f317 – venture capital & entrepreneurial finance revenue models & financial projections

F317 – Venture Capital & Entrepreneurial Finance

Revenue Models & Financial Projections

“How do you make money?” is the fundamental question every investor wants to understand.

Only a handful of companies achieve a successful exit without having fully figured out to monetize the product or service.

10,000 FT View

A Couple of points to consider about Monetization Strategies

1)It may change over time (need to be nimble);

2)There are multiple strategies to monetize a product or service; and

3)Multiple revenue streams is better than a single revenue stream.

Today we are going to discuss monetization strategies and financial

projections

Let’s quickly review the team quiz(Revenue Model Portion)

Revenue Stream(s)? Recurring Revenue Strategy(s)?

Revenue Stream(s)? Recurring Revenue Strategy(s)?

Revenue Stream(s)? Recurring Revenue Strategy(s)?

Revenue Stream(s)? Recurring Revenue Strategy(s)?

Revenue Stream(s)? Recurring Revenue Strategy(s)?

Let’s go through 5 actual start-up companies and answer the following:

1) What’s the pain point?2) Who’s the target customer?3) What’s the potential revenue

models?4) Pricing? 5) Customer Acquisition Strategies?

Company A

Company A offers an email add-on that combines your social media contacts with your email. It shows you everything about your contacts’ profiles right inside your inbox. You can immediately see what people look like, where they’re based, and what they do. You can establish a connection by mentioning shared interests. You can grow your network by connecting on LinkedIn, Twitter, Facebook and more. And you can record thoughts for later.

Company A

1) What’s the pain point?

2) Who’s the target customer?

Company A

Assembling background information on the people you are meeting takes lots of time.

Young, busy professionals that are actively building their networks

Company A – Revenue Model?

Sale of a Physical Product? Sale of a Service?

Distributor of a product or

service?

Freemium/Loss Leader Model

Development/Sale of Virtual Goods?

Marketplace Model?

Landlord Model? Advertising ModelProduct

Subscription Model?

1) How would you price the product?

2) Customer Acquisition Strategy?

Company A

Monthly Recurring Fee?

Are people looking for this? Is there a viral component?

Company B

Company B offers anyone the opportunity to support content creators at the micro-level. Like a blog post or a YouTube Video? Simply click on a single button and a portion of a monthly budget (you set for yourself) will go to that content creator.

Company B

1) What’s the pain point?

2) Who’s the target customer?

Company B

People want to support great content providers but there isn’t a system to provide for compensation.

Content Creators / Supporters

Company B – Revenue Model?

Sale of a Physical Product? Sale of a Service?

Distributor of a product or

service?

Freemium/Loss Leader Model

Development/Sale of Virtual Goods?

Marketplace Model?

Landlord Model? Advertising ModelProduct

Subscription Model?

1) How would you price the product?

2) Customer Acquisition Strategy?

Company B

Small fee per transaction / 10%

Added cost of educating the market. Would you pay for content that’s traditionally been free?

Company C

Company C has streamlined this process of ordering flowers. All the customer does is swipe and three taps is all it takes to have fresh flowers to a loved one in 90 minutes, even when ordered by 5:30pm that night.

Company C

1) What’s the pain point?

2) Who’s the target customer?

Company C

Sending flowers via the Internet and Phone is a pain; creates friction within the flower industry

People that want to use flowers as a way a showing affection

Company C – Revenue Model?

Sale of a Physical Product? Sale of a Service?

Distributor of a product or

service?

Freemium/Loss Leader Model

Development/Sale of Virtual Goods?

Marketplace Model?

Landlord Model? Advertising ModelProduct

Subscription Model?

1) How would you price the product?

2) Customer Acquisition Strategy?

Company C

Market / negotiate on cost structure

Social Media?

Company DCompany D has created a dispenser that allows you to sell specialty loose leaf teas economically and efficiently. With a range from 8-24 oz you can offer your customers a variety of cup sizes with a consistent flavor profile by dispensing the exact amount of tea needed for each cup! This will also help you manage inventory and provide your customers with a superior experience compared to the typical tea bag. By purchasing teas in bulk you can sell premium loose leaf teas at a price point that adds real value for you and your customers

Company D

1) What’s the pain point?

2) Who’s the target customer?

Company D

Different serving size options creates problems with utilizing the right amount of tea

Restaurants that want to provide an excellent tea experience

Company D – Revenue Model?

Sale of a Physical Product? Sale of a Service?

Distributor of a product or

service?

Freemium/Loss Leader Model

Development/Sale of Virtual Goods?

Marketplace Model?

