ES 212 Quiz
how to think about financial projections?
-establish your assumptions on revenues and costs -understand revenue and cost drivers for your industry - find comparable companies - work up revenue and costs
5 stages of CEO development
1. Product conceptualization Product, vision, culture 2. MVP / MSP Product development 3. Early customer acquisition Hands on sales, marketing 4. Early scale Culture, organization development (team), company vision, business strategy, fund raising 5. Defend Maintenance, fending off competitors
Business Model
A business model describes the rationale of how an organization creates, delivers, and captures value
Cost structure
All the costs incurred to operate a business Fixed - same every month Variable- ones that rise and fall as commodities markets change
What should an entrepreneur think about when considering potential investment opportunities?
Capital needed - $ 1m (angel0 versus $2m (VC) offered Valuation (and other economic considerations) Angel investor $1M for 17% versus VC $2M for 33% Implications for control / decision making Investor expertise and network Fit and alignment
Ten Types of Innovation
Configuration Profit model: The way in which you make money Network: Connections with others to create value Structure: Alignment of your talent and assets Process: Signature or superior methods for doing your work Offering: Product performance: Distinguishing features and functionality Product system: Complementary products and services Experience Service: Support and enhancements that surrounded your offerings Channel: How your offerings are delivered to customers and users Brand: Representation of your offerings and business Customer engagement: Distinctive interactions you foster
Innovation Ambition Matrix
Core Optimizing existing products for existing customers Use existing products and assets Serve existing markets and customers Adjacent Expanding from existing business into "new to the company" business Add incremental products and assets Enter adjacent markets, serve adjacent customers Transformational Developing breakthroughs and inventing things for markets that don't exist yet Develop new products and assets Create new markets, target new customer needs Also called disruptive
VC Process
Deal sourcing > deal screening > due diligence > investment (portfolio company engagement / portfolio management)
Customer Segments
Groups of people or organizations your enterprise aims to reach and serve Mass market Niche market segmented Diversified Multi-sided
Channels
How a company communicates with and reaches its customer segments to deliver a value proposition Direct sales (sales force) Web sales Proprietary stores Partner stores Wholesaler
Cost
How much money goes into producing your product or service Labor, parts, buildings, etc Lower costs = more value to share with customers Creates competition between firm and supplier
Venture Capital Funds
Investor Profile A type of private fund that typically invests in rapidly growing companies, often with a specific industry focus VC funds are typically structured to last at least ten years, with the first few years focused on investing in portfolio companies, followed by monitoring their investments, and then "exiting" and hopefully returning a profit to their own investors (or limited partners) Level of Involvement VC funds tend to take an active role in mentoring their portfolio companies, taking a seat on the board of directors or advisory board. Traditional VC Investors provide an array of services to their portfolio companies, including strategic guidance, connection to other investors, connection to customers, operational guidance and support on hiring key personnel. Investment Structure Because of regulatory requirements, most venture capital investments are structured as equity, such as preferred stock. Scale of Investment 500k - $ Millions
Angel Investors
Investor Profile Generally high-net-worth individuals who invest their own money Most are accredited investors, and many are current or former entrepreneurs Level of Involvement Often bring strategic industry knowledge to a company, taking an active role as a director or advisory board member Investment Structure Loan, convertible debt, equity, often in a syndicate of angels Scale of investment In syndicate: $200k - $400k
Early stage investors
Investor Profile Invest based on the relationship with the founding team May not bring strategic industry knowledge Level of Involvement Not actively involved in oversight of a business Investment Structure Loan, convertible debt, equity Scale of Investment Smallest: ~ $10k-50k
Key activities
Key activities The most important things a company must do to make its business model work Production Problems solving platform/network
Due Diligence
Market Is market big enough and growing Substantial unmet need? Competition? differentiation? Product / technology Is the technology validated? Path to long-lived advantage? Compelling business model? Does the product fit the market? Is the selling proposition validated? Team Experience, skills, diversity, culture, vision, integrity, special insight and mission Financing Use of funds/value - creating milestones/runway terms , target return potential What is the path to the next round
Startup Opportunity MAP
Market need = unmet customer need Large growing market opportunity Advantage = differentiates value of product / service Substantial improvement and sustainable advantage Profit potential = revenue / cost assumptions Compelling economics
Bottom Up Approach to market sizing
Market size = # of customers x $ avg revenue per customer per year Razor razorblade model- when you buy the initial product, you need to keep buying components for it Companies need to calculate the lifetime value of their customers
Top down approach
Market size = broad industry market size x %target share of market Ex. $10B market = $500b healthcare x %2 target share
Breakthrough innovation
Often need to bring in someone that has a completely different skill set to you Can ask people to help gather innovation about your domain Mavericks Skunk Works Open Innovation/prizes
VC Math Valuation
Pre money valuation is the agree open, negotiated value of the company before investment Share price * pre-money shares Post money valuation = pre money valuation + investment % ownership = investment / post money valuation
VC Math Example
Pre-money valuation = share price * pre-money shares investment = share price * shares issued Post-money shares = pre-money shares + shares issued Post-money valuation = pre-money + investment % owned = investment / post-money valuation A startup raises a Series A round of $7 million on a pre- money valuation of $20 million. What is the post-money valuation? How much does the investor now own? Post money valuation = Premoney valuation + Investment ($7 million + $20 million = $27 million) % Ownership = Investment / Post money valuation ($7 million / $27 million = 26%)
tech push-problem first
Producer learns and understands customers problems Product development based on belief that supplier recognizes a market need before market does Producer ultimately educates customer Reshapes the market! Risky
disruption
Radical change, complete shift, impact, transformation *pre-modern (wheels, engine, electricity) #centuries; *modern era (internet, smartphones, social media) #decades; *markets (cloud, social, streaming, 3D, EV) & models (ecommerce, gigeconomy, connect, influence, data monetization) #years
Basic Research
Research divisions Academic partnerships Journals and conferences discovery of a new phenomenon that enables new problem solving techniques stemming from research.
