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Prussel & Co http://prussel.com Due Diligence. Growth. Transformation. Tue, 25 Aug 2020 10:21:11 +0000 en-US hourly 1 https://wordpress.org/?v=5.8 Guide to Conducting a Feasibility Study http://prussel.com/guide-conducting-feasibility-study/ Thu, 04 Jan 2018 13:45:25 +0000 http://prussel.com/?p=14106 So you’re thinking of a launching a new venture? Entering a new market? Launching a new product? It’s estimated that only one in fifty business ideas are actually commercially viable and so you’ll want to understand the viability of any proposed project before you invest your time, energy and money into it. That’s why you need a feasibility study.   […]

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So you’re thinking of a launching a new venture? Entering a new market? Launching a new product? It’s estimated that only one in fifty business ideas are actually commercially viable and so you’ll want to understand the viability of any proposed project before you invest your time, energy and money into it. That’s why you need a feasibility study.

 

Why do you need a Feasibility Study? 

With such a low success rate of new business ventures a business feasibility study is the best way to learn whether you have an idea that could work and guard against wastage of further investment. If the results are positive, then the outcome of the feasibility study can be used as the basis for a full business plan allowing your to proceed with a clearer view of the risks involved and move forward quicker. If it’s negative then you’ve skilfully avoided wasting time and money on a venture that wouldn’t have worded out.

 

What is a feasibility study? 

A feasibility study aims to make a recommendation as to the likely success of a venture. At the heart of any feasibility study is a hypothesis or question that you want to answer.  Examples include “is there a demand for a X new product or product feature”, “should we enter Y market” and “should we launch Z new venture”.

 

How to conduct a feasibility study? 

Once you’ve got a clear hypothesis or question that you want to answer, you need to look at five areas that will impact the feasibility of your idea. Let’s look at each of these in turn:

 

Market Feasibility

Is the market in question attractive? Are there high barrier to entry? Is it of a size that will support our ambitions? Is it growing? Are there any regulatory or legislative requirements to enter or participate in the market?

 

Technical Feasibility

What technical skills/ability/knowledge/equipment is required? Do you have or could you source the technical expertise required? Do you fully understand the technical requirements underpinning your hypothesis? Could you manufacture / develop the product or service with the resources you have available?

 

Business Model Feasibility

How will the idea make money? How will you attract users? What costs will you have to pay? Have you modelled the financials? Do you have access to the funding needed? What legal entity structure would you need?

 

Management Model Feasibility

Who will lead the venture? Do you have the skills and expertise required to manage and operate the venture/product/market? Does the team have the time needed to deliver the venture? If not, can they be recruited or are their skills hard to find?

 

Exit Feasibility

Do you have a plan to exit the venture and do you need one?

 

When competing a feasibility study each of the above areas should have a recommendation as to whether it’s feasible or not from that specific perspective factoring in the resources you have available.  This should conclude with a recommendation based on the analysis as to if the venture is or isn’t feasible and the key data points that underpin that recommendation.

Remember that a great feasibility study should not just give you a go / no-go decision. It should provide either a spring board to move forward, highlighting the key areas to focus on to achieve success or a useful analysis highlighting the key obstacles that make the venture unfeasible and should be considered for any future ideas. Even if the answer is no, it’s not a wasted effort, the analysis will leave you better informed for future decisions.

 

Conclusion

A feasibility study is an essential tool for anyone looking at a new venture. It’s very easy to get excited by a new idea of proposition and steam ahead spending time and money without having a clear view as to whether it’s viable or not. A feasibility study should be your first stop to maximise the returns on your time, energy and investment.

 

Best of luck with your feasibility studies!

Chris Purcell @ Prussel & Co

 

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What is an Operating Model? http://prussel.com/what-is-an-operating-model/ Fri, 10 Mar 2017 14:35:28 +0000 http://prussel.com/?p=14096 Every business has an operating model. Its how your business is set up to structured to meet your customers needs. It’s your people, your processes, your technology, your tools and it’s something that we review for our clients regularly. Be it as part of a detailed due diligence review using our due diligence methodology, part of a business growth project […]

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Every business has an operating model. Its how your business is set up to structured to meet your customers needs. It’s your people, your processes, your technology, your tools and it’s something that we review for our clients regularly. Be it as part of a detailed due diligence review using our due diligence methodology, part of a business growth project to understand how a business can scale or perhaps part of a transformation project looking at how a business can better meet customers needs.

 

Key Components of an Operating ModelOperating Model

Operating models typically look at people, processes, technology and governance however we believe that this is only part of the picture. A businesses customers, channels, products, functions, data, locations and suppliers are all essential components that make up how your business is structured and all need to be considered when reviewing a businesses operating model.

Below we’ve broken down these components to explain what they are, why they matter and why the come together to make an operating model.

 

Customers

Customer should be at the heart of any business. This section of the operating model should articulate who the businesses customers are and the number of them. This is important to be able to put the design of the business into context. For example, a bank with 100 thousand customers will need a very different operating model to a bank with 100 million customers.

 

Channels

Channels are the mechanisms through which your Customers interact with your business. Examples include your website, your stores, and your phone line. This helps us understand how your channels work and how your customers interact for both sales and servicing.

 

Products

Products are what your customers are paying for. This could be a physical product, a digital product  or services. Clearly articulating what your product is helps us understand how your business is set up to sell and service your customers and products. For example,  a product such as a car the company will require both show rooms and garages to sell and service, with the associated salesmen and mechanics, processes for both, locations for both, customer journeys that involve both etc.

