Making Money Part 2 - includes key concepts from Disciplined Entrepreneurship framework, Theme 4 (how do you make money off your product)

1. MIT Entrepreneurship and
Maker Skills Integrator
Making Money! Part 2
January 2018
Elaine Chen, Brian Yen

2. DE Themes, again

3. Business models, pricing etc

4. Osterwalder on biz models
4
“Business mode generation” – Alexander Osterwalder & Yves Pigneur

5. ”FREE” is not a business model!
Because, statistics
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6. What are some products / services you use…
• … and how do you pay for it?
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7. It’s really very simple
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Transactional Subscription Ad-based

8. Anything can be made recurring
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9. 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
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10. 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?
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11. Sharing!
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12. Now let’s get straight to the $
• Money you make
• Less money you spend
• Less taxes you pay
• = Money you keep
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13. 5 year pro-forma simulation
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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

14. What to figure out first
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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

15. Let’s whiteboard this
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16. Some basic tenets
• Value based, not cost-plus
• Comparables help
• Surveys help somewhat…
• … but you HAVE to test purchase intent by extracting “currency”
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17. Testing purchase intent with “currency”
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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

18. Revenue
=
Cash?
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19. Cash management challenges
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$$$ For components
$$$ tied up in inventory
$$$ For tooling
$$$ CM
$$$ stuck on a boat

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

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

23. Cash
=
Oxygen
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24. Last but not least: Try not to lose money forever
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Life
time
value
(LTV)Cost of
Customer
Acquisition
(COCA)

25. Common mistakes
25
Underestimating
COCA
Life time value
(LTV)
Cost of
Customer
Acquisition
(COCA)
Low LTV

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

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