Landlord Model? Advertising ModelProduct

Subscription Model?

1) How would you price the product?

2) Customer Acquisition Strategy?

Company C

Make money on the machine or the tea?

Through dealers / distributors?

Going direct?

Part 2:Developing a set of Financial

Projections for a Start-up

There are lies, damned lies, and then there are financial projections for a start-up.

10,000 FT View

A Couple of points to consider regarding Financials

1)Financials are designed to provide a “high level” view of the potential return;

2)Financials for start-ups are based on unsubstantiated assumptions;

3)If done correctly, it should provide an early capitalization roadmap.

Elaborate Financial Models come later / Don’t start with one

The job of an initial financial model is to make an economic case for

the investor.

Keep it high level / and the assumptions reasonable. You want to weave your financial projections

into the overall story.

Creating Financial Projections for a Start-up (example):

Dinner Call®

www.DinnerCall.com

Flash Prepared Meals Marketing Platform for Grocery Retailers

The Pain PointThis is Mike. Owner of a Grocery store in Utah. Mike is trying to increase sales of his prepared dinners. The challenge is that he’s competing with Quick Serve Restaurants that offer convenience (i.e. Drive-Thru). However, Mike can offer customers price, quality, and variety (if he can get them to think about his Grocery Store for dinner).

Product StoryDinnerCall® is a mobile commerce solution that allows Mike to create a weekly summary of what he’s cooking this week for dinner. He can then push the weekly menu out to his customers’ phones at which point his customers can immediately “reserve” the meals that appeal to them. Once a customer reserves and pays, the meal is added to the customer’s calendar. When Tuesday comes for example, the meal is made fresh for the time of pick-up. The customer is reminded via text message 30 minutes before pick-up. Dinner problem solved!

Ex. Grilled Salmon + Roasted Vegetables $6.99.

Through DinnerCall®, Mike can potentially add an additional $500,000 in sales each year for prepared meals:

100 Meals Per Day$10 Average Meal Ticket335 Days =

$502,250

Additionally, Mike draws customers into his store which will drive additional ancillary sales (i.e. Milk, cereal, Wine, Beer, etc.)

Customer Benefits

DinnerCall® charges Mike a $100 monthly subscription fee plus 1% per completed sale (reserved dinner)

$502,250 * 1% =

$1200 - Annual Subscription Fee$5000 - Transaction Fees

$6200 Per Year in Revenue

Revenue Model

There are 35,000 Grocery Retailers throughout the United States that are seeking to grow their evening/prepared meals business (and who are increasingly competing with Fast Food).

$6200 in Transaction Fees Average Per Store * 35,000 (Retailers) =

$217MM Market Opportunity

Market Opportunity

Step 1: Create Revenue Assumptions

PRE-

REVENUE BASELINE GROWTH GROWTH 2014 2015 Years 2-3 Years 4-5CUSTOMER TRACTION ASSUMPTIONS Number of Retail outlets Using Platform è 2 125 75% 150%Estimated Annual Meal Sales (Per Retailer) è $50,000.00 $350,000 10% 7%XXXXXXX è $0.00 $0 0% 0%XXXXXXX è $0.00 $0 0% 0%

Step 1: Create Revenue Assumptions

PRE-

REVENUE BASELINE GROWTH GROWTH 2014 2015 Years 2-3 Years 4-5

REVENUE ASSUMPTIONS Annual Subscription Fees Per Retailer è $0 $1,200 0% 0%Transaction Fee / % of Retailer Sales è 1% 1% 0% 0%Set-Up Fees (Per Retail Location) è $0 $500 0% 0%XXXXXX è $0 $0 0% 0%

Step 1: Create Revenue Assumptions

PRE-

REVENUE BASELINE GROWTH GROWTH 2014 2015 Years 2-3 Years 4-5

COST OF GOODS ASSUMPTIONS Customer Support Per Account (Per Year) è $2,000 $400 2% 3%

Step 2: Revenue Assumption drive Revenue Projections

2014 2015 2016 2017 2018 2019CUSTOMER TRACTION ASSUMPTIONS Number of Retailers Using Platform 2 125 219 383 957 2,393Estimated Annual Meal Sales (Per Retailer) $50,000 $350,000 $385,000 $423,500 $453,145 $484,865XXXXXXX XXXXXXX REVENUE $1,000 $649,000 $1,151,563 $2,162,617 $5,772,286 $15,189,645Annual Subscription Fees Per Retailer $0 $150,000 $262,500 $459,375 $1,148,438 $2,871,094Transaction Fees (All Retailers) $1,000 $437,500 $842,188 $1,621,211 $4,336,739 $11,600,778Set-Up Fees (Per Retail Location) $0 $61,500 $46,875 $82,031 $287,109 $717,773XXXXXX COST OF GOODS $4,000 $50,000 $89,250 $156,188 $394,297 $985,742Customer Support Per Account (Per Year) $4,000 $50,000 $89,250 $156,188 $394,297 $985,742XXXXXXX $0 $0 $0 $0 $0 $0XXXXXXX $0 $0 $0 $0 $0 $0XXXXXXX $0 $0 $0 $0 $0 $0

