DeepDive NOVEMBER 18, 2013

Transcription

1 DeepDive NOVEMBER 18, 2013

2 FINANCIAL STATEMENTS FOR EARLY-STAGE COMPANIES revenue expense Income Statement Balance Sheet assets liabilities equity Statement of Cash flow =cash flow by category Focus on the income statement to build a financial road map that allows you to measure progress and plan for future growth. Only critical elements of the balance sheet and statement of cash flow are needed.

3 STANDARD MONETIZATION METHODOLOGIES METHOD MECHANICS Ads Commission Subscription Pay per Use Pay per Asset undefined charge advertisers charge buyers/sellers charge users charge users charge users undefined CPA, CPM, CPC, CPE % or share weekly, monthly, annually download, credit, stream item, usage, rental undefined Q: Who is your buyer? What motivates them to pay for your product or service? How do they want to pay you?

4 STANDARD MONETIZATION METHODOLOGIES METHOD EXAMPLES Ads Commission Subscription Pay per Use Pay per Asset undefined Facebook, Twitter, Goggle Poshmark, TicketMaster, ebay LinkedIn, Salesforce, Wall St Journal Apple, Netflix, Amazon Rent the Runway, GetAround, AirBNB YOU Q: What is currently not working? How can you fix it?

5 EVOLUTION OF REVENUE MODELS ERA brick and mortar e-commerce digital goods collaborative consumption tbd DON T THINK OUTSIDE OF THE BOX. GET RID OF THE BOX Q: How can you use technology to innovate the shopping experience?

6 1) GET THE FACTS

7 UNDERSTANDING THE BUYER How does the buyer interact with the alternative product or service in the market? - List the attributes that are critical to their experience What is the buyer currently paying to receive this product or service? - List the price range they are willing to pay What isn t working with the alternative product or service? - List all negative feedback received from alternative and those gleaned from your observations.

8 DEVELOPING A PRICING STRATEGY Deliver it cheaper, faster, or better than the alternative. - List the ways in which you can sustainably compete on price and/ or performance. Make if fun by using referral awards. - List all the ways in which you can drive the buyer to your product or service (hint: what motivates them?) Reward loyal customers with perks. - List all the ways in which you can increase the lifetime value of your buyer by incentivizing them to stay.

9 MEASURING YOUR PROGRESS Create cohorts by type (device, acquisition date, or other characteristic). - List buyers in cohorts based on similar characteristics. Review viral coefficient, churn rate, or customized metric regularly. - List the ways in which you will benchmark and measure performance. Get your entire team involved give them purpose and share the wealth. - List the ways in which you will communicate your financial goals to your entire team (hint: use % if you don t wish to reveal $) and reward them when they reach their goal.

10 CASE STUDY: POSHMARK Problem Solution Innovation Consignment is a hassle Give people tools to bring it on line and control the process ipad app that provides platform for buyers and sellers

11 CASE STUDY: AirBNB Problem Solution Innovation Hotels are too expensive Give people tools to bring it on line and control the process Website that provides platform for buyers and sellers

12 CASE STUDY: Rent The Runway Problem Solution Innovation Apparel is expensive Give consumers tools to rent what they need and control the process. Website that provides platform for consumers.

13 2) STAY ALIVE

14 LIFE OR DEATH ERA revenue > expense = life revenue < expense = death IF IT S NOT PROFITABLE, IT S A HOBBY NOT A BUSINESS. Q: Is your pricing strategy profitable and sustainable?

15 Ad-based Model - Revenue Revenue [1] is derived from advertisers (the buyer) and requires a robust user base (product) to monetize. Ad-based models are high risk as you must first attract users (product) by offering a free service and incurring the costs. Average Revenue Per User (ARPU) is the most commonly used metric. [1] Revenue from ads has moved from 100% to 85% from 2007 to 2011.

16 Ad-based Model - COGS Cost of goods sold (or cost of revenue) includes expenses directly related to the product or service. Facebook includes: - data centers - bandwidth costs - maintenance costs - salaries + benefits (ops) - share-based comp - credit card fees - transaction fees Always footnote your cost of goods sold / cost of revenue.

17 Ad-based Model R&D Research and development includes expenses directly related to development. Facebook includes: - salaries + benefits (R&D) - share-based comp (R&D) Always footnote your cost of goods sold / cost of revenue.

18 Ad-based Model SG&A Sales, general, & administrative includes expenses directly related to sales, business development, and marketing. Facebook includes: - salaries + benefits (SG&A) - share-based comp (SG&A) - user developer - advertiser-facing marketing - promotional expenditures

19 3) KEEP YOUR MIND ON YOUR MONEY AND YOUR MONEY ON YOUR MIND

20 STANDARD METRICS - CAC CAC Cost of Acquisition sales, marketing, advertising, salaries # of customers acquired Remove salaries and any other expenses that are not applicable. Q: What costs are incurred acquiring a customer or user?

