CFI November 3 Revenue Models_Kwon

8/20/2019 CFI November 3 Revenue Models_Kwon

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An Entrepreneur's Perspective on

Revenue, Cost and Profits

Charles Kwon



Agenda

• Why Would I Be Interested in Doing this Session

• Life Source of Your Business (Cash Flow)

•

Mechanics of Making Money (System and Elements)• What do Investors (Angel and VCs) Expect

• Pulse of a Successful Business (Metrics)



Who is Charles Kwon

• 25+ years as Entrepreneur

• Also Head of Strategy of a F1000 Company, Partner in a

Management Consulting Firm and Venture Partner in a VC

•

Not a CFO or any accounting firm experience!

Sample Companies Their Business Role

DSP Dev Corp Digital Signal processing software Founder

Ixthos Industrial PC Boards Founder, CMO

Neodesic Community and Knowledge Portal Founder, CEO

NanoInk Nano technology applications CBO

Extenprise SaaS Supply-chain and POS system CEO

Latel VoIP Phone Company Founder, BoD, Investor

Advaxis Cancer Vaccine Investor

MedRed Medical Decision Support SW BoD, InvestorLidoPatch OTC Lidocaine Pain Patch BoD, Investor



W y wou I e Interestein doing this session?

• I want to make understanding revenues, cost and

profits integral to how you think about and live your

business…• …NOT just a way to do your Financials for your

business plan – to raise money

•

That is why I wanted you to see a different perspective on this topic



Life Source of Your Business

• A financial plan shows how youplan to make money using the

language of cash flow .

• I will discuss this from the

perspective of the non-financial

entrepreneur .

• First thing to understand is that

cash flow IS the life source ofthe business (like water to a

human, a business will not last

long without positive cash flow)!



Mechanics of Making Money

The f inanc ial m odel shows you, your

team and investors how you plan to

make money and ultimately create

wealth for all!

2) How much will it cos t and how long will it

take to sel l it AND will it cover the cos t of

sales and runnin g the business ?

1) What will customer

pay for it and how much

does it cost to make it ?

3) How much cash will it

generate over tim e andwill the sales and

margins sc ale up over

time?

4) How does all that

cash f low translate

into wealth cr eat ion ?



Definition of Terms

• Gross Margin – Realized Price minus Cost of Goods

• Contribution Margin - Realized Price minus Variable Cost

• Cost of Goods – Total Cost of Product (Both Fixed and Variable)

•

Fixed Cost – building, equipment – portion allocated to eachproduct

• Variable Cost – labor, parts, utility – actual cost per unit

• SG&A Expense – Sales, General and Administrative Expense –

NOT tied to product manufacturing

• EBITDA – Earning Before Interest Tax, Depreciation and

Amortization (Basically Cash Flow)



1) Products Got to Make Money

• Making money is the difference between the

price and the cost = margin

• There are two types of margin – gross margin

(GM) and contribution margin (CM). GM is C-

F based on total cost , CM based on variable

cost focuses on the incremental cash needed

to produce the product/service (fixed cost

already paid for)

• There are two types of costs – fixed cost (FC)

and variable cost (VC). FC is the building and

equipment or other high investment costs you

allocate, VC is the incremental labor, parts or

utility costs per product .

• When we were developing Ixthos

(computer board company) business plan,

we needed very high end manufacturing

equipment to manufacture the boards

• The (fixed) cost of the equipment would

have doubled our funding (cash flow)

needs

• We decided to find another company that

had the equipment and “rented” space

• This reduced our C-F needs by 50%

• Other similar ideas: SaaS subscription,

Financing, sub-let space, etc.

Product and Service Margin Ix thos Example



2 Se ng tAND Running the Business

• (Period) Expense – The cost of running the

business (your salary, your exec team, and the

sales staff). Typically known as SG&A (Sales,

General and Administrative Cost)

• This gets paid whether the product gets

made OR not – month to month, hence

“period” expense

• Also on the Sales side – need to take into

consideration how long it takes for a new

salesman to sell their quota – most can take

6-9 month before first sale and 12-18 months

before they are fully producing (all C-F OUT

before C-F IN )

• Extenprise (POS and Supply Chain SaaS

company) was getting repositioned into a

multi-billion market – strong interest and

market

• However, because this was a New product

to New customer (New / New ) – it

required 2-3 more time (and C-F) to build

the reference base and sell into new

customers

• My experience tells me that New / New

opportunities can be huge – but risky!

