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Entrepreneurship II - Preparing for Launch, Certification link.

  1. Earning Revenue: go-to-market strategies.
  2. Financial Forecasting : make and present.
  3. Raising Capital from outside investors.
  4. Managing Growth : Metrics, Pivots, Failing Well.

1. Earning Revenue

The difference between a startup concept and a startup business is paying customers.

1.1 Go-To-Market Strategy

  • Leslie’s Compass: A Framework For Go-To-Market Strategy marketing and sales are counterbalances: If you’re marketing-intensive, the product is bought. If it’s sales-intensive, the product is sold.
    • Use 7 factors : Price, Market Size, Complexity, Fit, Customer, Relationship, Touch, to determine whether you have a sales-intensive or marketing-intensive product.

Go-to-market strategy describes how you’ll use direct or indirect marketing, sales, and distribution channels to deliver your solution to your target customers. The ultimate goal is to generate sales as efficiently, effectively, and profitably as possible. Elements of go-to-market strategy:

  • Target Customers : B2B vs. b2c; Buyers vs. end user; Job title or position; Influencers.
  • Building Awareness : website (or landing page); Personal networks; Referrals.
  • Outbound Marketing (boardcasting message to potential customers) : advertising; public relations; direct mail, email, phone calls; in-person sales calls.
  • Inbound Marketing (passive, help customers who are actively seeking a solution to find you) (less expensive, and more effective): word of month; SEO; Content creation; Social media; Events.
    • Credibility & become an trusty Authority.
  • Online / Physical Sales Channels.
    • Selection : depends on the customer relationship desired; customers expectation; channel capabilities.
  • Metrics:
    • Revenue per dollar of sales expense.
    • Closing/conversion rate.
    • Length of sales cycle.
    • Customer Acquisition Cost (CAC).
    • Vanity metrics.

1.2 Revenue Models

Revenue Model Definition Advantages Disadvantages
Ad-Based (广告收入) Monetize through ads placed on high-traffic platforms. Simple to implement, widely used. Requires millions of users, ads can be annoying, low click-through rates.
Affiliate (联盟收入) Earn commissions by promoting products/services. More profitable than ad-based models. Limited by industry size, product types, and audience.
Transactional (交易（直接和网络）) Direct sales of products/services. Clear and straightforward, wide range of options. High competition, price erosion.
Subscription(订阅收入) Recurring payments for access to products/services. Generates recurring revenue, benefits from “lazy” subscribers. Depends on a large customer base, high churn risk.
Channel Sales (渠道销售（或间接销售）) Agents sell your product, and you deliver it. Ideal for incremental sales, accumulative profit. Not suitable if product competes with partners.
Commission Marketplace(佣金市场) Charge a commission for facilitating transactions on a platform. Scalable, flexible, profitable for all parties. Requires significant software development and administrative resources.
Licensing (许可) Earn royalties from the licensed use of intellectual property. Protects IP, steady income, promotes brand. Contract terms can be complex and risky.
Retail (零售) Sell physical goods through brick-and-mortar stores. Boosts brand awareness, offers deals and complementary products. Not ideal for early-stage or digital product companies.
Donations (捐赠) Receive financial support from a community or crowdfunding. Fast returns, high visibility, feedback from users. Needs a large, loyal community, interaction with users required.
Freemium (免费+增值) Free basic services with paid premium features. Attracts users with a free trial, encourages upgrades. Requires significant investment to convert free users to paying customers.
  • Subscription revenue model: What is it and how does it work 2019 The subscription revenue model generates revenue by charging customers a recurring fee that is processed at regular intervals, built on establishing long-term relationships.
    • Fit Business : Access to content - video, music, books; Access to services - SaaS, utilities, insurance,; Access to products - personal care, food.
    • More emphasis on customer retention.
  • Subscription Revenue: The Model for Long-Term (Sustainable) Revenue 2024
    • The flat-rate pricing model; Tiered pricing model; Usage-based pricing model
    • Pros : (1) Stable Growth; (2) Predictable Metrics; (3) Evaluation of Customer Satisfaction.
    • Challenges : (2) Customer management; (2) Invoicing; (3) Accounting and Taxes.

Choose : Foucs on value proposition & customer relationship & customers expectation to pay. Ask customers!

Metrics : sales conversion rate; Churn rate (repeat buyer); Viral coefficient (new customers brought in by exist customer).

1.3 Pricing

Four ways to grow profits : (1) More customers; (2) Higher prices; (3) Lower variable costs; (4) Lower fixed costs.

Pricing Method Definition Advantages Disadvantages
Cost-plus Pricing Prices are set by adding a markup to the cost of production.
Price = VC/Unit + Profit/Unit		 Simple to implement, requires few resources, covers all product costs. Inefficient, creates isolationism, ignores customer perspective. Changes over time.
Competitor-based Pricing Prices are set based on competitors’ pricing, with minor adjustments. Simple, low risk, accounts for market share, can be fairly accurate. Leads to missed opportunities, doesn’t assess true value, encourages price competition.
Value-based Pricing Prices are set based on the perceived value to the customer, using customer data. Provides real data, improves product quality, enhances customer loyalty. Requires time and resources, needs consistent dedication, varies by customer personas and regions.

