ASSIGNMENT 3
A. Executive Summary Re-write
Re-write your original Executive Summary to incorporate what you’ve learned up to this point in the course. There’s no doubt—at this stage, your team’s idea has evolved and you’ve learned a great deal of new things about your market through both primary and secondary research. Take this opportunity to update your Executive Summary with this information.
B. Go To Market Section (Sales, Marketing, Pricing)
So far you have determined the target customer, the value proposition, the market opportunity, the product and the competitive advantage. We are now ready to start to determine and finalize your business model to capture value and also your marketing and sales strategy. Specifically, focus on determining the Life Time Value of an Acquired Customer (LTV) and then the Cost of Customer Acquisition (COCA) so as to determine the fundamental profitability of this business.
Here are the guidelines for the Business Model, Pricing and LTV part of the “Go to Market Section”:
1. Did the student team present a well-researched and credible DMU and DMP?
2. Was this used as the foundation for the rest of the analysis that followed?
3. Did the student team creatively think about a business model that fit well with the interests of their
customer, themselves and their partners before they settled on their initial business model?
4. Were the competitors considered in this process too?
5. Was the student team business model to capture value clear? Was it appropriate? Will the customer
accept it?
6. Was the pricing of the product clear and well-thought through?
7. Were the initial programs/discounts needed to acquire the first strategic customers considered?
8. Did the team build a convincing source for recurring revenue if possible?
9. Was all of this done in alignment and consideration of optimizing the COCA vs. LTV ratio?
10. Did the team include an analysis of the customer retention rate? Is it reasonable?
11. Was the profitability of the different revenue streams considered? Over time?
12. Are all of the assumptions in the LTV clear?
13. Was a proper calculation of LTV done that is comprehensive? (e.g., it only includes NPV of the profit
and not revenue, reasonable assumption made on life time of customer, retention rates, etc.)
14. Did the team show how LTV would evolve over time and why?
15. Again, did the student team have a clear understanding of the target customer’s DMU and DMP?
16. Was this validated by demonstrated primary market research?
17. Did everything else done in this section build of this foundation and that of the persona?
18. Did the team clearly state how it intended to generate leads? Was inbound marketing considered?
19. Did the team clearly state how it intended to close the leads and the reasons the sales model was
chosen? (i.e., sales model options – direct, indirect, online, Avon model, etc.)
20. Was there a map of the sales process with the different parties involved and their roles from lead
generation to collection of money?
21. Was there a realistic timeline presented for the full sales cycle? (thru to collection)
22. Did the team clearly state its assumptions on closure rates as prospects move through the sales
funnel?
23. Did the team do a credible analysis of the full costs along the sales cycle?
24. Was there a COCA calculation done? Was it comprehensive? (e.g. includes only Marketing and Sales
costs and not COGS & Fixed Costs, makes reasonable assumptions on sales closure rates, etc.)
25. Did it include the costs of customers who were not closed as well? (full allocation of M&S costs)
26. Did the team take into consideration the power of Word of Mouth (WOM)? 27. Did the team show how COCA would evolve over time?
To help you answer these specific questions you also might think of your “Go to Market” strategy at a higher level as well with considerations such as:
Overall Marketing Strategy
• Describe the specific marketing philosophy of the company, given the value chain and channels of distribution in the market niches you are pursuing.
• Describe which geographic areas you will initially target, how will you expand geographically, and why this makes sense.
• Describe any seasonality to your business and what can be done to promote sales off-season.
Pricing
• Discuss pricing strategy vs. competition.
• Analyze gross margin per product sale and show that you can cover other expenses to reach your desired profit margin on a cost accounting basis.
• Justify the difference in price between you and the competition.
Sales Tactics
• Describe the method (direct, distributors, sales representatives, etc.) that will be used to make sales and distribute the product or service and both the initial plans and longer-range plans for the sales force. Include any special requirements (e.g. refrigeration).
• Discuss the value chain and resulting margins to be given to retailers, distributors, wholesalers, and salespeople.
• Describe special policies, e.g. discounts, regional exclusivity, etc.
• Describe how your sales force and sales efforts will grow and scale over time and how you will shape its growth.
Include a sales schedule with a budget including sales, advertising and service expenses. Include what you expect the volume of each salesperson/distributor to be and how that will grow. This schedule will help you calculate customer acquisition cost (COCA).
Advertising and Promotion
• Describe appropriate methods you will employ to drive customers toward your product. Consider different tactics depending on whether you are selling through channels, direct sales, OEMs. Are you going to buy “keywords”? If so, what is your budget? How will you measure success? Failure?
Distribution
• Describe methods and channels of distribution you will use.
• Describe shipping costs if applicable.
C. Product Section
Now that the target customer, value proposition and market opportunity are clear, it is time to focus on the product and your team’s competitive advantage. In the product section you get to tell us about your product. You will want to cover things like:
1. Did the student team specifically and concisely describe their product in the first paragraph?
2. Did the student team give a visual representation of the product? (the more visual, generally the better—the responsibility is on the student team to make it easy to understand, not on the reader to “get it”)
3. Was it easy to understand?
4. Was it clear how this product would create value (i.e. linkage to the value proposition done before which should by now be more refined and solid)?
5. Was this based on primary customer research that was made clear?
6. Did the student team make up a brochure that presented the product from the customer’s perspective with an emphasis on feature—function—(and most of all) benefits?
7. Were the assumptions clear (and testable) as to what would make the product unique and successful?
8. Was the the Minimum Viable Product—MVP clear?
9. Does the MVP align with the important assumptions so they can be tested as soon as possible?
10. What are the estimated COGS (Cost of Goods Sold) for this offering?
11. Is there a longer-term product plan to grow the product?
12. Will it include alternating functional releases and QA (Quality Assurance) releases?
13. Overall, did the product plan align with the target customer and persona throughout?
Include a timeline outlining the major phases of development that you will need to complete in order to take your first product to market.