Plan for ways to extend C-F

Expense Backgroun d Extenpr ise Exam p le



2 New New Bus ness s very r s y – all my failures were in that space



3) Scaling Up a Business

•Scaling up a profitable business can be tricky,especially when you are encountering high

growth.

• Key reasons are due to cash you need to buy

parts to make the product, pay for sales

staff before they are producing, and typically30-60 days before you get paid by the

customer

• As you experience 100%+ growth, you will

be spending cash faster than getting cash

•

Modeling Cash Flow and doing Scenarioscan help to see what levers you have – e.g.

factoring to get money faster, delaying

payments to suppliers, timing sales staff

onboarding, etc.

•Although, Ixthos computer boards had highmargins (2x performance, 50% cost) and high

revenue growth we were rapidly running out

of cash

• We had already used factoring, delayed

payments, managed sales staff onboarding, etc.• We either had to raise more money (but due to

medium sized market opportunity, the pre-

money valuation was not high – more on that

later)

•

Or sell the company to a competitor. When weran the analysis, due to dilution from raising

more money, selling was better

• We sold the company and provided a >10x

return for the investors (this was pre-internet

days)

Scaling UP C-F Model and An alysis Ix thos Example



4) Cash Flow + Growth = Value

• When you Value a Company it is all about

Cash Flow (today and in the future).

• The key metric for C-F is EBITDA (Earnings

Before Interest, Tax, Depreciation and

Amortization) – basically free cash flow

• Three key components are: 1) how much

Potential CASH FLOW generated per unit

(of product or service), 2) how fast you are

GROWING, and 3) what the overall and

your potential SHARE of the OPPORTUNITY

(prefer to be in billions of dollars)

• My first company DSP Dev Corp (a scientific

digital signal visualization software

company), was a leader in the market ,

after 3 years had $5M in sales, with a 20%

EBITDA

• However, due to a small market

opportunity and slowing growth (after

hitting $5M), the valuation was roughly

$6M

• If the company was going after a multi-

billion market , the company would be

worth $100Ms at that point

C-F and En terpris e Value DSP Dev Corp Example



What do Investors Expect

• Angel investors expect you to understand how the market

works and that your financial model is realistic

• They will also want to understand what the cash flow impact

would be when things do NOT go as planned .

• VC’s want to understand that the market is very large (multi-

billion dollar market potential)

•…And that your model credibly shows how you can attain yourtop down share BOTTOM UP and achieve your pro forma

financials



Pulse of a Successful Business

• Your metrics for success will change based on business model (more later)

AND the stage of your business you are in (e.g. product development;

beta test; initial sales; breakeven; expanding sales)

• But it is always about impact on cash flow first and foremost; then how

your revenues will scale and maintain margin (e.g. product / service

margins over time, time to first sale, sales pipeline; A/R and A/P terms;

and EBITDA over time (both % and net)

• Finally things that impact valuation (e.g. number of competitors, share of

wins, overall revenue and margin growth, changes to size of market

opportunity – in many Web 2.0 business, due to an efficient market –

many tends to be “winner take all” – so being 2 or 3 creates a slow death)

C B T



Consumer Bus ness Types anMonetization Drivers

TechCrunch Teardown: 13 Consumer Internet Business Models (Part I) «

The World According To Carp http://fndri.com/jEvuYa - Steven Carpenter

E



Est mate num er to reac$10MM/Year



Commerce Examples

• What model will you use? How will you model it?

• Commerce Example



Subscription Example



Develop the Pro Forma Financials

MarketRevenue

Assumptions

Staff & Salary

Expense and Capital

Pro Forma Finanacials



Final Thoughts

• Its all about the Cash Flow

• Model it and Live It – so you will know what the cash flow

impact will be if things (or you think it might) change – they

always do!

• Live It and Monitor It – internalize the business model and

think about how to sustain the business and how to maximize

its value



Thank You!

Charles Kwon

[email protected]

Documents

CFI November 3 Revenue Models_Kwon