2. Financial Forecasting

2.1 Financial Projections

Financial Projections Helps make “Go” or “no-go” decision. Projections should be consistent with the business model and plan.

  • Create a Value proposition and go-to-market strategy.
  • Revenue model must work for the customer.
  • Pricing strategy must be reasonable.

Readings:

Comparison Aspect Top - Down Forecasting Bottom - Up Forecasting
Definition Begins with the whole market and works downwards. Starts from business - specific elements and expands.
Pros - Reduces variability; offers a broad view.
- Generates faster results.		 - More realistic.
- Enables better item - level forecasting.
- Increases employee involvement.
Cons - Less accurate at item/department level.
- Ignores operational details.		 - Time - consuming.
- Sensitive to component data inaccuracies.
Suitable for - Stable - profit firms.
- Startups lacking sales data.
- Fund - seeking new businesses.		 - Seasonal businesses.
- Startups for budgeting and hiring.

  1. Estimate Revenue.
    • Usual Mistakes: (1) Customer adoption is slower than expected; (2) The length of the sales cycle is underestimated; …
  2. Estimating Expenses. (1) Cost on production; (2) Cost on customer acquistion; (3) Cost of company operation.
  3. Estimating Cash Flow. (1) Average collection period or days receivable; (2) Inventory turnover; (3) Days payable; …

2.2 Presenting Financial Forecasts

The lesson emphasizes the importance of understanding your audience and being prepared to discuss your financial model in detail during follow-up meetings.

  • Goal of Initial Meeting: The aim is to secure a follow-up meeting, not immediate investment.
  • Financial Model Components: Include at least three years of projections, income statements, balance sheets, and cash flow statements, all adhering to generally accepted accounting principles.
  • 🍎 Key Assumptions: Prepare a worksheet detailing the assumptions behind your projections, especially regarding revenue and growth.
    • Avoid putting raw tables, Put key numbers in to table or graph.
  • Cash Runway: Present a monthly cash budget to show how long you can operate before needing more funds.
  • Sensitivity Analysis: This tool helps assess how changes in key assumptions affect projections, allowing you to present best-case, worst-case, and most likely scenarios.
  • Initial Presentation Content: Focus on highlights that communicate the business’s potential and required investment without overwhelming details.
  • 🍎 Call to Action: Clearly state your financing needs and how the funds will create value.

2.3 Financing Options

Assets vs. Cash.

Debt vs. Equity Financing: Which Way Should Your Business Go? 2016

  Debt Equity
Provided by Lenders Owners
Repayment Schedule Specified Indefinite
Investor’s Risk-Tolerance Little or none Moderate to high
Management Role Little or none Can be very active
Type of Return Principal and interest Capital gain
Source of Repayment Cash flow from profits A liquidity event

Financing Type Pros Cons
Debt Financing - Control over capital use.
- Little long - term operational impact.
- High flexibility.		 - Interest expense.
- Difficult to qualify.
- Risk of asset seizure.
Equity Financing - No interest payment.
- Access to investors’ resources.
- No repayment obligation in case of failure.		 - Time - consuming.
- Loss of ownership and decision - making power.
- Potential conflicts with investors.

3. Raising Capital

3.1 Equity - Angels & Venture Capitalists

  • Self-Financing: Entrepreneurs often start by using their own savings, which signals commitment to potential investors.
  • Family and Friends: These individuals can provide initial support based on personal connections rather than financial returns.

🍎 Angel Investors: Wealthy individuals who invest their own money, often bringing expertise and connections to the business. They typically invest in a portfolio of startups and expect high returns.

  • The american angel have high risk tolerance and expect high return.
  • Take a portfolio approach, since 10% of investments produced 85%-90% of returns.
  • Find them through organized groups and networks : university-related, geographic regions, syndication platforms.

🍎 Venture Capitalists(风险投资者): Professionally managed partnerships, investing institutional capital. Managers receive a management fess and a “carried interest” in the eventual profits.

  • A wide range of investment strategies depends on different managers.
  • Very high return targets - IRR targets > 40%. (expect one or two big successes to pay for many more failures)
  • To Approach VCs:
    • Use a referral from a successful entrepreneur or respected advisor.
    • Do Your Homework: Research the VC’s investment strategies and portfolio companies.
    • Presentation and executive summary.
    • Build a relationship before asking for money - seek advice first.
    • Don’t lead with an NDA. Don’t propose your own terms nor valuation. Don’t wait until you’re out of money.

3.2 Venture Capital Valuation

Valuation Process: Entrepreneurs and investors negotiate the business’s worth, considering factors like the business plan, management team, and competitive advantage.

