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What makes recurring revenue so valuable? |
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A start-up can spend more of its energy growing the business rather than on trying to acquire enough new or repeat business just to hit the same revenue level it did the year before |
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Why do investors like recurring revenue? |
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because it can better predict what a start-up is going to earn in future years. In fact, the more recurring revenue a company has, the higher the valuation it will receive from prospective investors and buyers |
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the specific ways a company brings money into a company |
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Asset sales Usage Renting/Leasing Licensing Listing Brokerage Advertising Data |
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Ownership rights are sold of physical product. Amazon® sells books. Telsa® sells cars. |
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A customer pays a one-time fee for a service. For example, attorneys are paid a fee to provide legal services (i.e purchasing someone’s time). FedEx® is paid a fee to deliver a package. |
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A customer pays for the exclusive right to physical asset for a period of time. Fans purchasing a concert ticket are purchasing the exclusive rights to a seat at the venue. Hertz® leases a car for a specific period of time. |
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The business retains ownership of content or software and licenses the same to third parties. Microsoft® sells a license to its desktop software. |
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– Business charges a fee to list a product or service for sale. Craigslist® generates revenue on classified listings and, unlike brokerage below, earns the fee regardless as to whether a transaction is completed from the listing. |
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Revenue is derived from connecting two or more parties together for purposes of consummating a transaction. For example, Real Estate agents receive a brokerage fee if it brings a buyer and seller together and a transaction is completed. E*Trade® charges a brokerage fee to its clients whenever they buy or sell a stock. |
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Advertising revenue stream |
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Definition
Revenue is generated by selling marketing access to large community of individuals. Newspapers generate a significant amount of their revenue via advertising. Facebook® generates nearly $8B per year by selling advertising space on individuals Facebook pages and timelines. |
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Online or mobile businesses that collect and monetize personally identifiable information (PII) and sell the same to third parties. For example, Acxiom® claims to have 1500 pieces of information on more than 200 million Americans in which it sells to interest parties. |
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Single largest cause of start-ups failing |
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Definition
Lack of product/market fit |
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The second biggest cause of startup failures |
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the cost to acquire a customer is much higher than the lifetime value of the customer |
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What are some techniques for entrepreneurs to use to map out a customer acquisition plan? |
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Definition
Search Engine Optimization (SEO), Search Engine Marketing (SEM), Public Relations (PR), Social Marketing, Direct Sales (start-up selling direct to the customer), and Channel Sales (selling to consumers through distributors/retailers) |
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What are start up prices constrained to? |
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Definition
what competitors are charging for a similar type product or service that already exists in the marketplace |
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What is the current CPM (cost per 1000 impressions) on the Web? |
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What is a startups first step when thinking about pricing? |
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Definition
a start-up should conduct an exhaustive web search of similar product/service offerings to get a general sense of the overall market |
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What do successful startups do in terms of creating revenue streams? |
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Definition
Find a non-commoditized area of the market in which margins are not razor thin and there is opportunity to acquire a large number of customers at reasonable margins |
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List of strategies to drive more predictable revenue |
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Affinity Membership Subscription Marketplace Community Experience Upgrade Loss Leader Freemium |
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a business offers a loyalty or rewards program to customers in order to increase the frequency and amount of purchases Some examples include Dicks® Sporting Goods “Scorecard” program. The Delta® Sky miles program is designed to increase purchase loyalty. Affinity is a strategy that’s often deployed by businesses that sell commodity-type products and services |
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offer their products and services at a bigger discount than normal if the consumer or business purchases an annual membership. An example would be Costco®. |
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– Subscription is the strategy of a consumer paying a monthly fee to gain access to an online product or service “or” to receive a certain type of product on a monthly basis |
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Successful start-ups that have utilized brokerage as a revenue stream have successfully created a large marketplace of buyers and sellers. This results in a certain level of predictability in terms being able to sell a product/service or acquire a product/service in as efficient means possible - the more buyers and sellers aggregated, the less likely the buyers and sellers will move to a competing offering |
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Definition
companies that create successful advertising revenue-based businesses have aggregated a large number of loyal individuals. For example, Facebook® has not aggregated more than 1 Billion users with hundreds of millions that come back to the site every month. Advertisers pay billions to gain access to Facebook’s community of users - outside monetizing a community via advertising, building a commmunity can help a company drive sales for physical products |
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Building a loyal following around brand or product or way of doing business can help drive recurring revenue - very difficult |
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create recurring income of “one-time purchased” products by encouraging customers to consistently upgrade to a new product or service |
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involves a start-up offering a product or service at a price that is not profitable for the sake of offering another product/service at a greater profit or to attract new customers. A classic example is that of razor blades |
