The Bridge Between a “Good Idea” and a Realistic Financial Model of Your Business

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

27. ClearEar Elevator Pitch

28. Session 6: Business Models
The Bridge Between a “Good
Idea” and a Realistic Financial
Model of Your Business