karl s revenue, costs & profits 20121211 v0.3

7/30/2019 Karl S Revenue, Costs & Profits 20121211 v0.3

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Revenues, Costs & Profits

by Karl Shaikh

The Founder Institute

Silicon Valley11th Dec ‘12



What you expect tonight…

Revenues, Costs & Profits• How do you plan to make money?

• How do you build a financial model?

• What are the types of expenses, such as fixed expenses andcosts of goods sold, and how do they scale?

• How do you know if your model is right?

• What do angel investors and venture capitalists expect from

your financial model?

• How do you identify the key metrics for your success?



Making Money

1) Dangers of spreadsheet & Validating

assumptions



A) Components of revenue

Revenue(weekly, monthly, qtrly, annual)

Number of customers

• New customers

• Churn of old customers

Price paid

Frequency of purchase

Qty purchased eachtime

……

Easiest and most dangerous

assumption, (if you base your

price on your competitors’ price)



Compet t on ase pr c ng sdangerous…

Assumes

• Established industry

• Clear price & demand curve:

lower price = higher demand

• Customers are price sensitive

• You have advantage in your cost

structure (compared to your

competitor)

Result

• Will be perceived as a “Me too”

product, difficult to establish

value of your USP

• Whether B2B, B2C, or B2B2C…



Prefer Value or Psychological Pricing

• To do that….you need clear

distinct value proposition…

Result

• Pricing should be the hardest part of

your forecast! (except appstores)

– Because you are providing “new” value

• Must be validated over and over

again…

• Your financial model should allow you

to revision control



B) Confidence level…

• ASSUME: Your model says you’ll make $1 mil revenues

in year 1

• +/- 10% accuracy of each of your underlying revenueassumptions

• Expected Costs: $800k

• That’s pretty accurate for early stage startup, pre MVP

• Right?



Multiplying your margin of error

+10%

# of

customers

X1.1

Avg Price X 1.1

Frequencey X 1.1Qty X 1.1

Net effect X 1.5

RevenueNumber of customers

Price paid

Frequency of purchase

Qty purchased each time

……

-10%

X 0.9

X 0.9

X 0.9X 0.9

X 0.6

2.2 x

You could be LOSS making !All must be validated over and

over again…



More on spreadsheets

C) Beware of hockey sticks

•Is it just “math”?

D) Don’t believe your own spreadsheet

•Repeatedly defending your numbers, distorts realityE) How complex and detailed should your spreadsheet be?

•Only make it as complex as your underlying factual data dictates.

•Employees of large corporations that are used to huge

spreadsheets, watch out!



Making Money

2) Foundations of your financial model



Be honest…

What do you spend most of your time thinking about….

•The solution?

•The problem?

“ Don’ t come to me

with a problem,

come to me with a

solution!”

Since you started FI,

you have beendefending, and

refining your pitch /

solution…

Society has conditioned us…

I ’ l f h l i di



It’s natural for the solution to dictate

your thoughts…

• SOLUTION: A website which lets you pick the person to sit

next to on an airplane

• PROBLEM: Optimize networking during my “flight time”

• Model is dependent on these groups of potential customers

Example: (from previous semester)

People who want to “hook up”

Sales people

Hypernetworkers



Go back to the root problem

13

Which is a bigger pain for

travellers?

Choosing who to sit next to Choosing who to AVOID sitting next to

Problem for:People who want to “hook up”

Sales people

Hypernetworkers

Problem for:Most people have at least one character

type of person they would want to avoid

Some people would avoid sitting next to

children, but some empty nesters welcome it

IMPACT on your model• Maybe a bigger audience, lower price (or free to end users if B2B2C)

• Maybe a B2B2C solution for airlines or booking sites

• Very different financial model!



How problem definition impacts profits

• SOLUTION: An ecommerce website for natural hair products

like shampoos and other related products….

• PROBLEM: “I can’t find what I need, and there’s a lot of info to

evaluate about the right healthy / natural products suitable

for my hair type.”

• Model based on ecommerce, profitability dependent on

aggregating other retailers OR also doing logistics in house

Example: PamperMe



Again, go back to the root problem

15

PamperMe currently solves the

consumers’ problem…

What if you tried to solve the other

related problem… Problem:

Hairdressers (who know your hair type) only recommend products that theyrepresent, or nothing at all. If they could recommend PamperMe (with or without

directing a particular product) not hold inventory, and receive 10% commission -

yeah

IMPACT on you model…

• Factor in 10% commission for HDs in agreements with suppliers

• This will avoid you paying for it through your own profits!

Possibly forcing you into a loss?

Y



Your nanc a mo e nee s…

TRUNK: Your solution

BRANCHES & LEAVES: Various

elements of your financialmodel

Y



Your nanc a mo e nee s… strong roots

TRUNK: Your solution

BRANCHES & LEAVES: Various

elements of your financialmodel

ROOTS: Strong problem that

you are solving



Summary

1. Pricing should be the hardest part of forecast, and

model should evolve and have revision control!

– Focus on validating your assumptions

– Don’t believe the hockey stick, don’t get carried awaywith the forecast! Only add depth, where “data” supports

your assumptions.

2. Pricing should be based upon A Strong Problem not

the solution

– Revisiting your problem may direct you to a different

customers, who pay more for solving the problem OR

avoid losses in the future



Thank you

karl s revenue, costs & profits 20121211 v0.3

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