  • Investor’s Required Return (R): This is calculated based on the investment amount (I), the investor’s rate of return (r), and the time until the investment is realized (T).
    • $R=I (1+r)^{T}$
  • Future Value (V): Estimated using projected revenue or profit (P) and valuation multiples (M) from comparable companies.
    • $V = PM$
  • Ownership Percentage (X): Calculated as the required return divided by the future value, determining how much of the company the investor will own.
    • $X = R/V$
  • Post-Money and Pre-Money Valuation: The post-money value includes the investment, while the pre-money value reflects the business’s worth before the investment.
    • Post-money = I/X.
    • Pre-money = Post-money - I. (on the entrepreneur’s side of the table)

Staged Financing : (1) seed capital; (2) first round; (3) second round; (4) mezzanine.

  • Investors: Reduce risk. Flexibility. Investor Confidence.
  • Entrepreneurs: Increased Valuation. Maintain more ownershup.
  • The company must achieve milestones to justify lower rates of return and higher valuations in the future rounds.

3.3 Deal Terms and Negotiations

Types of Securities: Everything from common stock to bonds is considered a security. For venture capital, companies typically need to be structured as C Corporations for tax reasons.

Investment Structure: Venture capitalists prefer Convertible Preferred Stock, which offers downside protection and can be converted to common shares if the company succeeds.

  • Key Terms:
    • Liquidation Preference: Preferred shares are paid out before common shares in case of liquidation.
    • Anti-Dilution Rights: Protect investors if the company’s share price decreases in future financing rounds.
    • Founder Vesting: Founders must stay with the company for a set period to earn their shares, aligning interests with investors.

Negotiation Tips: Entrepreneurs should aim for a fair deal, focusing on major issues like valuation and board structure, and consider having an experienced attorney during negotiations.

Convertible Securities: Startups often use convertible debt or SAFEs (Simple Agreements for Future Equity) to raise initial capital without immediate valuation discussions.

4. Managing Growth

4.1 Growth Metrics

Readings :

Importance of Metrics: Monitoring key performance indicators (KPIs) is essential to manage growth and ensure the business is on track. To face environment changes, and to help make key decisions - Shifting Priorities.

  • Strategic Planning: Continuous evaluation of market conditions, customer needs, and business strategies is necessary as the company evolves.
  • Hypothesis Testing: Developing specific, testable hypotheses about business strategies helps in assessing their effectiveness.

Key Metrics: Important metrics include customer acquisition cost (CAC), customer lifetime value (CLTV), sales conversion rate, and churn rate. These metrics help in understanding the business’s health and scalability.

Avoiding Vanity Metrics: Focus on metrics that truly impact business objectives rather than superficial statistics that do not correlate with success.

4.2 Pivots

  • Youtube : Eric Ries explains The Pivot 2013
  • You can pivot, but you should never twirl 2014 指出过度转型的危害，并批判了精益创业理念中的一些误导（It’s actually not all right to have your first customers be your last beta testers），强调应将客户需求置于首位。应该找到最小可行受众(Minimum Viable Audience MVA)，之后再运用 MVP 方法，为目标客户迭代优化产品或服务。

Build, Measure, Learn Cycle: This feedback loop encourages continuous improvement by testing assumptions about customers and the market, learning from results, and adjusting strategies accordingly. 🧠Lean Startup.

A pivot is a significant change in strategy when initial business model assumptions are proven incorrect. It is essential for startups to adapt when their original approach isn’t working. Types of Pivots:

  • Zoom-in Pivot: Focusing on a single feature that becomes the main product (e.g., Flickr).
  • Zoom-out Pivot: The entire product becomes a feature of a larger offering.
  • Customer Segment Pivot: Targeting a different customer group.
  • Customer Need Pivot: Changing the strategy to meet a different need of the same customer group.
  • Value Capture Pivot: Adjusting pricing or revenue models.
  • Engine of Growth Pivot: Changing customer acquisition strategies.
  • Channel Pivot: Altering how the product reaches customers.
  • Technology Pivot: Delivering the same value proposition through a new method.

After pivoting, it’s crucial to continue testing new assumptions to ensure they are valid. Entrepreneurs should consider how many pivots they can afford before running out of resources.

4.3 Failing Well

Failure can be devastating but is often a part of the entrepreneurial journey. Learning from failure can lead to future success.

  • Honesty and Transparency: Being honest with yourself and stakeholders (investors, employees, etc.) about the situation is crucial. This builds trust and respect.
  • Cash Management: Managing cash flow is essential, especially when facing insolvency. Prioritize obligations to creditors and employees.
  • Soft Landing Strategies: Planning for a “soft landing” can help minimize negative impacts. This may involve selling assets or an “aquihire” to retain talent.
  • Learning from Mistakes: Analyze what went wrong to improve future ventures. Understanding market assumptions and team dynamics is vital.