Technology Ventures: From Idea to EnterpriseChapter 16: Summary Summary How will a new venture generate revenue and achieve positive cash flow? The revenue and profit engines show how the firm will create powerful value for its customers and customers will enable the new firm to profit. Managing revenue growth is important. Also a firm needs a plan to harvest the benefits of its growing venture. Profit is the product of labor plus capital multiplied by management. You can hire the first two. The last must be inspired. Fost Profit and Harvest 16 *sales model – describing how to generate revenues from customers, then, determine cost model, and how to generate profits from its revenues.

Chapter 16: Table 16.1 Revenue Model: describes how the firm will generate revenues. Five Revenue Models Sales Product Model Subscription (Member) Fee Model Advertising Revenue Model Transaction Fee Revenue Model Affiliate Revenue Model Profit and Harvest 16 Technology Ventures: From Idea to Enterprise A firm’s revenues are its sales after deducting all returns, rebates, and discounts. Models for generating revenues. e.g.Visa, ebay e.g. “Redirecting” to amazon

Technology Ventures: From Idea to OpportunityChapter 16 Cost Model: describes the factors that affect total firm costs Four types of cost drivers Fixed Variable Semivariable Nonrecurring Profit and Harvest 16 Technology Ventures: From Idea to Enterprise

Chapter 16: Figure 16.1 Profit Model: the mechanism a firm uses to reap profits from its revenues. The Value of A Product and Profit Profit and Harvest 16 Technology Ventures: From Idea to Enterprise Profit is the net return after subtracting the costs from the revenues. Must examine all activities on the value chain.

Chapter 16: Figure 16.2 The Revenue and Profit* Flows from the Firm's Operations Profit and Harvest 16 Technology Ventures: From Idea to Enterprise * The revenue and profit engine. The best conditions for profit occur when the perceived valued value of a product to a customer is high and the cost to produce the product is low.

The early losses of a successful startup turn profitable after a time T. Profit and Harvest 16

Nine Types of Profit Models Profit and Harvest 16

Where: PM = profit-to-sales ratio L = debt-to-equity ratio T = the ratio of total assets to sales. If a start-up firm has no debt (L=0), we have Chapter 16 Sustainable Growth Profit and Harvest 16 Technology Ventures: From Idea to Enterprise

Chapter 16: Table 16.5 Incentives for Growth Attracting Capital for Market Expansion Attracting Capable Team Members Economies of Scale Development of a Reputation and Brand Growing Profitability and Financial Rewards for Owners and Employees Profit and Harvest 16 Technology Ventures: From Idea to Enterprise

Chapter 16: Figure 16.6 CausesFactorsDriversMarket Value Causes and Drivers of Market Value Note: Operating Leverage = Profit and Harvest 16 Technology Ventures: From Idea to Enterprise

Chapter 16: Harvest Plan A harvest plan defines how and when the owners and investors will realize or attain an actual cash return on their investment. Profit and Harvest 16 Technology Ventures: From Idea to Enterprise

Five Methods of Harvesting The Wealth Created by a New Firm The Sale of the Firm to An Acquiring Firm The Sale of the Firm's Stock on A Public Market through An Initial Public Offering Issuance of Cash Dividends to the Owners and Investors The Sale of the Firm to the Managers and Employees Transfer the Firm through Gifts and Sales to Family Successors Chapter 16: Table 16.7 Profit and Harvest 16 Technology Ventures: From Idea to Enterprise

Chapter 16: Sunk Cost Sunk Cost is a cost that has already been incurred and cannot be affected by any present or future decisions. Profit and Harvest 16 Technology Ventures: From Idea to Enterprise Knowing when to stop or terminate… e.g. Funds and time invested.

Chapter 16: Figure 16.7 – decision tree for sunk costs A Decision Tree for the Sunk Cost Dilemma Invest More Time & Money Continue Decision Total Investment in a New Venture which is failing to achieve positive cash flow Terminate the Venture Learn from the Experience and then consider new opportunities Profit and Harvest 16 Technology Ventures: From Idea to Enterprise

A new firm with a powerful revenue and profit engine and a reputation for ethical dealings can achieve strong but manageable growth leading to a favorable harvest of the wealth for the owners. Chapter 16: Principle Profit and Harvest 16 Technology Ventures: From Idea to Enterprise

Chapter 16: Exercise A new fuel cell has been designed for use in hybrid vehicles. Select a revenue and profit model and determine an achievable sales growth rate for no debt and a low profit margin PM=0.15 when T=1 Profit and Harvest 16 Technology Ventures: From Idea to Enterprise

Chapter 16: Venture Challenge VENTURE CHALLENGE 1) Describe the revenue model of your venture. 2)Describe the profit model of your venture 3)Using table 16.7, discuss your harvest plan. Profit and Harvest 16 Technology Ventures: From Idea to Enterprise

Chapter 16: DVD Video DVD Video “Reducing Company Costs: PayPal and SpaceX” Elon Musk (SpaceX) Profit and Harvest 16 Technology Ventures: From Idea to Enterprise