Defining and Validating the Businessgsm.ucdavis.edu/.../day_2.4_faea17_business_validation.pdfYour Venture Defining and Validating the Business 2017 Food + Ag Entrepreneurship Academy

2017 Food + Ag Entrepreneurship Academy 2/7/17

(c) UC Davis Institute for Innovation and Entrepreneurship 1

DefiningandValidatingtheBusiness

ClevelandJustisExecutiveDirector

MarketIsitfeasible?Isitdesirable?Isitviable?

BusinessIsitfeasible?Isitdesirable?Isitviable?

TechnologyIsitfeasible?Isitdesirable?Isitviable?

YourVenture




Day2 Day3Day1

TheProblem(and Solution)

TechnologyHypotheses

MarketHypotheses

BusinessHypotheses

TheDeliverables

TheTeam

TheMilestones

TheInvestment

TheSummary&NextSteps

TheIdea(asapitch)

TheExperiments

AcademyScheduleMeetsCurriculum

LearningObjectives

Understandhowto:

• Defineyour(current)visionofyourventureintermsofitsbusinessattributes;

• Validateyourvisionbyrecognizingandresolvingitsbiggestuncertainties.

• Basedonyourvisionandvalidation,settherightmilestonestopursuenext.



Overview

Fourquestions(fornow)1. Howwillyoumakemoney?

2. Howmuchwillyoumake?

3. Howmuchwillitcost?

4. Whenwillithappen?

Practiceapplyingwhatyou’velearned

RefertotheBusinessValidationportionofyourcoursebook.

The Business Hypothesis

“Thebusiness,ascurrentlydefined,isviable(andprofitable).”

go?

nogo?



MarketIsitfeasible?Isitdesirable?Isitviable?

BusinessIsitfeasible?Isitdesirable?Isitviable?

TechnologyIsitfeasible?Isitdesirable?Isitviable?

YourVenture


1.HowWillYouMakeMoney?(RevenueModels)

UnitSales Sellaproductorservicetocustomers(wholesale,retail,ordirect).

AdvertisingFees Sellopportunitiestodistributemessages(viewers,readers,listeners,orothers)

FranchiseFees Sellandsupportareplicablebusinessforotherstoinvestin,grow,andmanage

UtilityFees Sellgoodsandservicesonaper-usebasis

SubscriptionFees Chargeafixedpriceforprovidingaccesstoyourgoodsorservices

TransactionFees Chargeafeeforreferring,enablingorexecutingatransaction

LicenseFees Selltherights(exclusiveornon-exclusive)tousepatent- orcopyright-protectedIP



2.HowMuchMoneyWillYouMake?3.HowMuchWillItCost?

BackoftheEnvelope(BOTE)

Remember$5,$50,$500– thisisn’trocketscience:youjustwanttobeintherightballpark.

–Thekeyistodefineaclearvision,testyourassumptions,andlearnfromit.

2.HowMuchMoneyWillYouMake?3.HowMuchWillItCost?Howmuchwillyoumake?(revenue)

– Price/unit– #unitssold/year(volume)

– PricexVolume=annualrevenue

Howmuchwillitcost? (expenses)– Costperunit(COGS)(variablecosts)– Operatingexpenses(fixedcosts)*– Capitalexpenses(one-timecosts)*

Revenue– Expenses=Income(profit)*ignoreforcalculatingapprox.profitability)



Let’sDoOneTogether…

Cost/unit

Price/unit

#unitssold/year

Revenue/yr

AnnualProfit/yr

NowIt’sYourTurn…

Cost/unit

Price/unit

#unitssold/year

Revenue/yr

AnnualProfit/yr



AllRevenueModels(seeyourworkbook)

