Startups often run at a deficit when designing and building the product. But businesses are designed to make money, and over time, as unit economics and customer acquisition costs improve, it's likely to become solvent.
At the very least, that's what your investors will be betting on. That means your business model slide should paint a picture showing where you are now and how the business can grow over time.
In theory, your “business model” could include all aspects of the business; the Business Model Canvas it's one way to explore it, and you could easily spend an hour just talking about the whole end-to-end business model. However, for the purposes of a funding argument, you will likely only need a few crucial elements:
- cogs, o Cost of Goods Sold, is the incremental cost for each unit delivered. For software, this is typically rounded to zero, but for hardware products or more service-oriented businesses, the unit cost can be substantial.
- ACC, o Cost of Customer Acquisition, is the cost of sales and marketing divided by the number of customers you have registered.
- LTV, o Customer Lifetime Value: How much is each customer worth, on average, once you sign them up?
- R&D cost is what it costs to develop the product. This is usually not included in the business model, but if the R&D cost is astronomical and the cost-to-profit line is never crossed, you might have a problem worth exploring.
- The Pricing Model It's not usually part of the business model itself (it's included in LTV), but if you're doing something unusual or creative with your pricing, it's worth including, either here or on your go-to-market slide.
Breaking down those numbers and presenting them the right way can greatly benefit the way you tell your startup story to investors.
Customer Acquisition Cost
Whatever your strategy for driving customers through the acquisition funnel, it probably costs money. Some companies advertise directly, some advertise through influencers, some go to trade shows. There are many ways to find new customers; some channels will be more expensive, and if you're lucky, some may even be free.
As a business, it's important to have a clear idea of what all of your acquisition channels are and how much they cost. I'll get to this below, but for a business model slide to make sense, you probably need to report the combined CAC.
A quick note here: "Our growth is organic" or "We haven't spent a dime on marketing" are not what investors want to hear. Yes, that's impressive, but those customer channels can't scale quickly, and if you suddenly find yourself with a marketing budget of $30,000 a month, you won't know where to put cash to grow faster.
Customer Lifetime Value (Lifetime Value)
If you make one-time sales, your lifetime value is the value of the sale. That goes for things like TVs: people buy a TV and don't need another one for at least another decade.
But even rare, one-time purchases can have surprisingly high LTV if you can. build a relationship. If you're a car dealer selling a new car, you could, for example, add service contracts, which would encourage customers to return.
For subscription and SaaS businesses, LTV is clear: how long can you retain customers and what is your average spend? Can you up-sell or cross-sell them, which would increase LTV?
The only time you know the true lifetime value of a customer is when you stop being a customer. For some companies, having a customer end their relationship with you is a positive thing; A good example of this would be a dating site, where success is measured by how many people don't come back because they've established themselves in happy relationships.
But having a client end a relationship with you is something you usually want to avoid. So, to calculate the lifetime value of a customer, you need to make a calculated assumption about how long each customer will stay and what their spending patterns are. At the beginning of a startup's journey, this will be little more than qualified guesswork. But as the business grows, you'll start to notice customer patterns and habits that could make it easier to create more sophisticated models that get a better approximation of LTV.
This may be obvious, but it's worth mentioning: if your LTV is lower than your CAC, you're in serious trouble. The same is true if the numbers more or less match; if you're not making a profit per customer, you'll eventually run out of cash because R&D and business operations will still incur costs.
Your CAC to LTV ratio is important to investors. If your customers spend $10 for every $1 you spend acquiring them, you should spend as much money as you can to acquire as many customers as you can.
Some companies choose not to report their LTV because they feel uncomfortable trying to model customer behavior for five or six years. Instead, they try to report the average spend for the first year and make sure the cost of customer acquisition is covered in that first year. The assumption is that if you manage to keep your customer past the first year, it's essentially pure profit.
Cost of Goods Sold (COGS)
COGS can vary wildly from company to company, depending on the market and industry. Delivering a pure software-as-a-service product can often be done very cheaply, and the COGS is rounded to zero. For other products that are more server-intensive (for example, if you have to run complex AI models that consume a lot of processing power, or if you have to transcode and send large volumes of video content), the cost of delivery may be significantly higher.
One way to present the business case is to show a snapshot of what is currently true in the business, as well as the numbers you are working towards. You can go into more detail on this in the operating plan section, but it's helpful to be able to talk about specific goals and how you plan to get there.
It's hard to give blanket advice on how to treat COGS as part of a release, but as a general rule of thumb, if your COGS is less than 10% of your revenue, you can probably ignore it as part of the release. If your contribution margins are relatively thin, you'll want to include COGS as part of the conversation because you'll likely prioritize reducing the cost of delivering your product or service.
Research and Development
Research and development often comes at a significant cost, but for the sake of this particular slide, please ignore it. A company's business model, in the context of a financing argument, is largely about cost and revenue per customer, and possibly unit economics.
R&D is often a different part of a startup story; it breaks down differently and most companies do not write off their R&D as part of their unit economics. Your research and development costs will show up in your operating plan, so don't be tempted to confuse the story at this point.
Pricing Model
Your pricing model is how you charge your customers. If you're selling hardware, it's often the cost of the widget, plus potentially a subscription model for any software that uses it. If you're building a SaaS business, you'll likely have a per-business or per-user pricing model, and possibly different tiers, depending on customer needs. Other companies may have registration fees, service contracts, down payments, setup costs, or any number of payment methods.
For many early-stage companies, the pricing model is fairly straightforward, and in fact it should be; its main contribution to the market is unlikely to be innovation in complicated pricing models. As the business grows and the customer base evolves, it would make sense to charge more for features that unlock greater value for certain customer segments.
For your launch pad, the rule of thumb is simple: include a pricing model if you really think you need an explanation.
all together
As part of various Pitch Deck and online documentation, there are a lot of great business model examples. Here are a few:
WayRay featured a very complicated 75 slide that went into a lot of detail in its $80 million Series C. The company's business model is complex enough to warrant further explanation. It would have been appropriate to count the amount of money flowing in for mass production, single-type payments, and license fees, but having an explanatory slide is helpful in this case.
For its Serie B At $15 million, Minut shows a much simpler pricing model: subscriptions with two tiers. That's it, no frills, no confusion. Faced with presenting more details, the company chose to include some of the important data of its business model in the KPI section:
Minut's KPIs section includes CAC and LTV.
Showing turnover, LTV and CAC in the KPIs helps to form a more complete picture of the Business Model that Minut operates with, which worked very well for them in this case.
Finally, one of the best presentations includes the following Business Models slides. Its origin, Orange:
The Orange Business Model slide is almost perfect. It shows all the important data that an investor needs to get a complete understanding of the company's Business Model dynamics: unit costs, CAC, LTV and CAC:LTV ratio.