21 STANDARD METRICS - CAC Cost to acquire one customer via ads (or promos): cost per click # of visitors activate account make purchase =$.50 =10,000 =5% =5% $.50 x 10,000= $5,000 10,000 = 5% x 5% =25 paying customers $200 to acquire one paying customer Customize CAC to best fit your expense structure. Q: What costs are incurred acquiring a customer or user?

22 STANDARD METRICS - LTV LTV Lifetime Value of Customer - (average value of sale) x (number of visits) x (duration) profit per user $ (retention rate / 1 + discount rate retention rate) (monthly recurring revenue x margin) / churn retention rate = 1- churn discount rate = 10% (net present value) Customize LTV to better analyze the quality of your customers or users. Q: How can you increase frequency and duration?

23 STANDARD METRICS - LTV LTV Lifetime Value of Customer (average value of sale) x (number of visits) x (duration) Average price of item in your store = $100 Number of purchases per year = 12 Duration of customer retention = 20 years Profit Margin = 30% Retention Rate = 70% Discount Rate =10% $100 x 12 x 20 = $24,000 (30%) = $7,200 Account for discount and retention (70% / %-70%) = $12,600 Q: How can you increase frequency and duration?

24 STANDARD METRICS MAU/DAU MAU Monthly Active Users (within 30 days) DAU Daily Active Users (within 24 hours) DAU/ MAU = 50% = average user is using it 15 days out of the month. 50% is a fair benchmark for most websites. Customize this metric based on the nature of your site. Q: How can you increase frequency of visits?

25 STANDARD METRICS FUNNEL EVENT 1 EVENT 2 EVENT 3 Customize funnel to analyze events that measure your performance. Q: How can you increase event participation?

26 BRICKS AND CLICKS take promo card OR click link visit store OR view products purchase Combine online and offline: tweet promo to be redeemed in store. Q: Where do customers or user drop off?

27 INDUSTRY CHURN RATES For subscription-based models, aim for 5% with a goal of 1% as the company scales. For ecommerce or retail models, aim for 10 % with a goal of 5% as the company scales. You will want to set the criteria for a churn as zero sales within a certain frame. For example, if a customer has not made a purchase in 90 days, consider the customer lost.

28 WHAT IS IT WORTH?

29 Valuation Methodologies Related Transactions Private companies, similar to yours, that have recently been acquired or funded. Use revenue multiple. MOST RELEVANT FOR EARLY-STAGE COMPANIES Public Comparable Public companies, similar to yours, that have recently gone public. RELEVANT IF DISCOUNTED FOR ILLIQUIDITY Discounted Cash flow (DCF) Applying discount rate to future cash flow. NOT RELEVANT FOR EARLY-STAGE COMPANIES

30 Valuation Process Use related transactions to estimate your current valuation. - use data from past 18 months - collect at least 10 data points - understand why high multiples occur

31 Valuations by Industry E-tail Publicly traded e-tail companies are valued at 1.7x revenue exceptions: e-bay 4.8 Priceline 6.5 Netflix 2.5 Q: Why do these brands receive such a high valuation?

32 Valuations by Industry SaaS Publicly traded SaaS companies are valued at 4.5x revenue exceptions: WorkDay OpenTable SalesForce 31x 11x 9x Q: Why do these brands receive such a high valuation?

33 Valuations by Industry Social Publicly traded social companies are valued at 10x revenue exceptions: LinkedIn 16x Facebook 14x Yelp 11x Q: Why do these brands receive such a high valuation?

34 Capital Sources Venture Capital Characteristics Typical Investment >$1 billion idea looking for big exit within 5 years 10x return on their money expect 20% -30% equity invest for others Generating $1million in revenue One million users or more. Sectors: Software, Internet, Digital Media, etc. Exceptions: Investors interested in Biotech, Medical Devices and Life Science use different metrics (clinical trials, government approvals, etc. to gauge readiness for investment.)

35 Capital Sources Angels Characteristics Typical Investment open to <$1 billion idea looking for big exit within 5 years 10x return on their money will accept convertible note invest own money open to idea stage open to few users. Sectors: Software, Internet, Digital Media, etc. Retail, Apparel, Films The traditional path for retail and apparel is broken at the VC level. Angels (pre-revenue) and private equity ($10 million or more) are robust, which leaves companies with few options as they grow.

36 Capital Sources Loans Characteristics Typical Investment Revenue-based loans require revenue history Asset-based loans require assets open to all sectors with healthy revenue and or assets. Loans are a good source of capital as they allow companies to build without giving up equity. Many apparel brands build on loans due to the VC gap.

37 Capital Sources Crowdfunding Characteristics Typical Project Each site states parameters An idea supported by video and / or screenshots The problem with crowd funding it that there is no due diligence. Many entrepreneurs over promise and under deliver. All crowd funding campaigns should have focus on building a basic business model and financial model.

38 Capital Selection Select a funding strategy based on: Long-term goals for your company do you want to exit in 5 years? Do you want to give equity and control to an investor?

39 Online Learning Lean Finance for Startups is an online course. DeepDive entrepreneurs can access the intro version using the code free or the full version using the 70% off code DD70 Popexpert is a video conferencing service. DeepDive entrepreneurs can use code deepdive to sign up for a free session.

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