3mm Startup

8/3/2019 3mm Startup

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1Copyright Ezra Roizen

The $3mm Startup

The optimal model for new media innovation in the first few

years, of the second decade, of the twenty first century.

A talk on how to create a more predictable model for launching successful new media ventures.

The template proposed herein should yield innovative new products for consumers, consistent

returns for investors, and a greater number of wealth creating outcomes for entrepreneurs.




Introduction

• Many startups have the wrong financial plan

– Too much funding

– Too little funding

• For new media startups I believe you should plan for 3 years

to build out the basic team, technology and offering

– Focus on reaching a decision point around commercialization

– Work against a consistent business plan which requires $3mm of

financing – The $3mm Startup




The question of commercialization

• Premature commercialization is the deathtrap of early stage companies – Overheating based on limited early success

– Insufficient capital to develop a fully formed distribution channel

– Bad timing (most often too early)

• It takes focus away from – Building the key technology/platform

– Working with early users

– Building the core R&D team

• Removes the key founders from the innovation process, and puts them on theroad selling half baked technology, raising money, and building a giant payroll

Rapidly commercialize

(raise $)

Self propel

(no more $)

M&A

Day 1

Commercialization

decision pointThree Years




You can’t have everything, but you can have something

• Optimizing limited resources in a new media startupenvironment

– Identification of a large market opportunity

– Significant technological innovation

–

Framework for solving a substantial, difficult problem – Strong team which can be the nucleus of a long term strategy

$300k $300mm$3mm $30mm




Your design determines what you will build

• Motivations

– Return profile of investors

– Desires of founders

– Dictates of projections

– Demands of diverse customer bases

• Realities

– You make different decisions if you’re looking for >$10mm in revenue

in year 3 than you do if you’re looking for <$1mm

• Market timing is the biggest variable in new media ventures – Too early / too late (most often too early)




New media strategic dynamics

• As a thought experiment let’s consider Digg and Mint (roughly in the same ballpark

in terms of value circa 2009)

• Digg has a high volume, low(er) engagement relationship with consumers, Mint

has a low volume, high(er) engagement relationship with consumers• How does a new digital media innovation create a direct relationship with

consumers (and where does it fall on these scales)?

– Or how does the innovation impact the existing relationships?

• Enhancing the relationship

• Reaching new consumers

<$10 Per User

>$100 Per User

Passing Relationship Deep Relationship

<2mm Users

>20mm Users

Deep Relationship Passing Relationship

Note: Mint and Digg chosen as examples of

consumer relationship/scale dynamics – not as

$3mm startups per se.


http://slidepdf.com/reader/full/3mm-startup 7/157Copyright Ezra Roizen

The triad

• The challenge for a new media venture is optimizing between

consumption, monetization and technology

•

Every company has its own balance of these three dimensions

• Maximum value is created when all three are strong

Consumption

Monetization Technology



Business models

• We know the revenue models

– Advertising: $1 CPM

– Lead gen: $5 per lead

– Subscription: $5 per month

– Product: $1,000 per sale

• We know the expense model – Core team building to decision point on commercialization strategy

• Fit strategies into a known 3 year business plan



Year 1 Year 2 Year 3

Consumption / revenue

Visitors per month - 116,415 1,694,066

ARPU -$ 0.08$ 0.11$

Revenue - 39,618 775,343

Employees

CEO 180,000 180,000 180,000

Product 1 150,000 150,000 150,000

Product 2 125,000 150,000 150,000

Product 3 80,000 120,000 120,000

Product 4 60,000 120,000 120,000

Product 5 51,000 102,000 102,000

Business 1 - 102,000 102,000

Total salaries 646,000 924,000 924,000

Additional employee costs 96,900 141,488 141,488

Total employee costs 742,900 1,065,488 1,065,488

Hosting/etc 42,000 42,000 42,000

R&D/licenses 18,000 21,211 28,526

Rent/facilities 48,000 48,000 48,000

Other 60,000 70,702 95,087

Total other costs 168,000 181,913 213,613

Total expense 910,900 1,247,400 1,279,100

P&L

Profit/loss (910,900) (1,207,783) (503,757)

Cumulative (910,900) (2,118,683) (2,622,440)

Min (2,728,486)

Projection - annual

-

100,000

200,000

300,000

400,000

500,000

Q1 -

Y1

Q2 -

Y1

Q3 -

Y1

Q4 -

Y1

Q1 -

Y2

Q2 -

Y2

Q3 -

Y2

Q4 -

Y2

Q1 -

Y3

Q2 -

Y3

Q3 -

Y3

Q4 -

Y3

Revenue Expense

-

500,000

1,000,000

1,500,000

2,000,000

Q1 -

Y1

Q2 -

Y1

Q3 -

Y1

Q4 -

Y1

Q1 -

Y2

Q2 -

Y2

Q3 -

Y2

Q4 -

Y2

Q1 -

Y3

Q2 -

Y3

Q3 -

Y3

Q4 -

Y3

Visitors per month



Q1 - Y1 Q2 - Y1 Q3 - Y1 Q4 - Y1 Q1 - Y2 Q2 - Y2 Q3 - Y2 Q4 - Y2 Q1 - Y3 Q2 - Y3 Q3 - Y3 Q4 - Y3

Consumption / revenue

Visitors per month - - - - 15,625 30,518 59,605 116,415 227,374 444,089 867,362 1,694,066