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a start-up gives a core product away for free to a large group of users and sells a premium version of the product to a smaller group of users |
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3 ways that you need to be able to read financial statements |
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Definition
- realize the vital role money plays in every business decision - determine if you are making a profit or losing money - calculate your current and future financial needs |
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For lending purposes, what will financial statements help you determine? |
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Definition
- if you can afford to pay a loan - the loan amount - the loan term (number of years) - which assets you should buy vs. which assets should be financed - what collateral is available to secure a loan |
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What does a balance sheet tell you? |
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Definition
This statement shows what you own (assets), what you owe (liabilities), and what’s left over (net value or equity in the business). The numbers change every time you receive money or give credit to a client as well as when you pay for or charge an expense. |
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What does a balance sheet show you? |
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Definition
- The net value of the business - How much of your loan debt is current, and how much is long-term - Percentages and ratios (which are extracted from the numbers) necessary to analyze your business (see Ratios section) - Compare two of the same time periods to see changes |
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What a balance sheet won't show you |
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Definition
- Income or expenses over a period of time. Remember, the Balance Sheet reflects one moment in time. - Market value of assets, although it will reflect purchase costs and depreciation according to industry standards - Quality of assets - Contingent Liabilities (money you agreed to repay by signing notes, or by being a comaker or guarantor of loans). - Operating Lease obligations (which allow you to buy the item at the end of the lease, for a set price, do not appear on the Balance Sheet). However, Capital Leases (with buyout price of $1) are shown on the Balance Sheet. |
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Money owners take, in the form of a loan, to be repaid |
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Records a sale when money is collected Records an expense when it is paid |
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- Sales are made on credit, and not immediately paid for. The amount customers owe is called Accounts Receivable - Buy items or incur expenses for the business, but pay later. The amount owed is called Accounts Payable. - Net worth does not always translate to cash, since money can be tied up in Accounts Receivable, expenses and inventory. To get a better idea of how much cash there is at the end of the month, learn about the Cash Flow Statement. - Lenders prefer the accrual method. |
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Other names for the income statement |
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Operating Statement • Earnings Statement • Profit & Loss Statement (P&L) |
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What the income statement shows you |
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If sales are going up or down Your gross profit — how much money is left for the rest of the business after deducting what it costs to produce or purchase the product All expenses for the time period it covers Increases and decreases in net income How much money is left to grow the business How much money is left for the owner(s) How much money is left to pay debt (principal only) |
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What the income statement won't show you |
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Definition
- If your overall financial condition is weak or strong (see the Balance Sheet). - What’s tied up in Accounts Receivable (money owed to you) and Accounts Payable (money you owe). - What you own (assets) and what you owe(liabilities) |
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What does a cash flow statement tell you? |
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Definition
The Cash Flow Statement shows money that comes into the business, money that goes out and money that is kept on hand to meet daily expenses and emergencies. |
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What the cash flow statement shows you |
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Definition
If the business has enough money to: - cover day-to-day activities - pay debts on time - maintain and grow the business without a negative cash flow The need for additional working capital (cash) when sales increase since increased sales mean increased purchases of material or labor. You should know how much you need. Show where the additional working capital will come from. The maximum loan payment the business can afford The breakdown of principal and interest on your loan payments. Note that the Income Statement only shows interest - not principal. Your weaknesses (an inability to keep and generate cash). For lending purposes, explain how you’ll handle these weaknesses |
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What the cash flow statement won't show you |
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Definition
How much you have in Accounts Receivable and Accounts Payable (shown in the Balance Sheet) Your balances in assets, liabilities and net worth Depreciation of equipment, which is a non-cash expense. This is dealt with in the Balance Sheet. |
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When should projecting financials take place? |
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Definition
The last step in your business plan preparation |
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Basic "rules of thumb" that every Angel or venture capital equity investor uses |
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Definition
1. Five-year financial projections are the norm - the average time to liquidity of an equity investment in a startup is now about five years. Thus most investors ask for 5-year projections 2. Aggressive revenue projections and growth rate. The first filter applied by most investors is to identify high-growth investable startups from ones that may be a good family business with organic growth 3. Gross margins greater than 50 percent - better climb to the 60 percent range by year five 4. Show red ink to match your funding request - Financial projections shown to investors should always be pre-funding projections, to illustrate what revenues and expenses you think are possible, and how much your current funding falls short 5. Build a path to 10x return |
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What percent of angel funding requests are satisfied? |
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What are some considerations one should make in regards to assumptions? |
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They should be based on some type of data - Anything in your statements is based on a number of assumptions - Understand how changes in the environment could change the data over time |
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What is one common area people leave off startup financials? |
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Areas to consider when deciding a revenue stream |
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Product/market fit Customer acquisition costs Pricing Number of customers required |
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