Business Validation

Mark Szczerba

Roll Global

Introduction

• Brief introduction

• Business Models & Definitions

• Capital Requirements & Reducing Risk

• Variety of Business Models

• Specific examples

• Exercises

Roll Global

• Roll Global is a diverse $3B company focused on consumer packaged goods and agricultural products

• Roll has a number of well known brands:

• Roll is well known for marketing and branding agricultural products

What makes a good business?

• How much revenue can you generate?

• What are the costs?

• What are the long term goals?

• Can the management team grow the business?

• Can the team grow with the business?

• Who is the customer?

• How many customers?

• Value proposition to the customer?

• Competition?

• Will it work?• Are materials

available?• Is it scalable?• Can it be tested

cost effectively?

Technology Market

Business Model

Team

Business Model: How will you make money?

• What is your strategy?

– What is your aspiration? Is it clear?

– Where will you compete? What is the market size?

– How will you ensure success? What is your “value proposition”?

– Do you have the capabilities? Do you have the right team?

Business Model: How will you make money?

– Who are the customers for your product/service?

– Why do your customers want your product/service?

– Are they willing to pay for your product/service?

Solving critical

problem?

Filling a gap?Providing

experience?Can manage

better?

Cost reduction?

Efficiency gain?

VALUE PROPOSITION

Business Model: How will you spend money?

• How much will it cost to generate your revenues?

• COGS: Cost of goods sold – direct costs associated with product sold

• OPEX: Operating expenditure – cost to run a business

• CAPEX: Capital expenditure – cost to purchase or add value to an asset

• How much revenue can you make and how quickly?

• Cost of Capital: cost to finance the business (cost of equity or debt); return required before generating value

Definitions: Gross Margin

• Revenue

– Money coming into the business from product sales

• Cost of Goods Sold (COGS)

– What it costs to make your products

– E.g. pizza boxes, toppings, and hourly labor

• Gross Margin (%)

– Proportion of each dollar of revenue that goes to profit

– Is your business successful? Is your Gross margin better or worse than industry average?

Definitions: Expenses

• Fixed costs

– Don’t change with production levels in the short term

– E.g. Overhead, Assets, Land

• Variable costs

– Change with business activity

– E.g. Direct labor, Packaging material

Definitions: Profitability

• Cash Burn rate

– How much cash you lose over a period of time (E.g. per month)

• EBITDA

– Earnings Before Interest, Tax, Depreciation and Amortization

– Basically net income + interest, taxes, depreciation and amortization

– Useful for valuation comparisons

• Net Income

– Revenues minus all expenses

Amounts in US $ thousands Mar 2013 Mar 2012

Revenue

23,498

26,679

Cost of Goods Sold

14,474

16,134

Gross Profit 9,024

10,545

Gross Profit Margin 38.4% 39.5%

SG&A Expense 6,029

7,066

Depreciation & Amortization

1,502

1,796

Operating Income 1,211

1,373

Operating Margin

0

0

Non operating Income

50

(308)

Non operating Expenses

4

20

Income Before Taxes 1,265

1,084

Income Taxes

475

365 Net Income After Taxes (before accounting adjustments for affiliated companies)

790

719

Accounting adjustments for affiliated companies

(214)

(187)

Total Net Income

576

532

Example Income Statement

Definitions: Pro-Forma Statements

• Pro-Forma Statements

– “Best Guess” predictions on cash flow

• “back of the envelope”

– Designed to show the impact of a certain choices

Definitions: J-Curve

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018-$40

-$20

$0

$20

$40

$60

$80

$100

$120

Profi

t ($M

M)

Capital required to reach“Cash Flow Break Even”

Capital RequirementsBu

sine

ss V

alue

Time

Proof of concept

Beta Customer

Commercial Launch

Cash Flow Break Even

(Increasing value and reducing risk along the way)

Revenue Models

Unit Sales Sell a product or service to customers (wholesale, retail, or direct).

Advertising Fees Sell opportunities to distribute messages (viewers, readers, listeners, or others)

Franchise Fees Sell and support a replicable business for others to invest in, grow, and manage

Utility Fees Sell goods and services on a per-use basis

Subscription Fees Charge a fixed price for providing access to your goods or services

Transaction Fees Charge a fee for referring, enabling or executing a transaction

License FeesSell the rights (exclusive or non-exclusive) to use patent- or copyright-protected IP

Final thoughts…

• Have a plan B

– And C and D

• Seek market validation quickly

– Get to market fast and with less capital

– Don’t do it all right off the bat

• What is your unfair advantage?

– Why can you do this, can you defend it?

Now it’s your turn…….

Cost/unitPrice/unit

# units sold/year

Revenue/yrAnnual Profit/yr

How much will it cost you?

– How much funding do you need?

– Look closely at your expenses

• Create an Excel file

• Cut and paste the following expenses...

• Delete the rows you don’t need (that aren’t significant)

• Add time periods across the top

• Start making assumptions...

Next Steps: Validating Your Business

Using the exercises in the coursebook, identify the critical uncertainties around your business and business model.

1. Rank and order the uncertainties.

2. Identify which should be resolved first (in the next 9-12 months). These are your business milestones.

3. List the resources (people, equipment, $) you need to reach those milestones.