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)