E-Commerce Business Plans / Business Models Tony Stanco Director, SEAS Council of Entrepreneurial Tech Transfer and Commercialization

What is a business model? First thing to do is create a business model that will likely result in producing more cash than it will consume – Easier part Actually building the model in the world to make it actually happen is the harder part Like any engineering project very doable with the right education and understanding

What is a business model? A business model is a representation of all the crucial activities of a business It describes what the business is about and how it will work It takes all the necessary inputs into account – Customers, suppliers, employees, existing company landscape (e.g, competitors and potential partners) And creates a net money making machine

What is a business model? It's all about the money Even if you are not a so-called capitalist or businessman it is all about the money It is simple: Your company-machine will sieze up (go out of business) if you don't have at least as much money on hand each month as it consumes each and every month

What is a business model? Only 2 ways to bring money in – Customers – Investors Customers are key – Only way to become sustainable i.e., long-term, more money in than out

What is a business model? Investors only put money in because expect lots and lots of customers at some point Investors put in short term money in expectation of customer sales later Cover cash shortfall before the customers come with enough of their money

What is a business model? The basic agreement with investors is this: you and the investor both have to agree that there will be lots of customers at some point (a big market) AND you can't do it without them, because you have a short term cash shortfall that you can't cover yourself or with the cash from customers at that point

What is a business model? Therefore, you can't execute your business model in the real world and it fails before you begin So, you bring in investors to give your business model a chance in the real world You only do this because you have to Investors know this and therefore take a big piece of the company

What is a business model? If you can build your model without outside money, you do it If you can't, you need to redo the model or just accept the investor bargain (assuming they are interested in your company) Most times, you re-work the model, so that it works without being so ambitous and therefore without needing outside money

Business Plan What is a Business Plan? – the document that describes, in qualative and quantative terms, the coherent model of how the firm will become sustainable, i.e., Make more money than it consumes

Reasons to Write One It puts all the pieces together in a way that makes sense Work out the logical inconsistencies in your model as best you can before you start Business Plans are reiterative – You do you best, then after you start your business, you re-work it every 3-6 months because you find out things that you didn't know before

Reasons to Write One Also, you use the business model document (aka the business plan) to explain your business model to outside parties – Potential partners – Potential key suppliers – Potential key executive employees – Potential investors (VC/angel investors)

Reasons to Write One The more logistically consistent your model is, the more likely outsiders will think you can do it – If they see inconsistencies or things that don't make sense to them, they will think it will not work and won't want to be involved The larger the opportunity (how much money it will make that can be shared with everyone), the more likely they will be interested in being part of the company

How long? Full Business Plan – Make it as short as possible, but covering all the major parts needed to show the model will work – Seldom more than 20 pages Have a 2-5page executive summary Have a 1-page teaser Have an “elevator pitch”

How long? You need to have the full business plan done for yourself (and any core partners) so you know your model holds together It may take many drafts to work out the kinks

How long? When you are ready to start selling the business model to others (employees, other partners, investors) – Start in reverse order – Start selling with Elevator Pitch – If interested, send the 1-pager – If still interested, send the exec summary and full business plan – At this point, if they like the exec summary, they may read the full plan and buy into it

What should it contain? Management Team Market Opportunity Product/Service Competition Distribution, Sales and Promotion Financials (the numbers)

Mangement Management makes company happen The most important part of the model Explain in a believable way why this group of people can successfully build the model Show relevant experience to the opportunity being pursued Skills and abilities, motivations and commitment

Market Who are the customers/buyers? – Crucial question if trying to create sustainable business (i.e. More money in than out) because customers are the only sustainable stream of money in – What are you offering customers that they will part with their hard earned money – Growing or shrinking market?

Product/Service What are your key product/service? What are the reasons customers will buy them What are the benefits your products/services offer? – “Pain-killer or vitamin” Relationship of selling price to your costs to make (i.e., gross margin; other costs besides direct costs) Delivery issues After-sales issues

Sales and Promotion How do you get product/services to customer Choice of sales channels – analyze based on cost, relationships with channel partners, and competitive pressure Promoting product/service – Cost of letting customers know about what you offer Motivating the salespeople

Competition Who is the competition? Why will they let you get the customers? What are their strengths and weaknesses? Why can't or won't they copy your business model if it is so good? How can you stop them? Competition is big reason companies fail, when there is a big market potential

Financials Putting it all together in dollar terms Business model is for a machine (with all its parts) that produces more money than it consumes The financials reduce the narrative model to a quantative model to show the model can, in fact, produce net cash over time

Financials Income Statement Balance Sheet Cash Flow Statement – Spreadsheet of monthly cash-in/cash-out for a few years – Need to show more money in than out – Show how will cover any cash shortfalls Need investors to make it work or to redo entire model?

Cash Flow Statement Cash flow is key Focuses consistency and coherency of plan by looking at cash-in/cash-out Shows a record of cash available at different points in time It shows not only how much you might need but also when you will need Usually monitored monthly

Making good projections Can’t avoid forecasting errors – no forecast is perfect – Adjust model with new information as you start building the company and get feedback Can avoid inconsistency errors, however – Incomplete or logical flaws easy to correct – talking to outside parties, usually gets these exposed before you start

E-Commerce Business Plans / Business Models Tony Stanco Director, SEAS Council of Entrepreneurial Tech Transfer and Commercialization