1,514,155$ 1,649,320$
Sales and Service 10,000$ 223,500$ 947,875$ 1,653,841$ 1,870,006$
Finance, General and Administration 45,002$ 118,002$ 417,540$ 423,566$ 429,923$
Total Operating Expenses (OpEx) 708,003$ 2,524,267$ 5,711,925$ 7,459,224$ 7,903,510$
Operating profit (aka EBIT)
Earnings Before Interest and Tax (EBIT) ($597,003) ($1,137,267) $25,778,325 $65,282,976 $77,890,250
Tax
Corporate tax (e.g. 40%) ($10,311,330) ($26,113,190) ($31,156,100)
Net income (aka Profit)
($597,003.40) ($1,137,266.80) $15,466,995.24 $39,169,785.70 $46,734,149.82
Whatyoumake

21. Let’s whiteboard this
21

22. Some basic tenets
• Value based, not cost-plus
• Comparables help
• Surveys help somewhat…
• … but you HAVE to test purchase intent by extracting “currency”
22

23. Testing purchase intent with “currency”
23
Short of taking $$$ from your potential customers for your nonexistent
vaporware, what are some asks you can pose to collect surrogate currency that
is a predictor of future willingness to pay?
• Yes to scheduling a meeting to discuss
• Actually getting a scheduled meeting on the calendar
• Actually meeting you
• Giving you the email of someone else you should meet
• E-introducing you to someone else you should meet
• Providing an email
• Providing Credit Card for a pre-order (no charge)
• Providing Credit Card for a pre-order (charged, rain check provided)
• … etc

24. Revenue
=
Cash?
24

25. Cash management challenges
25
$$$ For components
$$$ tied up in inventory
$$$ For tooling
$$$ CM
$$$ stuck on a boat

26. Cash management challenges
26
$$$ For components
$$$ tied up in inventory
$$$ For components
$$$ CM
$$$ stuck on a boat
The $450,000 call

27. Cash management challenges
27
$$$ For components
$$$ tied up in inventory
$$$ For components
$$$ CM
$$$ stuck on a boat
The $450,000 call

29. Cash
=
Oxygen
29

30. Last but not least: Try not to lose money forever
30
Life
time
value
(LTV)Cost of
Customer
Acquisition
(COCA)

31. Common mistakes
31
Underestimating
COCA
Life time value
(LTV)
Cost of
Customer
Acquisition
(COCA)
Low LTV

32. Very simple
Make more $$ than you spend per acquired customer
32
LTV : COCA = 3 : 1 or better

33. What we talked about
• Business models
• Forecasting revenue
• Cash flow management for a hardware startup
• Make more money than you spend (eventually)
33

34. Questions?
34