Techstars Seattle — Startup Revenue Models and Forecasting
1 like172 views
The document outlines various revenue models and business strategies relevant for startups, detailing the importance of understanding unit economics, market positioning, and customer acquisition costs. It reviews 14 different revenue models—from subscription to marketplaces—highlighting key metrics and associated challenges for each. Additionally, it emphasizes the significance of effective marketing, sales strategies, and maintaining a robust financial model to attract investors and drive growth.
Techstars Seattle — Startup Revenue Models and Forecasting
- 1. Copyright, DKParker, LLC 2020 Revenue Models & Forecasting Dave Parker @DaveParkerSEA www.GetTrajectory.com @DaveParkerSEA
- 2. Copyright, DKParker, LLC 2020 Agenda ¤ Outcomes for this presentation: ¤ Business model breakdown ¤ Identify Key Inputs ¤ Identify Unit Economics ¤ Choose primary/secondary revenue models ¤ Go-to-Market – Marketing and Sales choices ¤ Choose financial template ¤ Common mistakes
- 3. Copyright, DKParker, LLC 2020 About Dave ¤ 5X founder, raised $12M, exited $85M ¤ Former SVP Programs at UP Global (Startup Weekend) ¤ Startup Next creator, Startup Week ¤ Author – ”Trajectory: Startup – Ideation to Product Market Fit” shipping 3/2021 ¤ 2X VC and random Angel ¤ 10 transactions – 8 sell side, 2 buy side now with NextPath Advisors
- 4. Copyright, DKParker, LLC 2020 Creating Value: Product or Service, Market, Team Delivering Value: Pricing, Marketing & Sales, Rev Model Capturing Value Reasonable to Exceptional Returns Business Model Breakdown
- 5. Copyright, DKParker, LLC 2020 Creating Value ¤ Product or Service ¤ Cost to Build – Team ¤ Engineering ¤ Design ¤ Hosting ¤ Manufacturing ¤ Cost of Delivery & Support
- 6. Copyright, DKParker, LLC 2020 Delivering Value ¤ Pricing ¤ Revenue Model ¤ Cost of Selling ¤ Marketing Methods and Spend ¤ Sales Models
- 7. Copyright, DKParker, LLC 2020 Capturing Value ¤ Topline Revenue ¤ Gross Margins ¤ Net Profit
- 8. Copyright, DKParker, LLC 2020 How to Monetize Your Startup: Revenue Models
- 9. Copyright, DKParker, LLC 2020 The Data ¤ 2654 companies from Crunchbase ¤ 5+ year tracking ¤ Creates massive impact on valuation ¤ Surprises ¤ Seed 1-10 ¤ Combinations models ¤ * on short time from Seed to A ¤ Failures ¤ Wayback Machine ¤ >80% lacked clear CTA and Value Prop
- 10. Copyright, DKParker, LLC 2020
- 11. Copyright, DKParker, LLC 2020 1. Fee for Service ¤ Example: Consulting Services company ¤ Use: B2B & B2C ¤ Key Metrics ¤ Project Revenue ¤ Cost of delivering (usually time) ¤ Gross Margin ¤ Services are hard to scale because they require people to deliver including Restaurant, Contractors, etc. ¤ Services include markup on cost of goods sold
- 12. Copyright, DKParker, LLC 2020 2. Commerce ¤ Example: Amazon, AmazonSupply ¤ Use: B2C & B2B ¤ Key Metrics: ¤ Wholesale or cost of goods sold ¤ Average Margin % ¤ Average Basket ¤ Commerce – Physical Goods- Wholesale, cost of goods, retail, average margin, physical good ¤ Notes: Can mature into marketplace
- 13. Copyright, DKParker, LLC 2020 3. Subscription ¤ Example: Salesforce , Box, Spotify ¤ Use: B2C & B2B ¤ Key Metrics ¤ Average Revenue Per User (ARPU) ¤ Conversion ratio – e.g. trial to purchase ¤ Churn ¤ Challenges: MVP won’t be enough to be Kick Ass Product ¤ Notes: Highest multiple, forecastable revenue
- 14. Copyright, DKParker, LLC 2020 4. Metered Servcie ¤ Example: AWS, Splunk, Azure ¤ Use: Favors B2B ¤ Key Metrics ¤ Average Revenue Per User (ARPU) ¤ Usage growth over time ¤ Churn ¤ Challenges: infrastructure required at launch ¤ Notes: Highest multiple, forecastable revenue
