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Mark Leslie - Business Models
1. Session 6: Business Models
The Bridge Between a “Good
Idea” and a Realistic Financial
Model of Your Business
2. Session Agenda
So far we’ve: started to quantify opportunities,
looked at market sizing, and looked at
marketing/sales strategies
Now we’ll: build a template to determine if we
have a real business
We will do the Clear Ear Business Model, and
The Clear Ear “Elevator Pitch” to convince
investors we’ve got what it takes to make
everyone rich
3. The Business Model
The business is composed of a number
of different component pieces
Each of which can be studied
Each piece can be projected
When all the pieces come together, do
you have a “going concern” that is able
to make money
4. Many types of business
models
HW – systems
HW – components / consumer
SW – enterprise
SE – consumer
Semiconducters
Semi Equipment
Service providers (xSP)
Consulting
Restaurant Chains / Consumer Business
Bio-Tech
Etc.
5. Each model is unique
Manufacturing model
High price / low volume
Low price / high volume
Sales Model
Enterprise sell
Consumer sell
One time costs
Development
tooling
6. Working models are visible
They are the existing profitable companies
They are all around us
We can examine their components
COGs
Gross margins
Ongoing development costs
Cost of sales and marketing
Capital intensity, etc.
You should assume that mature companies
are staffed with very smart people who work
hard at increasing productivity and holding
costs down!!
7. A startup is different
Startup
No revenues
High development costs
Uncertain model, etc
However, we should be able to know where
we are going by looking at other companies
Our models should mature into the selected
models closest to our business idea
8. Basic Building Blocks –
Department Budget
Startup Model
Y1 Y2 Y3 Y4
Income Income Income Income
Statement Statement Statement Statement
Balance Balance Balance Balance
Sheet Sheet Sheet Sheet
Cash Flow Cash Flow Cash Flow Cash Flow
9. What are the components that
need modeling
One time costs
Development
Tooling
brand
Ongoing costs
Size of market (Including Which Segments)
Price of product
Cost of sales / marketing
Cost of product
Cost of services
10. One time costs
Development
Only D, no R
Too much / too long = too much risk
Tooling
What is the cost/volume assumptions that make
the business work
Brand
Is brand recognition required
what is the cost to get it
how unique is the product
How much noise in the market
Are the one time costs in overall proportion to
the Venture???
11. Size of market
Total available market
Served available market
Competitors in the market
If successful, how large a company
could we build?
What do VC’s need to see
12. Price of product
What is the market elasticity
At any price, what is the market size
What are prices of similar products
Can I sell for more because of feature
richness, unique capabilities
Must I sell for less, how much less
Can I produce this product competitively
13. Cost of sales – sales model
End user direct
Productivity assumptions
Usually less than ½ mature company
New hire time to productivity
Overheads
SE’s
Manager’s
Remote offices
T & E
Marketing support
14. Cost of sales – sales model
Channel
How many tiers?
Channel discounts
Channel sales
Marketing programs and support
15. Cost of product
Cost / volume curve – where do I have
to be to make money?
Critical components
Material Lead times / expediting
Scrap
Product life cycle transitions
16. Cost of services
Competitive price of services
Cost of selling services
Efficiency of resources
Downtime
Training
Reusable skills
Overheads
17. Key Variables – Enterprise
Software Company
Time to market
Sales Model
Product price
Cost of Sales
Sales force productivity
Channels / Channel conflict vs harmony
Not important
Inventory
Product life cycles
18. sales in an Enterprise SW
company
Overall cost per rep
Specific cost
OTE = 200
SE = 100
1/5 mgr = 60
Salary overheads = 72
T&E = 50
Other = 100
Total = $580K
Productivity
Full productivity < $1 m / year
Start up quarters = 0, ½, ½, full
Corporate business planning assumption reduces
individual productivity expectation by 25%
19. sales in an Enterprise SW
company
First year cost = 580
First year revenue = 0 + 125 + 125 + 250 =
500
Planning assumption = $375 first year, 750
second year
Sales costs alone may exceed
revenues during start up phase!!!
Rising productivity is absolutely required, and
a mark of successful company / product
20. Example – price vs. channel
Channel % Discount % Discount
(from list) W/ Volume
End user 0 20
Reseller 35 40
Distributor 50 55
Binary OEM 65 75
Source OEM 85 90
Very High Volume 95 98
OEM
21. Key Variables –
Semiconductors
Intellectual Property
Design integrity / design cycle
Yield
Design wins
Time to volume
Technical lead
Not important
Marketing (consumer)
22. Key Variables – Consumer
Electronics
Brand / Visibility
Channel
Channel stuffing / AR
Inventory
Life cycle management
Service costs (perfection of finished
product)
23. Key Variables – xSP
Cost of capital
Efficiency vs. Scale
Market share
Not important
IP
24. Key Variables – Professional
Services (consulting)
Productivity / efficiency
Billed time vs non-billed
Vacation, sick time, personal
Selling
Training
Practice development
Price vs Cost (salary + overheads, etc)
Typically 40% gross margin
Special purpose vs general purpose
consulting
Development of “Practices”
25. ClearEar Case Discussion
Chris Dier Discussion on What
Happened Based on Decisions
Discussed in Session 3
26. For Next Session:
The Elevator Pitch
Company Name and What Is My Product
What Problem Do I Solve?
How Big Is the Market? (I.e. How Important is
this Problem)
Why Is My Solution the Basis for a
Sustainable Business? (Unlike My
Competitors)
Why Do I Have the Right Team?
How Much Money Am I Raising and for
What?
All of This Must Come Through in About 90