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