PRE-

REVENUE BASELINE GROWTH GROWTH 2014 2015 Years 2-3 Years 4-5

EXPENSE ASSUMPTIONS Customer Acquisition (Per Retail Account) è $5,000 $300 100% 75%# Employees è 2 5 75% 100%Avg salary, FICA, Benefits (Per Employee) è $50,000 $65,000 $85,000 $95,000Sales Commissions (Per Retailer Added) è $500 $100 $250 $350Product Investments / Design / Etc. è $200,000 $300,000 5% 7%Rent / Infrastructure è $25,000 $50,000 25% 50%Hosting / Maintenance è $1,000 $6,000 100% 75%Legal / Accounting è $5,000 $10,000 25% 50%Travel è $10,000 $50,000 25% 50%Other è $10,000 $15,000 25% 15%

Step 3: Develop High Level Expense Assumptions

OPERATING EXPENSES $357,000 $906,000 $1,412,938 $2,177,016 $4,427,445 $8,782,146

Headcount 2 5 9 15 31 61

Customer Acquisition (Per Retail Account) $5,000 $37,500 $131,250 $229,688 $502,441 $1,256,104

Avg salary, FICA, Benefits (Per Employee) $100,000 $425,000 $743,750 $1,301,563 $2,909,375 $5,818,750

Sales Commissions (Per Retailer Added) $1,000 $12,500 $54,688 $95,703 $334,961 $837,402

Product Investments / Design / Etc. $200,000 $300,000 $315,000 $330,750 $353,903 $378,676

Rent / Infrastructure $25,000 $50,000 $62,500 $78,125 $117,188 $175,781

Hosting / Maintenance $1,000 $6,000 $12,000 $24,000 $42,000 $73,500

Legal / Accounting $5,000 $10,000 $12,500 $15,625 $23,438 $35,156

Travel $10,000 $50,000 $62,500 $78,125 $117,188 $175,781

Other $10,000 $15,000 $18,750 $23,438 $26,953 $30,996

XXXXXXXXX $0 $0 $0 $0 $0 $0

XXXXXXXXX $0 $0 $0 $0 $0 $0

XXXXXXXXX $0 $0 $0 $0 $0 $0

Step 3: Expense Assumptions drive Expense Projections

Combine Revenue & Expense projections to create model

2014 2015 2016 2017 2018 2019

REVENUE $1,000 $649,000 $1,151,563 $2,162,617 $5,772,286 $15,189,645 COST OF GOODS $4,000 $50,000 $89,250 $156,188 $394,297 $985,742 OPERATING EXPENSES $357,000 $906,000 $1,412,938 $2,177,016 $4,427,445 $8,782,146 OPERATING INCOME -$360,000 -$307,000 -$350,625 -$170,586 $950,544 $5,421,756

May have to raise up to $1.5 - $2MM in order to bring the company to profitability??

Most start-up projections are unrealistically optimistic (as is the

case here).

To temper the optimism: Multiply Revenue by .75 and expenses by

1.25 (for entire 5 years)

Revised “Tempered” Outcome

May have to raise up to $5MM+ in order to bring the company to profitability

2014 2015 2016 2017 2018 2019

REVENUE $1,000 $649,000 $1,151,563 $2,162,617 $5,772,286 $15,189,645 $750 $486,750 $863,672 $1,621,963 $4,329,215 $11,392,234 COST OF GOODS $4,000 $50,000 $89,250 $156,188 $394,297 $985,742 $3,000 $37,500 $66,938 $117,141 $295,723 $739,307 OPERATING EXPENSES $357,000 $906,000 $1,412,938 $2,177,016 $4,427,445 $8,782,146 $446,250 $1,132,500 $1,766,173 $2,721,270 $5,534,306 $10,977,683 OPERATING INCOME ($360,000) ($307,000) ($350,625) ($170,586) $950,544 $5,421,756 ($448,500) ($683,250) ($969,438) ($1,216,448) ($1,500,815) ($324,755)

Start-up financial projections will be different based on the

selected revenue model.

And remember:

This is an “Art” not a “Science”

End of Lecture

Questions?