- 15. Copyright, DKParker, LLC 2020 5. Transaction Fees/Rental ¤ Example: 99Designs, KickStarter, Elance, Chugg ¤ Use: B2C & B2B ¤ Key Metrics ¤ Average transaction revenue ¤ Fee % per transaction ¤ Number of transactions ¤ Challenges: Margins are small (15%), need efficiency ¤ Notes: Don’t start too low
- 16. Copyright, DKParker, LLC 2020 6. Productize a Service ¤ Your offerings is generally complex and requires services to deploy ¤ Gross margin on Services >35% ¤ Product development comes with services ¤ Use: B2C & B2B ¤ Examples: Moz, service company convert to tools. ¤ Challenges – difficult to make the transition away from services
- 17. Copyright, DKParker, LLC 2020 7. Combinations ¤ Combinations business models happen for two reasons ¤ You don’t know which model is right ¤ At scale you can expand revenue sources ¤ Examples: Hardware sensors + software services to create data analytics ¤ Challenges – most require scale or at least traction ¤ Mature faster
- 18. Copyright, DKParker, LLC 2020 8. Marketplaces ¤ Example: eBay, Alibaba ¤ Use: B2C & B2B ¤ Key Metrics ¤ Average Transaction Amount ¤ Number of Monthly Transactions ¤ Commission % ¤ Challenges: two sided market places require you start with one side, value to seller & Product market fit (x2) ¤ Notes: critical mass or marketplace required
- 19. Copyright, DKParker, LLC 2020 9. Lead Generation ¤ Example: Mint.com, AllStarDirectories, NetQuote ¤ Use: B2C & B2B ¤ Key Metrics ¤ Cost to generate traffic ¤ % conversion of form data ¤ Price per lead ¤ Challenges: Highly competitive, barrier of entry is low ¤ Notes: Conversion rates average 0.06%
- 20. Copyright, DKParker, LLC 2020 10. Gaming ¤ Example: King.com/Candy Crush ¤ Use: B2C Only ¤ Key Metrics: ¤ Downloads ¤ % play ¤ Average in app purchase ¤ Challenges – tends to be “hit driven business” ¤ Notes: use in first 21 days is a predictor of success
- 21. Copyright, DKParker, LLC 2020 11. Advertising/Search ¤ Example: Google, Facebook ¤ Use: B2B – advertisers pay, users are free ¤ Key Metrics ¤ Traffic ¤ Click ¤ Avg. revenue/click ¤ Challenges – Scale, need >1M uniques/month to consider the option
- 22. Copyright, DKParker, LLC 2020 12. New Media ¤ Example: SnapChat, WhatsApp ¤ Use: B2C only ¤ Key Metrics: ¤ K-Factor (Viral Co-efficient) ¤ Network effect of inviting others to join ¤ Challenges – K-Factor is hard. Little revenue until scale ¤ Notes: Everyone wants to! Not happening in B2B ¤ No revenue acutally required
- 23. Copyright, DKParker, LLC 2020 13. Big Data ¤ Examples: PatientsLikeMe ¤ Use: B2B ¤ Key Metrics: ¤ Per API Call ¤ Per record pricing ¤ Frequency/recency ¤ To monetize data, you need to have the data in advance or massive cash
- 24. Copyright, DKParker, LLC 2020 14. Licensing ¤ Example: Think Microsoft office license or server license – before subscription. Content Licensing ¤ Use: B2B ¤ Key Metrics: ¤ Duration of license ¤ Upgrades & maintenance (20-25% annually) ¤ Use can be based on vertical market or geography
- 25. Copyright, DKParker, LLC 2020 Revenue Models– Primary/Secondary 1. Fee for Service 2. Commerce 3. Subscription 4. Metered Service 5. Transaction Fee/Rental 6. Productize a Service 7. Combinations 8. Marketplace 9. Lead Generation 10.Gaming 11.Advertising/Search 12.New Media 13.Big Data 14.Licensing
- 26. Copyright, DKParker, LLC 2020 Marketing – Finding the right customers
- 27. Copyright, DKParker, LLC 2020 Marketing – Finding Customers ¤ Messaging/Value Proposition ¤ Does it resonate with the target customer segment ¤ They are the hero of the story ¤ Is it repeatable? ¤ Strategy ¤ Outbound first ¤ Inbound second
