Business Models for Startups


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Business Models for Startups

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