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

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$$$ 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

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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