Business Models for Startups

SoftBank Capital – Joe Medved

Business Models for Startups

October 2010


Overview

Assessing Your Business Model• Define your product or service• What problem does it solve?• Who will buy it and how will you reach them?• Are the economics viable?

Building Your Financial Projections• Focus on core revenue and expense drivers• Review cash need under various scenarios• Determine your funding options


What is your product or service?

• Develop a succinct definition– Investors are often ADD, so keep it simple– If available, a demo is the best description

• What problem are you solving?– Is there a real market need?– Solicit blunt advice from potential customers


Who will buy it?

People who like

ice cream

People who has

hands

Ali G’s Ice Cream Glove – Total Addressable Market

Core Drivers

Total Addressable Customers


How will you acquire customers?• Determine your customer acquisition cost• Drive users via advertising, marketing & PR– “Viral” is typically icing, not a primary strategy

• Sell in person, over the phone, or self-serve?• Consider cost of customer support and churn– Maintaining existing customers should be cheaper

than acquiring new ones

Core Drivers

Customer Acquisition Cost

Customers – Adds, Churn


How will you monetize?• Who will pay for your product or service, your

users or third parties targeting your users?• How will you charge – pricing and structure?• Consider long term pricing trends– Due to network effects, supply costs, competition

• Determine average customer life

Core Drivers

Paying Customers

Revenue per Customer

Average Customer Life


What does it cost to run your business?• How will you build, sell and support your

product or service?• Who will you hire and when?• What are your infrastructure, services and

other operating costs?• Consider variable vs. fixed components

Core Drivers

Cost of Goods Sold

Personnel – Base, Bonus, Benefits

Operating – Rent, Legal, Accounting, Insurance, T&E, IT


Are you building a viable business?• Review long term unit economics +

fixed costs to gauge profitability • Defining and implementing a

monetization strategy day one may not be possible, but consider the potential options long term

• The world’s most beautiful product or service is useless if customers will never pay enough to cover costs

• You will get a better exit price if you’re not for sale. Build an independently sustainable business.


Building Financial Projections


Your Projections Will Be Wrong

• And that’s okay• Nothing will go

exactly to plan• You just need

guidelines, for understanding your near term cash needs, and long term potential value


How far out should projections go?

• Different schools of thought, though most investors will expect 2-3 years, with more detail over first 12-18 months

• Investors want to know how far their funding will take the business. Early focus will be on expenses.

• 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


Basis for assumptions

• Base drivers on something you can reference• Pricing based on target customer feedback,

competitor rates, tangential services• For compensation metrics, talk to recruiters or

use online resources like CompStudy.com• Interview service providers for real estate, IT,

legal, accounting and HR cost estimates


Build a Model From Your Core Drivers

• Allow yourself to easily sensitize the drivers– Tie variable expenses to revenue where possible

• Add comments to row labels with basis for assumptions– This is rarely seen but will lend credence to your

estimates and make investor diligence easier• Review the growth trends for each line item– Are the trends rational?– Margins in Year 2 probably shouldn’t exceed Google’s


My Recommended Summary Tab

• Display quarterly #’s for Year 1, annual for Years 2 & 3

• Start with key dashboard metrics, such as # of users, paying customers, units sold or partners

• Show P&L, breaking out significant revenue and expense line items

• End with headcount for an expense barometer


Summary Tab - Sample2011

Q1 Q2 Q3 Q4 Total 2012 2013Markets Launched 1 3 7 10 10 20 35Cost of User Acquisition $10.00 $9.00 $8.00 $7.00 $7.50 $6.00 $5.00Avg. Active Users 250 1,750 8,500 24,500 10,454 67,500 181,250

Revenue Type 1 $375 $3,063 $17,000 $55,125 $75,563 $742,500 $2,175,000Revenue Type 2 250 2,188 12,750 42,875 58,063 607,500 1,767,188Revenue Type 3 188 1,750 10,625 36,750 49,313 472,500 1,359,375Total Revenue $813 $7,000 $40,375 $134,750 $182,938 $1,822,500 $5,301,563Avg Monthly Rev/User $1.08 $1.33 $1.58 $1.83 $1.46 $2.25 $2.44

Cost of Goods Sold 244 2,100 12,113 40,425 54,881 455,625 1,060,313Gross Profit $569 $4,900 $28,263 $94,325 $128,056 $1,366,875 $4,241,250% margin 70% 70% 70% 70% 70% 75% 80%

Personnel & Consultants 162,000 142,000 172,500 361,500 838,000 1,195,500 1,567,755Marketing 5,000 22,500 88,000 147,000 262,500 390,000 812,500Other Operating Expenses 52,750 32,250 53,300 101,700 240,000 261,000 370,550Total Operating Expenses $219,750 $196,750 $313,800 $610,200 $1,340,500 $1,846,500 $2,750,805

Free Cash Flow ($219,181) ($191,850) ($285,538) ($515,875) ($1,212,444) ($479,625) $1,490,445

Headcount 5 5 7 8 8 10 13


Recommended Backup Tabs

• P&L– Top line revenue through detailed expense line items

• Revenue– Total addressable customers and market penetration– Incorporate avg. customer life and churn if applicable– Have pricing assumptions that can be sensitized– Tie revenue growth to corresponding increase in sales staff,

channel partners, customer acquisition, etc.• Personnel

– This is likely your biggest expense item– Break out your hires with base, bonus, benefit and raise

assumptions that can be sensitized


P&L Tab - Sample2011

Q1 Q2 Q3 Q4 Total 2012 2013Revenue Type 1 $375 $3,063 $17,000 $55,125 $75,563 $742,500 $2,175,000Revenue Type 2 250 2,188 12,750 42,875 58,063 607,500 1,767,188Revenue Type 3 188 1,750 10,625 36,750 49,313 472,500 1,359,375Total Revenue $813 $7,000 $40,375 $134,750 $182,938 $1,822,500 $5,301,563

