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.

Copyright Ezra Roizen

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

Copyright Ezra Roizen

The question of commercialization

Rapidly commercialize (raise $) Day 1 Three Years
Commercialization decision point

Self propel (no more $) M&A

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 the road selling half baked technology, raising money, and building a giant payroll
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Copyright Ezra Roizen

You cant have everything, but you can have something

$300k

$3mm

$30mm

$300mm

Optimizing limited resources in a new media startup environment

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

Copyright Ezra Roizen

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 youre looking for >$10mm in revenue in year 3 than you do if youre looking for <$1mm

Market timing is the biggest variable in new media ventures

Too early / too late (most often too early)

Copyright Ezra Roizen

New media strategic dynamics

>$100 Per User >20mm Users

<$10 Per User Passing Relationship Deep Relationship

<2mm Users Deep Relationship Passing Relationship

As a thought experiment lets 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
Note: Mint and Digg chosen as examples of consumer relationship/scale dynamics not as $3mm startups per se. 6

Copyright Ezra Roizen

The triad
Consumption

Monetization

Technology

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

Copyright Ezra Roizen

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

Copyright Ezra Roizen

Projection - annual
Year 1 Consumption / revenue Visitors per month ARPU Revenue Employees CEO Product 1 Product 2 Product 3 Product 4 Product 5 Business 1 Total salaries Additional employee costs Total employee costs Hosting/etc R&D/licenses Rent/facilities Other Total other costs Total expense P&L Profit/loss Cumulative Min
Copyright Ezra Roizen

Year 2 116,415 0.08 39,618

Year 3 1,694,066 0.11 775,343

500,000 400,000 300,000

180,000 150,000 125,000 80,000 60,000 51,000 646,000 96,900 742,900 42,000 18,000 48,000 60,000 168,000 910,900

180,000 150,000 150,000 120,000 120,000 102,000 102,000 924,000 141,488 1,065,488 42,000 21,211 48,000 70,702 181,913 1,247,400

180,000 150,000 150,000 120,000 120,000 102,000 102,000 924,000 141,488 1,065,488 42,000 28,526 48,000 95,087 213,613 1,279,100

200,000 100,000 Q1 - Q2 - Q3 - Q4 - Q1 - Q2 - Q3 - Q4 - Q1 - Q2 - Q3 - Q4 Y1 Y1 Y1 Y1 Y2 Y2 Y2 Y2 Y3 Y3 Y3 Y3 Revenue Expense

2,000,000 1,500,000 1,000,000 500,000 Q1 - Q2 - Q3 - Q4 - Q1 - Q2 - Q3 - Q4 - Q1 - Q2 - Q3 - Q4 Y1 Y1 Y1 Y1 Y2 Y2 Y2 Y2 Y3 Y3 Y3 Y3 Visitors per month

(910,900) (910,900) (2,728,486)

(1,207,783) (2,118,683)

(503,757) (2,622,440)

Projection - quarterly
Q1 - Y1 Consumption / revenue Visitors per month ARPU Revenue Employees CEO Product 1 Product 2 Product 3 Product 4 Product 5 Business 1 Total salaries Additional employee costs Total employee costs Hosting/etc R&D/licenses Rent/facilities Other Total other costs Total expense P&L Profit/loss Cumulative Min Q2 - Y1 Q3 - Y1 Q4 - Y1 Q1 - Y2 15,625 0.06 $ 2,354 Q2 - Y2 30,518 0.07 $ 4,951 Q3 - Y2 Q4 - Y2 Q1 - Y3 Q2 - Y3 Q3 - Y3 Q4 - Y3 59,605 116,415 227,374 444,089 867,362 1,694,066 0.07 $ 0.08 $ 0.08 $ 0.09 $ 0.10 $ 0.11 10,413 21,901 46,064 96,886 203,781 428,612

45,000 37,500 12,500 95,000 14,250 109,250 10,500 4,500 12,000 15,000 42,000 151,250

45,000 37,500 37,500 20,000 140,000 21,000 161,000 10,500 4,500 12,000 15,000 42,000 203,000

45,000 37,500 37,500 30,000 30,000 25,500 205,500 30,825 236,325 10,500 4,500 12,000 15,000 42,000 278,325

45,000 37,500 37,500 30,000 30,000 25,500 205,500 30,825 236,325 10,500 4,500 12,000 15,000 42,000 278,325

45,000 37,500 37,500 30,000 30,000 25,500 25,500 231,000 37,538 268,538 10,500 4,729 12,000 15,763 42,991 311,529

45,000 37,500 37,500 30,000 30,000 25,500 25,500 231,000 34,650 265,650 10,500 5,092 12,000 16,975 44,567 310,217

45,000 37,500 37,500 30,000 30,000 25,500 25,500 231,000 34,650 265,650 10,500 5,484 12,000 18,280 46,264 311,914

45,000 37,500 37,500 30,000 30,000 25,500 25,500 231,000 34,650 265,650 10,500 5,906 12,000 19,685 48,091 313,741

45,000 37,500 37,500 30,000 30,000 25,500 25,500 231,000 37,538 268,538 10,500 6,360 12,000 21,199 50,059 318,596

45,000 37,500 37,500 30,000 30,000 25,500 25,500 231,000 34,650 265,650 10,500 6,849 12,000 22,829 52,178 317,828

45,000 37,500 37,500 30,000 30,000 25,500 25,500 231,000 34,650 265,650 10,500 7,375 12,000 24,584 54,460 320,110

45,000 37,500 37,500 30,000 30,000 25,500 25,500 231,000 34,650 265,650 10,500 7,942 12,000 26,475 56,917 322,567

(151,250) (151,250) (2,728,486)

(203,000) (354,250)

(278,325) (632,575)

(278,325) (309,175) (305,266) (301,501) (291,840) (272,532) (220,942) (116,329) 106,045 (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)

Copyright Ezra Roizen

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Key points
Were not looking for a plan with >$10mm in revenue in year 3 and were not going to build for that plan
Raise your hand if youre looking for a business plan with less than $1mm in revenue in 3 years

Market salaries (or at least decent) Commercialization

Access a more experienced talent pool

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 growing nicely

One business person (in addition to CEO) Small, tight team

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Milestones
Quarter Q1 Y1 Q2 Y1 Q3 Y1 Q4 Y1 Q1 Y2 Q2 Y2 Q3 Y2 Q4 Y2 Q1 Y3 Q2 Y3 Q3 Y3 Q4 Y3 Milestone Team & financing Architecture & prototype Alpha product Beta product Limited release Refinement Conversion optimization Full release Consumer observation Refinement Roadmap definition Decision point Have everybody work from the same scorecard
Start developing relationships with strategics here.

What to do
If youre ahead of plan? If its taking longer than anticipated? If you come up with a better idea in the middle? If youre just wrong?

Have a 360 degree view of what happens if you start missing deadlines

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

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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

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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

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