memsi january 2018: making money part 2

MIT Entrepreneurship and

Maker Skills Integrator

Making Money! Part 2

January 2018

Elaine Chen, Brian Yen

DE Themes, again

Business models, pricing etc

Osterwalder on biz models

4“Business mode generation” – Alexander Osterwalder & Yves Pigneur

”FREE” is not a business model!

Because, statistics

5

What are some products / services you use…

• … and how do you pay for it?

6

It’s really very simple

7

Transactional Subscription Ad-based

Anything can be made recurring

8

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

9

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?

10

Sharing!

11

Now let’s get straight to the $

• Money you make

• Less money you spend

• Less taxes you pay

• = Money you keep

12

5 year pro-forma simulation

13

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

Wh

at y

ou

mak

e

Wh

at y

ou

sp

end

/ p

ay in

tax

es

Wh

at y

ou

kee

p

What to figure out first

14

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

Wh

at y

ou

mak

e

Let’s whiteboard this

15

Some basic tenets

• Value based, not cost-plus

• Comparables help

• Surveys help somewhat…

• … but you HAVE to test purchase intent by extracting “currency”

16

Testing purchase intent with “currency”

17

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

Revenue

=

Cash?

18

Cash management challenges

19

$$$ For components

$$$ tied up in inventory

$$$ For tooling

$$$ CM

$$$ stuck on a boat

Cash management challenges

20

$$$ For components

$$$ tied up in inventory

$$$ For components

$$$ CM

$$$ stuck on a boat

The $450,000 call

Cash management challenges

21

$$$ For components

$$$ tied up in inventory

$$$ For components

$$$ CM

$$$ stuck on a boat

The $450,000 call

Cash

=

Oxygen

23

Last but not least: Try not to lose money forever

24

Life

time

value

(LTV)Cost of

Customer

Acquisition

(COCA)

Common mistakes

25

Underestimating

COCA

Life time value (LTV)

Cost of Customer

Acquisition (COCA)

Low LTV

Very simple

Make more $$ than you spend per acquired customer

26

LTV : COCA = 3 : 1 or better

What we talked about

• Business models

• Forecasting revenue

• Cash flow management for a hardware startup

• Make more money than you spend (eventually)

27

Questions?

28