1. 1 IDEAS Contest: Workshop: Business Plan Why? How? When? November 22nd to 24th 2010

2. 2 Agenda From idea to product: give the idea shape Technological questions Customer demand and willingness to pay Substitutes and competing products Market analysis: define your playing field customers Competitors suppliers The business plan: What is your company about: Define the business model Building up a business plan Business plan for non-profit organizations Case Study: Biogas from organic waste 3. 3 New technologies are no new products What is the new technology good for? Discuss user cases in comparison with any other technology doing the same. How are people supposed to use a new technology? Make sure users can do so easily and best within there traditional processes. Is your product or the process to offer your service standardized? Customers need to identify a reliable promise to always perform in a certain way. Did you optimize the component list with regard to product reliability and sourcing power? Product production is scalable with no o little variation or tolerance from a set norm. Ideatoproduct 4. 4 Demand needs to be transformed into willingness to pay or a price Only real coins sound in your pocket (Immanuel Kant) Would and could are no sound starting point for good business planning. Make easy calculations: Today people spend 100 U$ on electricity. Technology Beta has proven to save 10 U$ on annual electricity spending Beta costs 30 U$ Customers can recover their investment in Beta within three years. If customers do have the liquidity (can afford Beta) customers will buy Beta. IdeatoProduct 5. 5 Competitors and substitutes might jeopardize new products market entrance Are there similar products in the market that solve the problem in a similar way. Are there different products in the market solving the same problem. How expensive are these (capex). How expensive are they to operate (opex). Compare so called total costs of purchasing (TCP). IdeatoProduct 6. 6 Customer analysis as first step to quantify business planning Who are the buyers and how many are there? May you differentiate different groups of buyers? Do different customer groups represent a variance in demand regarding different product characteristics or a different willingness to pay (a different price)? Are there buyers who can be seen as early adopters of the technology or service? How can customers be convinced to buy your product? If there are few buyers or even only one buyer how strong is he with regard to price negotiations. MarketAnalysis 7. 7 Competitors will try to get their share of the cake How many competitors (same products or substitutes) are there? Will there potentially new competitors if your product is successful (barriers to entry) Do your competitors have any advantage? (Can you or should you copy this?) How big can your share of the cake be? MarketAnalysis 8. 8 The power of suppliers defines your margin How many suppliers are there for your input? Does the negotiation power change when growing (economics of scale)? Can you substitute certain components by others? Can you produce components yourself or build up additional suppliers? MarketAnalysis 9. 9 The business model describes what your company is supposed to do and how What are you paid for by whom? (Main sources of income) What drives your business, what decides whether it is at all successful, strongly growing, shrinking? How can you influence or control these? What are your companies strength & weaknesses, what are the opportunities & threats you face in the market (SWOT analysis) What does this mean for your investment plan? What are your single most important costs components and how do these develop over time. Is there an alternative way of sourcing and are there any potential substitutes. BusinessPlan 10. 10 The business plan quantifies objectives, gives guidance and measures performance Profit & loss account (p&l): an overview of revenue and costs in a defined period of time. Revenue is not the same as income, costs are not the same as spending. Important key performance indicators are deducted from the p&l: Gross Margin, EBITDA, EBT, Revenue Margin, Profit or Earnings Cash flow statement: profit plus all costs that are no spending (like depreciation) minus revenues that are no income. Single most important key performance indicator is the free cash flow from operations (no debt considered) Balance sheet: a representation of the company at a certain point of time showing origin (liabilities) and employment (assets) of capital. BusinessPlan 11. 11 Building up a Business Plan (1): the special role of marketing Marketing spending are entering the profit & loss account as expenses The volume of these expenses should have a directly impact on the revenue line. Marketing expenditures that doe not have an impact are senseless. A good criteria to judge on the marketing budget is not the additional pieces sold or revenue (which is not the same !) but the additional profit (or if you are non profit: the additional efficiency, e.g. people served within same budget). There are many ways to live with a reduced marketing budget (articles instead of announcements, direct mailings, take advantage of existing products / campaigns). BusinessPlan 12. 12 Building up a Business Plan (2): financing Growth goes along with special financing demand. Revenues do not fully cover working capital or investment needs. Sources of financing might be Income (operative cash flow) Shareholder loans Suppliers loans (prolonged payment periods) Debt (long or short term) Cash flow statement shows financing needs and potential originating of capital. In the first years the cash flow statement is the single most important economic analysis BusinessPlan 13. 