ARPU -$ -$ -$ -$ 0.06$ 0.07$ 0.07$ 0.08$ 0.08$ 0.09$ 0.10$ 0.11$Revenue - - - - 2,354 4,951 10,413 21,901 46,064 96,886 203,781 428,612

Employees

CEO 45,000 45,000 45,000 45,000 45,000 45,000 45,000 45,000 45,000 45,000 45,000 45,000

Product 1 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500

Product 2 12,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500

Product 3 - 20,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000

Product 4 - - 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000

Product 5 - - 25,500 25,500 25,500 25,500 25,500 25,500 25,500 25,500 25,500 25,500

Business 1 - - - - 25,500 25,500 25,500 25,500 25,500 25,500 25,500 25,500

Total salaries 95,000 140,000 205,500 205,500 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000

Additional employee costs 14,250 21,000 30,825 30,825 37,538 34,650 34,650 34,650 37,538 34,650 34,650 34,650

Total employee costs 109,250 161,000 236,325 236,325 268,538 265,650 265,650 265,650 268,538 265,650 265,650 265,650

Hosting/etc 10,500 10,500 10,500 10,500 10,500 10,500 10,500 10,500 10,500 10,500 10,500 10,500

R&D/licenses 4,500 4,500 4,500 4,500 4,729 5,092 5,484 5,906 6,360 6,849 7,375 7,942

Rent/facilities 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000

Other 15,000 15,000 15,000 15,000 15,763 16,975 18,280 19,685 21,199 22,829 24,584 26,475

Total other costs 42,000 42,000 42,000 42,000 42,991 44,567 46,264 48,091 50,059 52,178 54,460 56,917

Total expense 151,250 203,000 278,325 278,325 311,529 310,217 311,914 313,741 318,596 317,828 320,110 322,567

P&L

Profit/loss (151,250) (203,000) (278,325) (278,325) (309,175) (305,266) (301,501) (291,840) (272,532) (220,942) (116,329) 106,045

Cumulative (151,250) (354,250) (632,575) (910,900) (1,220,075) (1,525,342) (1,826,843) (2,118,683) (2,391,215) (2,612,157) (2,728,486) (2,622,440)

Min (2,728,486)

Projection - quarterly



Key points

• We’re not looking for a plan with >$10mm in revenue in year 3 –and we’re not going to build for that plan – Raise your hand if you’re looking for a business plan with less than $1mm

in revenue in 3 years

• Market salaries (or at least decent) – Access a more experienced talent pool

• Commercialization – No revenue in Year 1

– Very little revenue, but real consumption on Year 2

– Under a million dollars in revenue in Year 3, but profitable and growingnicely

• One business person (in addition to CEO)

• Small, tight team



Milestones

Quarter Milestone

Q1 Y1 Team & financingQ2 Y1 Architecture & prototype

Q3 Y1 Alpha product

Q4 Y1 Beta product

Q1 Y2 Limited release

Q2 Y2 Refinement

Q3 Y2 Conversion optimization

Q4 Y2 Full release

Q1 Y3 Consumer observation

Q2 Y3 Refinement

Q3 Y3 Roadmap definition

Q4 Y3 Decision point

• What to do…

– If you’re ahead of plan?

– If it’s taking longer than anticipated? – If you come up with a better idea in the

middle?

– If you’re just wrong?

• Have a 360 degree view of what

happens if you start missingdeadlines

• Have everybody work from the same

scorecard

Start developing relationships with

strategics here.



Culture

• These companies share the psychological DNA of their founder(s)

•

There’s discipline in capital / outside perspective

• Leave the founders in charge

• Build substantial peer pressure to perform

• Develop a customer orientation – ease of use is worth millions of dollars

• Bad decisions are expensive

• Set expectations –

What it means to work at a startup – We will fire people, without severance, and sometimes without warning (this close to the edge

things are tough)

– The rewards are great

– There are no entitlements



Goods and bads

• (often) Goods

– Patents

– Media exposure/public points of validation (be seen as a leader in

your category)

– Thoughtful use of licensed technology and open source (be ready to

explain these things)

• (often) Bads

– Perfunctory CEOs

– Putting founder on a capital search

– Substantial debt (until you can make the payments on your own)

• Serious impact on end game

– Off shoring R&D

• The team is a core asset



Cheat sheet

• Identify a great market

• Build a framework for addressing a difficult problem

• Develop a tight team

• Create real technology

• Track to a consistent set of milestones

• Infuse patience into the system

3mm Startup

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