Subject: Notes from a talk on what is a business model.
From: Bob Weiner <weiner@altrasoft.com>
Date: Wed, 2 Sep 1998 18:00:56 -0700

A number of people wrote in response to one of my recent messages asking
for these notes, so here they are.  They are just notes, not a full
transcription.  Use for your own internal purposes and send these to your
friends but don't post it all over the net.  Cheers,  Bob


    Notes from Darlene Mann Talk at the Chinese SW Entrepreneurs Meeting
			     on Business Models

				  12/10/97

				 Bob Weiner
			       Altrasoft Inc.
			      www.altrasoft.com

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* About Onset Ventures: founded 14 years ago as a deal feeder fund for KP,
  Mayflower and others.  Now a full fund which just closed a fresh $100m
  round of venture dollars.  Generally limited partner investors agree to
  let the VCs manage their money for 10-12 years.  Onset focuses exclusively
  on business-to-business ventures, not consumer ventures.  Like other VCs
  they want to see a business that has at least a possible vision of
  $100 m in revenues yearly within 5 to 12 years (she said the time-frame
  is less important than a continual growth curve).


* What is a Business Model?  A system that enables a company to grow and make
  money on a sustainable basis.

* Why make one?

  1. Common language for talking about the business
  2. Enables analogies, comparisons to other firms
  3. Acts as a roadmap
  4. Focuses on sustainable growth


* Two major business success factors they have seen:

  1. Experienced Mentor - done it before

  2. Company NOT executing against original business plan - have to grow and
     change but learn from the business plan


* Four parts to a Business Model:

  1. Markets and Customers
  2. Products and Services
  3. Channels of Distribution and Distribution Strategy
  4. Financial Engine


* Business Model: Markets and Customers

  1. Profile and Segmentation  

  2. Key Pain Points - Are you a Vitamin (bad) or a Pain Killer (good)?

  3. Size of the Problem in $$

  4. Immediacy of the Problem

  5. Location of the $$ - who owns the dollars, put buyers names down to make
     it concrete

  6. Competition - is the market crowded

  7. Sustainability through Market Downturns


* Business Model: Products and Services

  1. Whole Product Definition - All parts used to deliver value to the customer

  2. Cost to company to develop the whole product and delivery cost

  3. Cost to the customer - What do they have to invest and how hard is it?

  4. Value and Pricing - How do they qualify and quantify the value?  Then
     set price as a fraction of this.

  5. Add-on Products - What do future products look like?  Much easier to
     leverage existing customer relationships and to sell related products.


* Business Model: Channels of Distribution and Distribution Strategy

  1. What is the marketing/distribution strategy?

       A.  Average direct sale size, for example, has to be $75k to support a
           regular high-tech sales organization.

       B.  With distributors, they take 40% and then add on advertising costs
           that you pay to have them promote your line.

       C.  The web is good if the company is well-known and the customer is
           reordering or if narrow, specialized goods like books are sold.

  2. What does the sales cycle look like?  In enterprise software, it is
     frequently nine to twelve months.

  3. What does the implementation cycle look like (for the customer to get
     productive with the product)?

  4. Strategic partners for distribution - use their existing relationships


* Business Model: Financial Engine - How will you make money to feed back in?

  1. Pricing and Revenue - How many units over what period of time at what
     discount rate?

  2. Sales and Distribution Plan - How many sales reps, when do they start
    (ramp up), how many will succeed (e.g. 3 out of 4)?

  3. Cost/Overhead Structure


* Startup Advice

  1. Keep burn rates low

  2. Focus on developing the business (not the product)

  3. Subject yourself to market feedback

  4. "Prove" a viable business model

  5. Having 3 customers who say they will buy is much better than reams of
     analyst market data when it comes to convincing VCs.


* Valuation

  Seed stage - most business model issues are still hypothetical

  Seed Money - Onset wants to see 2-3x return (step up) from the post-seed
  money valuation to the pre-2nd round valuation.  So if the seed pre-money
  valuation is $3m and $1m is put in ($4m post-money), then they expect
  an $8-12m valuation for the 2nd round.


* Venture Firms Ranked on 2 Factors

  1. Cash return from cash put in

  2. Internal Rate of Return - time value of dollars


* For quite awhile now, the most likely exit strategy for software companies
  has been to become acquired.


* www.onset.com - has a whitepaper she wrote on what she wishes she knew
  about VCs when she was an entrepreneur

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