This is the fifth and final post in a series on developing a good business model for an early stage company.
3. Sound Capital Structure.
I am not sure that enough could be said about this point, but I see so many business plans that only address market opportunity (with all the MBA highlights) and how smart the management team is but then ignore financial structure that I feel it must be addressed in some detail.
A good financial model is one that starts with costs and then approaches revenue. After all, for almost every early stage company, most costs can be fixed. A good financial model should be able to nail expenses for 1st year operation within 5% of the budget. This takes discipline – both on uncovering assumptions and implications when budgeting and in living to the budget after it is set. Most variable costs should be tied directly into revenue (i.e., when revenue increases, these costs increase in proportion). So, we don’t care as much about those. In my first year of operating Alerding Castor Hewitt, I missed my expense projections by $27 – and it was not that hard to be that close.
Revenue projections are harder. Once you have good expense model, you develop your product price point and do your market research, you should be able to develop a reasonable break even analysis and first year revenue projections. That is goal one. You will need to talk to customers to develop the POCP (see my earlier post in this series about Proof of Commercialization at Profit under Market Opportunity) - ignore the hoopla but focus on what customers will actually write a check for. Address every assumption and implication in your financial projections. For every number you should be able to explain the story underlying that number.
Depending on the capital structure developed, you will need to address your strategy. Most companies fall into one of three capital strategies: (1) Boot-strapping, (2) debt financing, or (3) raising private equity. Don’t be too quick to jump to #3. Raising capital from private equity firms, angel investors or venture capitalists is a hard process. It will take over your life for a period of time and is a variable that is outside of your control. I have seen many business die in this stage. Only take on investors if you NEED investors.
See also:
Entrepreneurial Law – Developing a Good Business Model – Part I
Entrepreneurial Law – Developing a Good Business Model – Part II
Entrepreneurial Law – Developing a Good Business Model – Part III
Entrepreneurial Law – Developing a Good Business Model – Part IV
3. Sound Capital Structure.
I am not sure that enough could be said about this point, but I see so many business plans that only address market opportunity (with all the MBA highlights) and how smart the management team is but then ignore financial structure that I feel it must be addressed in some detail.
A good financial model is one that starts with costs and then approaches revenue. After all, for almost every early stage company, most costs can be fixed. A good financial model should be able to nail expenses for 1st year operation within 5% of the budget. This takes discipline – both on uncovering assumptions and implications when budgeting and in living to the budget after it is set. Most variable costs should be tied directly into revenue (i.e., when revenue increases, these costs increase in proportion). So, we don’t care as much about those. In my first year of operating Alerding Castor Hewitt, I missed my expense projections by $27 – and it was not that hard to be that close.
Revenue projections are harder. Once you have good expense model, you develop your product price point and do your market research, you should be able to develop a reasonable break even analysis and first year revenue projections. That is goal one. You will need to talk to customers to develop the POCP (see my earlier post in this series about Proof of Commercialization at Profit under Market Opportunity) - ignore the hoopla but focus on what customers will actually write a check for. Address every assumption and implication in your financial projections. For every number you should be able to explain the story underlying that number.
Depending on the capital structure developed, you will need to address your strategy. Most companies fall into one of three capital strategies: (1) Boot-strapping, (2) debt financing, or (3) raising private equity. Don’t be too quick to jump to #3. Raising capital from private equity firms, angel investors or venture capitalists is a hard process. It will take over your life for a period of time and is a variable that is outside of your control. I have seen many business die in this stage. Only take on investors if you NEED investors.
See also:
Entrepreneurial Law – Developing a Good Business Model – Part I
Entrepreneurial Law – Developing a Good Business Model – Part II
Entrepreneurial Law – Developing a Good Business Model – Part III
Entrepreneurial Law – Developing a Good Business Model – Part IV
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