Cost of Goods Sold 244 2,100 12,113 40,425 54,881 455,625 1,060,313Gross Profit $569 $4,900 $28,263 $94,325 $128,056 $1,366,875 $4,241,250% margin 70% 70% 70% 70% 70% 75% 80%

Operating ExpensesPersonnel 117,000 117,000 157,500 346,500 738,000 1,165,500 1,567,755Consultants 45,000 25,000 15,000 15,000 100,000 30,000 0Marketing 5,000 22,500 88,000 147,000 262,500 390,000 812,500Cost of Acquisition $10.00 $9.00 $8.00 $7.00 $6.00 $5.00

Rent 10,000 10,000 10,000 10,000 40,000 50,000 80,000Hosting 750 5,250 25,500 73,500 105,000 135,000 181,250Legal 30,000 5,000 5,000 5,000 45,000 10,000 20,000Accounting 5,000 5,000 5,000 5,000 20,000 25,000 40,000Insurance 2,000 2,000 2,000 2,000 8,000 10,000 11,000T&E 3,000 3,000 3,000 3,000 12,000 15,000 17,500IT 2,000 2,000 2,800 3,200 10,000 16,000 20,800Total Op. Expenses $219,760 $196,759 $313,808 $610,207 $1,340,500 $1,846,506 $2,750,810

Free Cash Flow ($219,191) ($191,859) ($285,546) ($515,882) ($1,212,444) ($479,631) $1,490,440Cumulative FCF ($219,191) ($411,050) ($696,596) ($1,212,478) ($1,212,478) ($1,692,109) ($201,669)

Beginning Cash $250,000 $30,809 ($161,050) ($446,596) $250,000 ($962,478) ($1,442,109)Ending Cash $30,809 ($161,050) ($446,596) ($962,478) ($962,478) ($1,442,109) $48,331


Revenue Tab - Sample2011

Q1 Q2 Q3 Q4 Total 2012 2013Markets Launched 1 3 7 10 10 20 35Addressable Users 100,000 300,000 700,000 1,000,000 1,000,000 2,000,000 3,500,000

Total Active Users 500 3,000 14,000 35,000 35,000 100,000 262,500% of Addressable Users 0.5% 1.0% 2.0% 3.5% 3.5% 5.0% 7.5%Avg. Active Users 250 1,750 8,500 24,500 10,454 67,500 181,250

Revenue Type 1/User $1.50 $1.75 $2.00 $2.25 $7.50 $11.00 $12.00Revenue Type 2/User 1.00 1.25 1.50 1.75 5.50 9.00 9.75Revenue Type 3/User 0.75 1.00 1.25 1.50 4.50 7.00 7.50

Revenue Type 1 $375 $3,063 $17,000 $55,125 $75,563 $742,500 $2,175,000Revenue Type 2 250 2,188 12,750 42,875 58,063 607,500 1,767,188Revenue Type 3 188 1,750 10,625 36,750 49,313 472,500 1,359,375Total Revenue $813 $7,000 $40,375 $134,750 $182,938 $1,822,500 $5,301,563


Personnel Tab - Sample2011

Base Bonus Q1 Q2 Q3 Q4 Total 2012 2013AdministrativeCEO $85,000 $35,000 $21,250 $21,250 $21,250 $56,250 $120,000 $126,000 $132,300COO 75,000 25,000 25,000 25,000 105,000 110,250VP Bus Dev 60,000 20,000 84,000 88,200VP Marketing 60,000 20,000 15,000 20,000 35,000 84,000 88,200Controller 50,000 10,000 63,000 66,150

EngineeringVP Engineering 100,000 25,000 25,000 25,000 25,000 50,000 125,000 131,250 137,813Developer 75,000 25,000 18,750 18,750 18,750 43,750 100,000 105,000 110,250Developer 75,000 25,000 18,750 31,250 50,000 105,000 110,250Developer 75,000 25,000 110,250Developer 75,000 25,000 110,250

ProductVP Product 80,000 20,000 20,000 20,000 20,000 40,000 100,000 105,000 110,250Product Manager 50,000 10,000 12,500 12,500 12,500 22,500 60,000 63,000 66,150Product Manager 50,000 10,000 66,150

Benefits (20%) 19,500 19,500 26,250 57,750 123,000 194,250 261,293

Total $117,000 $117,000 $157,500 $346,500 $738,000 $1,165,500 $1,567,755

Headcount 5 5 7 8 8 10 13Note: Assumes 5% annual raise


How much funding do you need?

• Sensitize your estimates to determine need– What if revenue takes 6-12 months > expected?

• Optimize your return potential– Consider how much outside capital required, if any, to

reach significant valuation milestones– Milestones vary by sector. Advisors with sector expertise

can provide significant insight here.• Target friends & family, angels, VCs, or bootstrap– Raise capital from a source with aligned expectations– Plenty of great companies have been bootstrapped


Conclusion

• Scope out a killer product or service• Assess whether it will yield a viable business• Build a guideline model based on core drivers• Raise capital from an appropriate source• Build and exit your business• Repeat


www.SoftBank.com

@joevc - www.twitter.com/joevc

www.JoeMedved.com

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Business Models for Startups