D. Financial Section and Human Resource Re-Write Financial Section
The financial plan is the glue that holds the entire thing together. It is the basic evaluation of investment opportunity and needs to represent your best estimates of financial requirements. The purpose of the financial plan is to indicate the venture’s potential and present timetable for financial viability. It can also serve as an operating plan for financial management using financial benchmarks. This section unites the assumptions from all other sections in the plan (sales forecasts, gross margin assumptions, technology development, etc.).
Refer back to the Product section. How does your product development timeline relate that to your need for capital? What are you going to need money for and when? How will you generate / raise/ borrow this money? Start with a cash flow analysis, by quarter, taking into account all your major expenses—people, manufacturing costs, etc.—and then use a spreadsheet to determine what your quarterly burn rate will be. Show when your firm will reach cash flow break even. All great technologies must be effectively built, and then produced and serviced at a level such that the company can react to growth, as well as service requests that the industry demands.
Your financial analysis should include:
Financial Summary
Annual income statement and cash flow statements for years 1–3. Remember, cash flow is the most important and you must track it relentlessly in a startup. Make a special emphasis to show how you generate your top line revenue and what assumptions you are making in this. It merits its own chart and section because everything depends on top line growth and that is the first thing we will look at.
Pro Forma Income Statements
(monthly for year 1, quarterly for years 2–3, annually for subsequent years)
• Using sales forecasts and accompanying production or operations costs, prepare pro forma income statements for at least three years
• Start off with a detailed but concise explanation of your top line revenue and what is driving it. Explicitly state all assumptions in this (and all other) financial projection. Discuss sensitivities to your sales numbers. Give a worst, best and likely scenario for the sales projections.
• Fully discussed assumptions (e.g., the amount allowed for bad debts and discounts, were any assumptions made with respect to sales expenses, were general and administrative costs a fixed percentage of cost or sales) made in preparing the pro forma income statement and document them.
• But always remember that Income Statement does not equal Cash Flow and while it is important, Cash is king. Pro Forma Cash Flow Analysis
(monthly for year 1, quarterly for years 2–3, annually for subsequent years)
• Project cash flows monthly for the first year of operation and quarterly for at least the next two years, detailing the amount and timing of expected cash inflows and outflows; determine the need for and timing of additional financing and indicate the requirements for working capital; and indicate how well-needed additional financing is to be obtained, such as through equity financing, bank loans, and short-term lines of credit from banks, on what terms and how is it to be repaid. Remember to use cash-based, not accrual-based, accounting.
• Discuss assumptions, such as those made on the timing of collection of receivables, trade discounts given, terms of payment to vendors, salary and wage increases, and anticipated increases in operating expenses, seasonality or cyclical business implications for inventory requirements, inventory turnovers per year, capital equipment purchases, and so forth. Again, these are real-time (i.e. cash), not accrual.
• Discuss cash flow sensitivity to a variety of assumptions about business factors (e.g. possible changes in such crucial assumptions as receivables collection or sales levels relative to forecasts).
Breakeven Chart
• Calculate breakeven and prepare a chart that shows when breakeven will be reached, and any stepwise changes in breakeven that may occur.
• Discuss the breakeven for your venture and whether it will be easy or difficult to obtain, including a discussion of the size of breakeven sales volume relative to objective total sales, the size of gross margins and price sensitivity, and how the breakeven point might be reduced in case the venture falls short of sales projections.
Ownership
Which of the founders get how much of the pie? Talk about the investment sought, but do not allude to how much you are willing to give up. In real life, this is the part you negotiate with the VC (valuation).
Cost Control
Describe how you will obtain information about report costs and how often, who will be responsible for the control of various cost elements, and how you will take action on budget overruns.
Financial Conclusions
Highlight the important conclusions, such as what the maximum amount of cash required is and when it will be required. State how much money you will need and what the possible sources of it are and your current decision on where to get this needed capital from. Note how much you will need at each expected milestone and what exactly the money will be used for. If you get investment in equity or debt, state how and when you expect to return it to the investors and what their expected return will be, if it is equity.
Addendum: Capitalization Table
Compile a capitalization table indicating ownership percentages of the founders, VCs and option pool assuming you get the financing requested when you request it. Include important key hires specifically and then the general employee stock option pool as well. Show the valuation multiples for your company and changes in the value of ownership stakes on a year-by-year basis. Note: This would never appear in a real business plan, but it is a useful exercise to understand who benefits from value creation over time, and we ask you to include it for purposes of this exercise.
Human Resources Section
In tandem with the Financial Section, you will also have to do a Human Resources or Team Section. This will likely be a key driver of your financial plan as salaries are often the number one expense for startup companies. This section should cover the following points:
1. Who is on the founding team? What are the roles for each? What qualifications do they have for these roles? How committed are they?
2. Who are your advisors? How committed are they?
3. What additional skills do you need to add to the team to be successful and when? Where do you intend to look to source them from? Make sure the hires are aligned with milestones in your overall plan and are consistent with your financial plan.
4. Show how your organization will evolved over the next three years (organizational charts can be effective to convey this info)? What do you anticipate it will look like in 5 years?
5. A discussion of the capital stock table here with regard to key employees and the employees in general is appropriate here as well.
E. Create a Tagline
Create a tagline, it should be no more than seven or eight words, and you should pick words that are crystal clear. Key elements to a good tagline:
o It is addressed to your target customer
o It clearly states your value proposition
o Sets the rules so you win (i.e., the question of “why you?” is clear or becomes clear if they buy into your
tagline)
o It is memorable