13 Business planing for Non-Profit organizations A company that is not thought to make profits is still a company which to be sustainable follows the same fundamental rules like any other company Customer definition and revenue streams might change but there is still somebody to be convinced to pay for a service or product your company is offering. BusinessPlan 14. 14 Biogas from organic waste (1): Idea and Product definition Biogas can be produced from organic waste like residuals from food markets, supermarkets, restaurants, residential housing. The biogas technology (anaerobic digestion) is relatively easy and at low cost to implement. Still German technology is too expensive under market conditions. No Latin America providers for industrial plants available (if not for CDM plants). Strong concerns about new technology and easy alternative available (composting). Engineering services are not well paid for and lack scalability. Many companies or municipalities cannot afford high one time investments. There is private and public money available for these project but knowing how to get it requires expertise The Product: BOO (Build-own-operate) approach for organic residuals solving the customers waste problem. CaseStudy 15. 15 Biogas from organic waste (2): market analysis Currently 10 known municipal or private tenders (average 1000 t FM / d), 50 projects in process of feasibility study, new legislation expected for 2014 with obligation for all landfills to handle organic waste. Gate fees between 2 U$ / t FM (Peru) to 5 U$ / t FM (Brazil) show head room compared to European level. Energy market strongly subsidized in Argentina (0,05 U$ / m3 gas) and fully liberalized in Chile (0,5 U$ / m3 gas) with other countries in between; all energy prices (electricity, gas, propane gas, diesel) rising. Waste Treatment companies like Veolia do not consider treatment as core competency but build up own sites on necessity if no other operator is available. Mainly local competitors with no specific expertise in financing and no operations track record. Composting companies as main competitors struggle with high transportation costs for processed compost. Waste selection and waste processing technology imported from Europe with few import licensees. Own proprietary selection and processing unit gives strong USP, allows low cost strategy and rises market entry barriers. CaseStudy 16. 16 Biogas from organic waste (3): business model NewCo is a BOO provider for anaerobic waste treatment plants. Revenue is generated by Gate fees Energy sales Sales of organic fertilizer Clients are Municipalities Food processing industry (slaughter houses, breweries etc.) NewCo is successful if It provides financing at competitive rates It develops proprietary technology and gains price leadership It develops expertise in energy trading and realizes synergizes between plants Main risks are Expensive treatment technology for biogas residuals / new legislation with higher requirements for treatment technology Stuffed regional markets for organic fertilizer CaseStudy 17. 17 Biogas from organic waste (4): from profit & loss account to cash flow CaseStudy in U$ 2011 2012 2013 2014 2015 revenue 0 3.004.000 6.200.000 15.896.000 32.643.400 number of plants 2 4 10 20 electricity 960.000 2.112.000 5.676.000 12.203.400 compost 1.022.000 2.044.000 5.110.000 10.220.000 gate fee 1.022.000 2.044.000 5.110.000 10.220.000 cost -1.650.000 -2.590.700 -4.581.400 -10.303.500 -19.807.000 personal -150.000 -150.000 -200.000 -200.000 -200.000 operations -1.890.700 -3.781.400 -9.453.500 -18.907.000 R&D -1.000.000 0 0 0 0 other -500.000 -550.000 -600.000 -650.000 -700.000 EBITDA -1.650.000 413.300 1.618.600 5.592.500 12.836.400 depreciation -700.000 -2.100.000 -5.600.000 -12.600.000 EBIT -1.650.000 -286.700 -481.400 -7.500 236.400 interest 0 -280.000 -840.000 -2.240.000 -5.040.000 PROFIT -1.650.000 -566.700 -1.321.400 -2.247.500 -4.803.600 _+ depreciation 0 700.000 2.100.000 5.600.000 12.600.000 liabilities / receivables 150.200 310.000 794.800 1.632.170 free operative cash flow -1.650.000 283.500 1.088.600 4.147.300 9.428.570 18. 18 Biogas from organic waste (5): balance sheet CaseStudy assets liabilities plants 7.000.000 nominal capital 10.000 earnings / losses -2.216.700 patents or others 1.000.000 equity -2.206.700 cash account 500.000 debt -10.706.700 8.500.000 -8.500.000 19. 19 Biogas from organic waste (6): conclusions High investment costs for proprietary technology requires solid financing Financing of plants either requires equity or a partner, interest eats up operative margin Financing is key for the business planning Markets defined by energy prices and possibility to commercialize fertilizer Chile, Brazil or Peru preferred markets but strong local differences Average electricity price alone do not pay back for the plant Prices for compost and gate fee are volatile High risks at current state but good outlook with increasing electricity prices and increasing prices for gate fee CaseStudy 20. 20 Three rules Wrapup Define your product (and be aware that it adapts to a changing market environment) Analyse your market (not only once but frequently) Build a complete and realistic business plan from the beginning and then revise and update it regularly (e.g. quarterly) 21. 21 Smart Utilities Solutions GmbH Dr. Karl Reinhard Kolmsee, Managing Director Traubinger Str. 18, 82327 Tutzing, Germany karl.kolmsee@smart-utilities.de