Sustaining Innovation
Roadmapping R&D labs Design thinking acquisitions dedicated effort to make good products even better, ensuring the continued satisfaction of loyal customers
Shark bite v. mosquito bite problems
Shark bite you can sell a few at an expensive price mosquito bite can be cheap but you can sell a ton of
Revenue Streams
The cash a company generates from each customer segment Asset sale Usage fee Subscription fees lending/renting/leasing Licensing Brokerage fees Advertising
Price
The final price a company charges when it sells a product or service Firm has most control over this lever Value is split between customer and firm-maximizing margin may result in sacrificing competitive advantage People undercut you
Disruptive Innovation
The issue is that the problem is not well defined You may know the domain but not the actual problem VC model This is the type of innovation that changes everything, a technological shift in the marketplace VC Model Innovation labs 15%/20% rule Lean launchpad Social media, chat gpt, etc
Willingness to sell
The lowest amount of money a supplier is willing to accept for materials, or its employees are willing to accept in exchange for labor to produce goods and services Sometimes you are willing to convince supplier to wait?? Factors that increase WTS Respectful and timely turnarounds (pay bills on time always) Pleasant working relationships Promotions Safe and fair working conditions Lowered risk levels associated with the job
Key Resources
The most important assets required to make a business model work Physical Intellectual Human Financial Fenty example: rihanna herself
Key Partnerships
The network of suppliers and partners that make the business model work Strategic alliance between non competitors Coopetition Joint ventures to develop new businesses Buyer-supplier relationship
Product market fit
The only thing that matters i s getting to product/market fit - Marc Andreessen Being in a good market with a product that can satisfy that market If 40% or more of your users would be "very disappointed" if your product disappeared, you have good market fit
Value Proposition
The reason why customers choose your company or product over another
Customer Relationships
The type of relationships a company establishes with specific Customer Segments Personal assistance Dedicated personal assistance (one to one) Self-service Automated service Communities Co-creation
Early Stage Investors
Why would a startup founder wish to raise money? Legitimacy Need more money expertise/connections from investors Less risky than putting all your money into it
Willingness to Pay (WTP)
Willingness to pay The highest price a customer is willing to pay for your product or service Factors that increase ____ (create value) Brand enthusiasm Goodwill Loyalty Product quality Packaging Community involvement environmental/social stewardship Apple does this really well
valuation
agreed-upon value of the company
4 types of innovation
breakthrough innovation, basic research, disruptive innovation, sustaining innovation
how is building a team difficult?
can't pay competitively, lack benefits, market presence, HR support, corporate culture evolving, may not have a company vision established, etc.
return
cash returned to investment fund with an exit cash-on-cash return: multiple of cash invested (100k --> 300k = 3x) Internal rate of return (IRR) = annualized return expressed as % (evaluates how long the investment took to return money)
share price
company value / total # of shares
cash flow statement
demonstration of cash inflow / outflow over a period of time
the hacker
focuses on product!! Brains of operation, make sure required tech / hardware is up to scratch
3 types of early stage investors
friends and family investors, angel investors, venture capital funds
Team
group with full set of diverse, complementary skills; committed to a purpose, set of performance goals, hold themselves mutually accountable
TAM (Total Addressable Market)
how big is the largest market #total customers x $avg Revenue per Customer per year
financial statements
income statement, balance sheet, assets, cash flow statement
why do teams fail?
lack of leadership, communication, commitment, common purpose, accountability, clear metrics, missing talent, etc.
assets
liabilities + shareholders's equity
net income
money remaining (net profit over a period)
revenue
money you get
expenses
money you spend
the visionary
often CEO, "beating heart of the team", articulate dream to others, inspire team, people facing
Founder v. CEO
one has the entrepreneurial vision and builds products v. one turns the vision into reality and builds companies
equity
ownership in a company
balance sheets
picture of the company at a moment in time assets = liabilities + shareholders' equity
stage and venture rounds
position of the startup regarding risk and value creation
Venture Capitals - what they do and how they are paid
raise funds from investors to invest in startups with high growth potential, aiming for big returns; they provide expertise, guidance, and resources to help these companies succeed. Fundraising Track record and expertise investment thesis Investing Deal sourcing screening, due diligence, term sheet, investment Portfolio company engagement Board seat, help company create value and returns via acquisition Return for LPs: general target is ~3-4x gross for the fund: $100 million fund returns $300-400 million VC compensation - "2 and 20": 2% management fees and 20% carried interest Large, growing market, favorable trends Well differentiated product / service, compelling profit potential, rapid scale Potential for big, rapid returns VCs need "homeruns" - early stage VC requires large return potential for startup investments Success rate low because risk is high for early-stage companies → small number of investments drive success of portfolio >10x cash on cash return target for early-stage VC: $1 million investment → $0 million return to investor
income statement
revenue, expenses, profits over a period of time (P&L statement)
the hustler
simultaneously the doer and taskmaster of the group, setting the pace and making sure everyone keeps up. not defined by position or title, but by attitude.
Exit: liquidity event
startup company is acquired or goes public (IPO)
equity
stuff remaining (net worth)
liability
stuff you owe
assets
stuff you owe or are owed
the perfect founding team
the visionary, the hustler, the hacker
EVG - earlyvangelists
what are your most potential customers? special breed of customers willing to take a risk on your startup's product or service
SAM - serviceable available market
what kind of portion of the market fits you = TAM x %Target Segment
SOM - serviceable obtainable market
what portion of the market are you able to reach? = SAM x %Market Share
