Business
Validation
Mark Szczerba
Roll Global
Introduction
• Brief introduction
• Business Models & Definitions
• Capital Requirements & Reducing Risk
• Variety of Business Models
• Specific examples
• Exercises
Roll Global
•
Roll Global is a diverse $3B company focused on consumer packaged goods
and agricultural products
•
Roll has a number of well known brands:
•
Roll is well known for marketing and branding agricultural products
What makes a good business?
• Will it work?
• Are materials
available?
• Is it scalable?
• Can it be tested cost
effectively?
• Can the management
team grow the
business?
• Can the team grow
with the business?
• Who is the customer?
• How many
customers?
• Value proposition to
the customer?
• Competition?
Technology
Market
Team
Business
Model
• How much revenue
can you generate?
• What are the costs?
• What are the long
term goals?
Business Model: How will you make
money?
• What is your strategy?
– What is your aspiration? Is it clear?
– Where will you compete? What is the market size?
– How will you ensure success? What is your “value
proposition”?
– Do you have the capabilities? Do you have the right
team?
Business Model: How will you make
money?
– Who are the customers for your product/service?
– Why do your customers want your product/service?
– Are they willing to pay for your product/service?
VALUE PROPOSITION
Solving
critical
problem?
Cost reduction?
Efficiency gain?
Filling a gap?
Providing
experience?
Can manage
better?
Business Model: How will you spend
money?
• How much will it cost to generate your revenues?
• COGS: Cost of goods sold – direct costs
associated with product sold
• OPEX: Operating expenditure – cost to run a
business
• CAPEX: Capital expenditure – cost to purchase or
add value to an asset
• How much revenue can you make and how quickly?
• Cost of Capital: cost to finance the business (cost
of equity or debt); return required before generating
value
Definitions: Gross Margin
• Revenue
– Money coming into the business from product sales
• Cost of Goods Sold (COGS)
– What it costs to make your products
– E.g. pizza boxes, toppings, and hourly labor
• Gross Margin (%)
– Proportion of each dollar of revenue that goes to profit
–
Revenue −COGS
Revenue
– Is your business successful? Is your Gross margin better or
worse than industry average?
Definitions: Expenses
•
Fixed costs
– Don’t change with production
levels in the short term
– E.g. Overhead, Assets, Land
•
Variable costs
– Change with business activity
– E.g. Direct labor, Packaging
material
Definitions: Profitability
• Cash Burn rate
Example Income Statement
Amounts in US $ thousands
– How much cash you lose over a
period of time (E.g. per month)
• EBITDA
Revenue
Cost of Goods Sold
Gross Profit
Gross Profit Margin
– Earnings Before Interest, Tax,
Depreciation and Amortization
SG&A Expense
– Basically net income + interest,
taxes, depreciation and amortization
Operating Income
– Useful for valuation comparisons
• Net Income
– Revenues minus all expenses
Depreciation & Amortization
Operating Margin
Non operating Income
Non operating Expenses
Income Before Taxes
Income Taxes
Net Income After Taxes
(before accounting
adjustments for affiliated
companies)
Accounting adjustments for
affiliated companies
Total Net Income
Mar 2013
Mar 2012
23,498
26,679
14,474
16,134
9,024
10,545
38.4%
39.5%
6,029
7,066
1,502
1,796
1,211
1,373
0
0
50
(308)
4
20
1,265
1,084
475
365
790
719
(214)
(187)
576
532
Definitions: Pro-Forma Statements
• Pro-Forma Statements
– “Best Guess” predictions on
cash flow
• “back of the envelope”
– Designed to show the
impact of a certain choices
Definitions: J-Curve
$120
$100
Profit ($MM)
$80
$60
$40
Capital required to reach
“Cash Flow Break Even”
$20
$0
-$20
-$40
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Capital Requirements
Business Value
(Increasing value and reducing risk along the way)
Commercial
Launch
Beta
Customer
Proof of
concept
Time
Cash Flow
Break Even
Revenue Models
Unit Sales
Advertising Fees
Franchise Fees
Utility Fees
Subscription Fees
Sell a product or service to customers
(wholesale, retail, or direct).
Sell opportunities to distribute messages
(viewers, readers, listeners, or others)
Sell and support a replicable business for
others to invest in, grow, and manage
Sell goods and services on a per-use
basis
Charge a fixed price for providing access
to your goods or services
Transaction Fees
Charge a fee for referring, enabling or
executing a transaction
License Fees
Sell the rights (exclusive or nonexclusive) to use patent- or copyrightprotected IP
Final thoughts…
• Have a plan B
– And C and D
• Seek market validation quickly
– Get to market fast and with less capital
– Don’t do it all right off the bat
• What is your unfair advantage?
– Why can you do this, can you defend it?
Now it’s your turn…….
Cost/unit
Price/unit
# units sold/year
Revenue/yr
Annual Profit/yr
How much will it cost you?
– How much funding do you need?
– Look closely at your expenses
• Create an Excel file
• Cut and paste the following
expenses...
• Delete the rows you don’t
need (that aren’t significant)
• Add time periods across the
top
• Start making assumptions...
Next Steps: Validating Your Business
Using the exercises in the coursebook, identify the critical
uncertainties around your business and business model.
1. Rank and order the uncertainties.
2. Identify which should be resolved first (in the next 9-12
months). These are your business milestones.
3. List the resources (people, equipment, $) you need to
reach those milestones.