Post on 11-Nov-2014
description
Session 6: Business Models
The Bridge Between a “Good Idea” and a Realistic Financial Model of Your Business
Session Agenda
So far we’ve: started to quantify opportunities, looked at market sizing, and looked at marketing/sales strategiesNow we’ll: build a template to determine if we have a real businessWe will do the Clear Ear Business Model, andThe Clear Ear “Elevator Pitch” to convince investors we’ve got what it takes to make everyone rich
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
Many types of business models
HW – systemsHW – components / consumerSW – enterpriseSE – consumerSemiconductersSemi EquipmentService providers (xSP)ConsultingRestaurant Chains / Consumer BusinessBio-TechEtc.
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
Working models are visibleThey are the existing profitable companiesThey are all around usWe 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!!
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 companiesOur models should mature into the selected models closest to our business idea
Basic Building Blocks – Department Budget
S t a r t u p M o d e l
Income Statement
Balance Sheet
Cash Flow
Y1Income Statement
Balance Sheet
Cash Flow
Y4Income Statement
Balance Sheet
Cash Flow
Income Statement
Balance Sheet
Cash Flow
Y3Y2
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
One time costsDevelopment 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???
Size of market
Total available marketServed available marketCompetitors in the marketIf successful, how large a company could we build? What do VC’s need to see
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
Cost of sales – sales modelEnd 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
Cost of sales – sales modelChannel How many tiers? Channel discounts Channel sales Marketing programs and support
Cost of product
Cost / volume curve – where do I have to be to make money?Critical componentsMaterial Lead times / expediting ScrapProduct life cycle transitions
Cost of services
Competitive price of servicesCost of selling servicesEfficiency of resources Downtime Training Reusable skills
Overheads
Key Variables – Enterprise Software Company
Time to marketSales Model Product price Cost of Sales Sales force productivity Channels / Channel conflict vs harmony
Not important Inventory Product life cycles
Example: End user direct 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%
Example: End user direct sales in an Enterprise SW company
First year cost = 580First year revenue = 0 + 125 + 125 + 250 = 500Planning assumption = $375 first year, 750 second yearSales costs alone may exceed revenues during start up phase!!!Rising productivity is absolutely required, and a mark of successful company / product
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
Key Variables – Semiconductors
Intellectual PropertyDesign integrity / design cycleYieldDesign wins Time to volume
Technical lead
Not important Marketing (consumer)
Key Variables – Consumer Electronics
Brand / VisibilityChannel Channel stuffing / AR
InventoryLife cycle managementService costs (perfection of finished product)
Key Variables – xSP
Cost of capitalEfficiency vs. ScaleMarket share
Not important IP
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 consultingDevelopment of “Practices”
ClearEar Case Discussion
Chris Dier Discussion on What Happened Based on Decisions Discussed in Session 3
For Next Session:
The Elevator PitchCompany Name and What Is My ProductWhat 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 Seconds
ClearEar Elevator Pitch
Session 6: Business Models
The Bridge Between a “Good Idea” and a Realistic Financial Model of Your Business