Business modeling for startups part ii

BUSINESS MODELING FOR INTERNET STARTUPSPART II

Pierre-Yves Pau

DRIVEN ACCELERATORAugust 22, 2013

What We Saw Last Time

• Business Modeling issues

• Cost classification

• Relevant costing concepts:− Fixed Costs− Variable Costs− Contribution Margin

• Customer acquisition costs

• Breakeven analysis

• Modeling techniques for long-term analysis

• R&D and deferred costs capitalization

What We Will Cover Today

Model of scenarios specific to your startup

Tips for validating projections, and

How to turn these into a set of pro-forma financial statements and schedules for investment valuation purposes

Refresher: Alphabet Soup• Pay-Per-Hit (PPH), Cost-Per-Hit (CPH)

• Conversion Rate (CR)

• Cost-Per-Acquisition (CPA)

• Revenue-Per-Hit/Acquisition (RPH, RPA) = CPH/CR

• CPA vs. customer LTV• LTV factors-in Customer Life-Cycle, Repeat Sales, Churn

• Variable vs. Fixed component of CPA (VCPA, FCPA)• PPH = Variable => VCPA• Marketing budget = Fixed => FCPA

If CPA > RPA, the venture will be short lived

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Refresher: Contribution MarginCM = Sales – Variable Costs = > Fixed Costs coverage

My Internet Startup Scenario• Branded or White-Label distribution• Drives traffic via SE, referrals, viral, embed

− VCoS is assumed as a % of Sales Volume• Seed-funded patent on proprietary IP valued $40k• Revenue streams:

− Monthly Subscriptions− Add/Content Shares− Support services

• Patent invested in IPR (=> $40k equity)• Currently applying for Round A angel financing• Contemplating VC Round B financing in 12-18 months• Needs to validate projections => credible pro-forma B/S

Tiered Offering: Mix Approach

Validate projections consistency between Sales volume (#), product mix, prices, and Sales $

$4,000/$18 =

1000 x 7600 / 0.02 CPM = 80k <=

Traffic vs. eCPM Assumptions Validation• eCPM = 1000 x (Revenue / #Impressions)

http://www.reviveconsultant.com/articles/what-is-ecpm-and-how-is-it-calculated/

• Revenue = #clicks x cost per click (CPC)• #clicks = #Impressions x clickthrough rate (CTR)• Therefore:

Revenue = #Impressions x CTR x CPC

And

eCPM = 1000 x (#Impression x CTR x CPC / #Impressions)

= 1000 x CTR x CPC• Also, #Impressions = 1000 x (Revenue / eCPM)• Example: 1st quarter revenue = $7.6k; eCPM = $0.02:

#Impressions = 1000 x 7,600 / 0.02 = 80k Impressions• If optional transaction after click Conversion Rate needs to be factored-in (CR)

to estimate Cost Per Acquisition (CPA) CoS• CPA = CPH / CR• If one time transaction CPA = CoS• If not (e.g., subscription) use LTV as substitute for Revenue / Sale

Back to My Internet Startup

=> Assuming 820k quarterly impressions by EoQ4

Revenue, Costs & Capex Projections

(incl. Product Development)

Other Assumptions

My Internet Startup Sales Scenarios

Revenue & Costs Schedule

Income Statement (I/S)

Cash-Flow Statement

Balance Sheet (B/S)

Depreciation Schedule (S/L)

Working Capital Schedule(W/C => Current Assets)

Changes in W/C directly impact cash-flow, B/S

Debt Schedule

Shareholders’ Equity Schedule

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Forecasting Business ValueValuation Methods

• Balance sheet-based methods (BV)• Income statement-based methods (EBITDA multiples)• Mixed methods (Goodwill)• Cash flow discounting (DCF) methods• Economic Value Added (EVA)• Real options

DCF methods are the most accurate – in principle!Forecasting Cash-Flows more an art than a science

The bank or the VC will probably not agree with your forecasts

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Why Balance Sheet Matters

1. Because Cash is King2. Fixed Assets quality determine future revenues3. Defensible IP + GoodWill mean recognized $$$ producing potential4. Shareholders’ Equity testifies to past revenue producing potential5. Too much (or not enough) LT Debt impairs growth potential6. Short-Term Debt > Current Assets is a death wish (> Cash = danger)

Cash

Short Term Securities

Working Capital (e.g, A/R)

Fixed Assets:-Tangible-Intangible (e.g., IP, Goodwill)

Short-Term Debt

A/P

Long-Term Debt

Shareholders’ Equity

ASSETS(Uses of funds)

LIABILITIES(Sources of funds)

=

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Typical Valuation Inputs

Summary• We have reviewed:

• A simple but realistic scenario for an Internet startup with diversified revenue streams (page impressions/clicks, one-time transactions, subscriptions, post-sale services)

• Tips for managing Sales Mix forecasts and validating projections wrt. Observable traffic, click-through, conversion and fill-rate analytics

• A detailed financial model for translating these projections into a complete set of financial statements and schedules

• Conclusions:• Based on this model My Internet Startup would have a book value of ~ $0.63M

• Given high multiples (>50) for (successful) Internet companies transaction/investment value could be much higher

• Your mission, if you will accept it:— Will be to use My Internet Startup financial model to create detailed, credible,

defensible pro-forma statements for your company— Still working on some model bugs

THANK-YOU!(AGAIN)