- 28. Copyright, DKParker, LLC 2020 Unit Economic Terms ¤ State your hypothesis ¤ CAC – customer acquisition cost ¤ LTV – lifetime value ¤ ARPU – average revenue per user ¤ ACV – annual contract value ¤ Churn – customers that leave monthly ¤ Net Negative Churn – increase in annual contract value ¤ Time to Close – in days ¤ Customer engagement – time on site, in app
- 29. Copyright, DKParker, LLC 2020 Organic Search Paid Search Word of Mouth Sales Calls PR Miracles! Time to Close Month 1 Month 2 Month 3 Month 4 $ Spen d # Conv # Conv # MRR Time
- 30. Copyright, DKParker, LLC 2020 Marketing Channels ¤ Paid Search ¤ Organic Search ¤ Word of mouth ¤ Sales calls ¤ Public Relations ¤ Affiliate ¤ Email marketing ¤ Social
- 31. Copyright, DKParker, LLC 2020 Marketing Qualified Leads ¤ Define qualified vs list ¤ Suspects ¤ Prospects ¤ Qualified Prospects
- 32. Copyright, DKParker, LLC 2020 Sales Qualified Leads ¤ Hand off to Sales ¤ Identify steps to close ¤ Number of calls
- 33. Copyright, DKParker, LLC 2020 Time to Close ¤ Lead attribution ¤ Source time ¤ Compressing or Expanding ¤ Trend by source
- 34. Copyright, DKParker, LLC 2020 Tracking ¤ Data allows you to know where to double down and where to hold back ¤ Conversion ratios
- 35. Copyright, DKParker, LLC 2020 Sales – capturing value creation
- 36. Copyright, DKParker, LLC 2020 How will they buy? ¤ Web Direct – place the order to buy on the web ¤ Direct – outbound sales, inside/outside ¤ Indirect/Channel – fulfills demand, doesn’t generate ¤ Retail – BestBuy, etc
- 37. Copyright, DKParker, LLC 2020 Sales Model Hypothesis Known Market Unknown Market Low Price Point High Price Point Known Search Words Unknown Search words Web Direct ✔ ✔ ✔ Direct ✔ ✔ ✔ ✔ ✔ Indirect ✔ ✔ ✔ Retail
- 38. Copyright, DKParker, LLC 2020 Pricing
- 39. Copyright, DKParker, LLC 2020 Ultimately pricing needs to cover ¤ Cost of Customer Acquisition ¤ Cost of Delivering ¤ Margin (Profits and Returns) ¤ Lifetime Value (LTV) is calculated at 12 or actual ¤ Pricing is not an afterthought ¤ 10, 100, 1000 customers
- 40. Copyright, DKParker, LLC 2020 Pricing Mechanics
- 41. Copyright, DKParker, LLC 2020 Cost Based ¤ Pay Rate ¤ Bill Rate ¤ Gross Margin
- 42. Copyright, DKParker, LLC 2020 Value Based ¤ What the market will bear
- 43. Copyright, DKParker, LLC 2020 Value Based ¤ Range ¤ Product maturity ¤ Jobs to be done framework
- 44. Copyright, DKParker, LLC 2020 Pricing Tiers ¤ Pricing should be appropriate for the stage/type of customer ¤ Usage based ¤ User based ¤ Balance friction, easy to start ¤ With cost of sales, minimum user size
- 45. Copyright, DKParker, LLC 2020 Hubspot Example
- 46. Copyright, DKParker, LLC 2020 Competitive Analysis ¤ Use the Wayback Machine – Internet Archive ¤ Know the Market ¤ Price changes over time ¤ Service/Product Offerings ¤ Terms – duration, contract length
- 47. Copyright, DKParker, LLC 2020 Hubspot Example
- 48. Copyright, DKParker, LLC 2020 Hubspot example
- 49. Copyright, DKParker, LLC 2020 A/B Testing ¤ Have a hypothesis – what will you test? ¤ Hide current pricing on site ¤ Traffic to landing pages ¤ Unbounce or other ¤ Squeeze Page – only CTA is buy
- 50. Copyright, DKParker, LLC 2020 Promotions ¤ Freemium ¤ Time based ¤ Early Adopter based ¤ Percentage Discount ¤ Grandfather early users
- 51. Copyright, DKParker, LLC 2020 Common Errors ¤ Setting your pricing too low ¤ Freemium is a marketing method, not a price ¤ Too Opaque of a price will frustrate customers ¤ “Knowing the answer” vs testing ¤ Positioning as “me too” – just like my competitors but less ¤ Same price for all customers ¤ Free for Life!
