1. Business Validation Mark Szczerba Roll Global

2. Introduction Brief introduction Business Models & Definitions Capital Requirements & Reducing Risk Variety of Business Models Specific examples Exercises

3. Roll Global Roll Global is a diverse $3B company focused on consumer packaged goods and agricultural products Roll has a number of well known brands: Roll is well known for marketing and branding agricultural products

4. What makes a good business? How much revenue can you generate? What are the costs? What are the long term goals? Can the management team grow the business? Can the team grow with the business? Who is the customer? How many customers? Value proposition to the customer? Competition? Will it work? Are materials available? Is it scalable? Can it be tested cost effectively? TechnologyMarket Business Model Team

5. Business Model: How will you make money? What is your strategy? – What is your aspiration? Is it clear? – Where will you compete? What is the market size? – How will you ensure success? What is your “value proposition”? – Do you have the capabilities? Do you have the right team?

6. Business Model: How will you make money? – Who are the customers for your product/service? – Why do your customers want your product/service? – Are they willing to pay for your product/service? Solving critical problem? Filling a gap? Providing experience? Can manage better? Cost reduction?Efficiency gain? VALUE PROPOSITION

7. Business Model: How will you spend money? How much will it cost to generate your revenues? COGS: Cost of goods sold – direct costs associated with product sold OPEX: Operating expenditure – cost to run a business CAPEX: Capital expenditure – cost to purchase or add value to an asset How much revenue can you make and how quickly? Cost of Capital: cost to finance the business (cost of equity or debt); return required before generating value

8. Definitions: Gross Margin

9. Definitions: Expenses Fixed costs – Don’t change with production levels in the short term – E.g. Overhead, Assets, Land Variable costs – Change with business activity – E.g. Direct labor, Packaging material

10. Definitions: Profitability Cash Burn rate – How much cash you lose over a period of time (E.g. per month) EBITDA – Earnings Before Interest, Tax, Depreciation and Amortization – Basically net income + interest, taxes, depreciation and amortization – Useful for valuation comparisons Net Income – Revenues minus all expenses Amounts in US $ thousands Mar 2013Mar 2012 Revenue 23,498 26,679 Cost of Goods Sold 14,474 16,134 Gross Profit 9,024 10,545 Gross Profit Margin38.4%39.5% SG&A Expense 6,029 7,066 Depreciation & Amortization 1,502 1,796 Operating Income 1,211 1,373 Operating Margin 0 0 Non operating Income 50 (308) Non operating Expenses 4 20 Income Before Taxes 1,265 1,084 Income Taxes 475 365 Net Income After Taxes (before accounting adjustments for affiliated companies) 790 719 Accounting adjustments for affiliated companies (214) (187) Total Net Income 576 532 Example Income Statement

11. Definitions: Pro-Forma Statements Pro-Forma Statements – “Best Guess” predictions on cash flow “back of the envelope” – Designed to show the impact of a certain choices

12. Definitions: J-Curve Capital required to reach “Cash Flow Break Even”

13. Capital Requirements Business Value Time Proof of concept Beta Customer Commercial Launch Cash Flow Break Even (Increasing value and reducing risk along the way)

14. Revenue Models Unit Sales Sell a product or service to customers (wholesale, retail, or direct). Advertising Fees Sell opportunities to distribute messages (viewers, readers, listeners, or others) Franchise Fees Sell and support a replicable business for others to invest in, grow, and manage Utility Fees Sell goods and services on a per-use basis Subscription Fees Charge a fixed price for providing access to your goods or services Transaction Fees Charge a fee for referring, enabling or executing a transaction License Fees Sell the rights (exclusive or non- exclusive) to use patent- or copyright- protected IP

15. Final thoughts… Have a plan B –And C and D Seek market validation quickly –Get to market fast and with less capital –Don’t do it all right off the bat What is your unfair advantage? –Why can you do this, can you defend it?

16. Now it’s your turn……. Cost/unit Price/unit # units sold/year Revenue/yr Annual Profit/yr

17. How much will it cost you? –How much funding do you need? –Look closely at your expenses Create an Excel file Cut and paste the following expenses... Delete the rows you don’t need (that aren’t significant) Add time periods across the top Start making assumptions...

18. Next Steps: Validating Your Business Using the exercises in the coursebook, identify the critical uncertainties around your business and business model. 1. Rank and order the uncertainties. 2. Identify which should be resolved first (in the next 9-12 months). These are your business milestones. 3. List the resources (people, equipment, $) you need to reach those milestones.