Adprice

#ofads

#ofviewers

AdRevenue/yr

Costofoperations

AnnualProfit/yr

Franchisefee

#offranchises

Costofoperations

AnnualProfit/yr

Capitalcost

Cost/unit

Price/unit

Unitsconsumed

Revenue/yr

AnnualProfit/yr

Cost/unit

Price/unit

Unitssold

Revenue/yr

AnnualProfit/yr

UnitSales AdvertisingFees FranchiseFeesUtilityFees

Cost/goodsorserviceprovided

Price/timeperiod

Subscribers

Revenue/yr

AnnualProfit/yr

Subscription FeesCost/hrworked

Price/hrworked

Hrs/project

#ofprojects

Revenue/yr

AnnualProfit/yr

ProfessionalFeesFee/transaction

#oftransactions

Costofoperation

Revenue/yr

AnnualProfit/yr

TransactionFeesCostof

development

Licensingfee

Royalties

UC

LicenseFees

DevelopmentGrants

(e.g.SBIR)

AppliedResearch

BasicResearch Stages ofventuredevelopment

NetCashFlow

StagesofventurefundingResearchGrants

4.WhenWillItHappen?

ValleyofDeath



4.WhenWillItHappen(andHow)?

Financialprojections(akapro-formas)- Adynamicviewofwhatdeterminesyourventure’s

revenue,expenses,andhenceincome(profit)

- “BestGuess” predictionsdesignedtoshowtheimpactofthechoicesyoumakeaboutthetechnology,market,andrevenuemodels.

$5, $50, $500

RevenueProjections

** All $ are in 000

Year1 Year2 Year3 Year4 Year5

revenue(000s) $62.5 $129.6 $336 $960 $1,600

expenses(000s) $85 $650 $250 $335 $750

netincome(000s) ($22.50) ($479.6) $ -85 $ 625 $850



3X5Whatarethe3mostimportantdriversofyourrevenueandexpensesoverthenextfiveyears?

Howwilltheygrow(orshrink)overthenext5years?

RevenueProjections

** All $ are in 000


revenue(000s) $62.5 $129.6 $336 $960 $1,600

customers 500 1200 3000 4000 5000

units/customer 5 6 7 15 20

price $25 $18 $16 $16 $16

expenses(000s) $85 $650 $250 $335 $750

headcount 10 14 15 27 34

COGS $18 $17 $15 $14 $14

CAC $325 $250 $200 $100 $50

netincome(000s) ($22.50) ($479.6) $ -85 $ 625 $850



RevenueProjections

** All $ are in 000


revenue(000s) $62.5 $129.6 $336 $960 $1,600

customers 500 1200 3000 4000 5000

units/customer 5 6 7 15 20

price $25 $18 $16 $16 $16

expenses(000s) $85 $650 $250 $335 $750

headcount 10 14 15 27 34

COGS $18 $17 $15 $14 $14

CAC $325 $250 $200 $100 $50

netincome(000s) ($22.50) ($479.6) $ -85 $ 625 $850

Whatarethe3factors(max)thatwilldrivechangesinyourrevenueandexpensesoverthenextthreeyears?Canyoucontrolthem?

ANote

Thekeytothisapproachistokeepyourfeet on the ground....no top-down estimates!



HowDoIPutThisIntoMyPlan?

Putdownyourbestguess• Remember…bettertobespecificallywrongthan

vaguelyright!

• Quicklycomparealternativerevenuemodels,placesinthesupplychain,orcustomersegmentsbeforepickingonetoexploreinmoredetail.

• Notsurewhatnumberstoputdown?Asksomeoneforhelp.

ApplyWhatYou’veLearned

Identifythecriticaluncertaintiesaroundyourbusinessandbusinessmodel:

1. Ordertheuncertainties.2. Inyourcurrentvision,identifywhich

“experiments” toruninthenextstage.3. Listtheresources (people,equipment,$)you

thinkyou’llneedtoreachthosemilestones.

RefertoDueDiligence:TheBusinessexerciseinyourcoursebook.

Documents

Defining and Validating the Businessgsm.ucdavis.edu/.../day_2.4_faea17_business_validation.pdfYour Venture Defining and Validating the Business 2017 Food + Ag Entrepreneurship Academy