- 52. Copyright, DKParker, LLC 2020 Top Templates ¤ Templates folder ¤ Subscription ¤ Recurring revenue, churn, ARR/MRR, LTV:CAC Ratio ¤ Transaction Fee/Rental (not booking topline revenue) ¤ Avg transaction amount, % commission, # transactions/mo, LTV: CAC ¤ Productize a Service – people are required for some portion – most robust model, includes subscription ¤ Split of revenue between product/services ¤ Marketplace – ¤ Two funnels, buy/sell side, % fee, 2X LTV:CAC
- 53. Copyright, DKParker, LLC 2020 Telling a Financial Story ¤ Finance is the language of business ¤ The story comes down to numbers, in cells on a spreadsheet, the model validates the story. ¤ Investors want to stress test the models and assumptions ¤ Models serve multiple purposes ¤ Fundraising – pitch deck ¤ Budgeting and forecasting – scalable revenue ¤ Cashflow forecasting – runway
- 54. Copyright, DKParker, LLC 2020 Two Views of Your Startup
- 55. Copyright, DKParker, LLC 2020 The Model Supports the Deck ¤ The pitch deck provides a 3-5 year summary ¤ You need to know the numbers ¤ The summary at a high level ¤ Revenue, cost of revenue and gross margin ($/%) ¤ Operating expenses ¤ Profitability and cashflow breakdown ¤ Headcount ¤ Key drivers (unit economics/customers)
- 56. Copyright, DKParker, LLC 2020 Financial Model Best Practices ¤ The success drivers (metrics, KPI’s) are simple and easy to understand. Avoid complicated formulas ¤ The revenue categories map to one or more of the 14 models ¤ The five-year ramp is realistic (not $100M) ¤ Cost of revenue is complete, so gross margin is correct: ¤ Hosting, fulfillment, shipping ¤ Labor (customer service) ¤ Production costs
- 57. Copyright, DKParker, LLC 2020 Financial Model Best Practices ¤ Operating expenses are complete: ¤ Expenses grouped by department (fixed vs. variable, cost of sales, etc) ¤ Headcount – roles, compensation, benefits ¤ Contractors – HR, Accounting, Engineering ¤ Travel expense ¤ Marketing – reflects go-to-market strategy ¤ G&A – facilities, insurance, other operating expenses ¤ Investments are reasonable to estimate: ¤ Intellectual property, equipment
- 58. Copyright, DKParker, LLC 2020 Financial Model Best Practices ¤ GAAP/Accrual based accounting ¤ Revenue recognition ¤ A great model answer the burning questions: ¤ When does the company become profitable? ¤ When does cash flow breakeven occur? ¤ How much investor capital is needed? ¤ Will more than one round of funding be necessary?
- 59. Copyright, DKParker, LLC 2020 Forecast vs Actual ¤ Four dimensions of financial reporting: ¤ Actuals – QuickBooks (accrual) ¤ Operating Plan – Budget (roadmap for the quarter & year) ¤ Forecasting ¤ Variance analysis ¤ Actual to plan ¤ Actual to forecast
- 60. Copyright, DKParker, LLC 2020 Use Cases ¤ Why do a financial model ¤ Scoping the business – for you and investors ¤ Fundraising requirements ¤ Pre/Post Product/Market fit impact ¤ Risk capital ¤ Growth capital
- 61. Copyright, DKParker, LLC 2020 Key Metrics ¤ Assumptions ¤ Staffing ¤ Timing ¤ Product & Pricing ¤ Launch timing ¤ Prices ¤ Sales Models ¤ Scaling past the founder ¤ Time to close ¤ Marketing Methods
- 62. Copyright, DKParker, LLC 2020 Inc 500 Data – Quiz: How much revenue to you need in three year to end up on the Inc 500 List?
- 63. Copyright, DKParker, LLC 2020
- 64. Copyright, DKParker, LLC 2020 Inc 500 List ¤ Data from Top 10 over 10 years ¤ Avg $59.47M ¤ High Average $131.81M ¤ Low Average $23.52 ¤ All from a baseline revenue of $1M in first of three years
- 65. Copyright, DKParker, LLC 2020 Common Mistakes ¤ Complex and confusing assumptions - not on one tab ¤ Confusing model design ¤ Metrics and success factors not defined ¤ Overly aggressive revenue ramp ¤ Understanding expenses and cash needs (optimism) ¤ Key milestones not clearly outlined
- 66. Copyright, DKParker, LLC 2020 Templates 1. Choose one 2. Familiarize yourself 3. Startup with Assumptions 4. Move to Compensation and people 5. Revenue next 6. Forecast
- 67. Copyright, DKParker, LLC 2020 Supporting Slides
- 68. Copyright, DKParker, LLC 2020 Corp Hygiene Note ¤ Museum Quality ¤ Fully executed contracts ¤ In OneHub, Drive, etc. ¤ Offer letters, W-4, I-9, options, PIIA ¤ Termination procedures ¤ Contractor files – NDA, Inventions Agreements ¤ Closed monthly books ¤ Payroll and tax payments
- 69. Copyright, DKParker, LLC 2020 Business and Revenue Models ¤ Business Models – abstract framework of Creating, Delivering and Capturing Value ¤ Revenue Models (part of business model) is the framework of revenue, pricing, who pay ¤ Models Lean toward Tech and Product