 

Functions

Functions are the core building blocks of your business and describe the key activities your business needs to perform to be able to operate and serve customers. Examples include areas such as Sales, Marketing, Operations, Purchasing etc. For a current state operating model analysis we develop a functional model of the business to understand how the business hangs together and how the functions work together.

 

Processes

Processes are central to any business. For small businesses these may just be “the way we do things” that are understood but not documented however for large corporation they should be written down and categorised (eg. business critical vs. non business critical) so that activities are performed consistently with the required level of control where required.  For industries that are heavily regulated (such as financial services) it’s important to ensure that the businesses processes meet regulatory requirements.

 

Organisation

The organisation section of the TOM explains how the people in the business are structured ie. which teams there are and how they hang together. An operating model should have a high level overview of the team structures and who does what and should be underpinned by a detailed organisational design document that articulated why the organisation is structured like it is and the detail of every team and role.

 

Data

Data is often overlooked as part of a TOM. With more and more companies using digital tools to offer a better service to customers it’s essential to understand how data is managed in your business. This could be customer data, product data, pricing data and all of these needs to be maintained to provide a great service to the customer.

 

Locations

Every business has locations and this section of an operating model should provide details of these, who owns them and any business continuity planning that is in place. The locations should overlay with the organisation section of the document to allow the reader to understand which teams are located where and ensure the right people can easily work together.

 

Key Suppliers

Many businesses utilise the services of key suppliers without which they can’t operate. Typical example include things like technology infrastructure, banks and payment providers and mail providers. In this section of an operating model we identify what these key suppliers are, how’re they managed and how any risks associated with them are controlled.

 

Technology

Technology is critical to any company. From a builder who needs a mobile phone to speak to her clients to a digital media company who’s entire business is technology based. This section should discuss the key technologies used by the business and how they’re supported. This should include disaster recover to ensure that when something goes wrong it can be fixed fast. The scope of this chapter of an operating model will vary significantly depending on the type and scale of the company.

 

Governance

The final component of an operating model is the governance of the business. Governance defines how decisions are made and risks are managed in the business. The governance structure should be simple and appropriate to the size of the business and the industry it operated in.

 

What’s not in an operating model

It’s just as important to understand what’s not in an operating model as what is in. For us there are three things that should not be included:

  • Strategy: the operating model is how the business is set up to deliver the strategy. It shouldn’t describe the strategy of the business but provide clear linkages to how the strategy is delivered by the operating model. The business should have a separate strategy document articulating and linking the vision, purpose and strategy.
  • Financials: the operating model will have a cost and should link to the company’s financials however these should not be part of the document. A good operating model is a working document and confidential financials should be held separately in the companies financial forecasts.
  • Detailed Organisational Design: high level organisational design should be included however there is no need to include a detailed breakdown of who does what as this makes the operating model difficult to read. This should be held in a separate organisational design document.

 

In a future post we’ll discuss Target Operating Models and how to define a roadmap for the delivery of a Target Operating Model.

 

Good luck with your ventures!

Chris Purcell @ Prussel & Co

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Our Approach to Due Diligence http://prussel.com/due-diligence/ http://prussel.com/due-diligence/#comments Fri, 10 Jun 2016 12:50:06 +0000 http://prussel.com/?p=14072 Due diligence is an essential part of any acquisition or investment. It helps ensure that the investor knows the risks involved, that they are investing in what they think they are investing in and that the opportunity that believe they are buying or are investing in is valid. At Prussel & Co we’re experts in due diligence. To help you […]

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Due diligence is an essential part of any acquisition or investment. It helps ensure that the investor knows the risks involved, that they are investing in what they think they are investing in and that the opportunity that believe they are buying or are investing in is valid.

At Prussel & Co we’re experts in due diligence. To help you navigate the world of due diligence, we’ve pulled together a guide to our approach and methodology for due diligence that we use with our client. This guide will help you understand the key parts of due diligence however it’s important to remember that the methodology is only half the picture. Good data and an experience team is essential to providing strong and robust recommendations.

 

What is Due Diligence?

Due diligence simply means doing your homework before entering into a business transaction. Typically due diligence is used to investigate and evaluate a business opportunity prior to making an acquisition or investment and the term due diligence describes the general duty to exercise care in required before any transaction. The term spans investigation into all relevant aspects of the past, present and predictable future of the business of a target company.

 

Why do Due Diligence?

Due diligence is essential to ensure that you fully understand both the business and the risks involved in any investment or acquisition. This helps provide investors with the confidence that they are buying or investing in what they thought they were and that the market opportunity is there and is attainable. 

 

Our Approach to Due Diligence: What’s In and What’s Out

There are a number of different types of due diligence each of which looks at a different element of the business. Typically these are legal, financial, commercial, operational and environment. At Prussel & Co, our methodology focussed on commercial and operational due diligence.. We believe that commercial and operational due diligence should be conducted together given they are to a large extent two sides of the same coin. We work with experts to provide financial due diligence where required and ensure this  aligns with our analysis, for example through the use of the same assumptions.

 

Our Due Diligence Methodology

At Prussel & Co we have a well tested methodology for conducting due diligence reviewed. Our approach to due diligence is tried and tested having worked with many investors and on many different deals of all shapes and sizes. Our approach provides and executive summary and  8 core sections each of which provides a different lens on the business in question.

 

1.Executive Summary: typically written last, the Executive Summary is key to any due diligence. The Executive Summary has two purposes:

  • Summaries  the findings for easy reading.  Provide a single page summary of the finding of the due diligence so that a reader with only one minute to read the pack and digest the key findings.
  • Respond specifically to scope questions: when we conduct due diligence we ensure at the outset that we have a specific set of scope questions that underpin the due diligence. Examples include “is X valuation fair market value” and  “what are the realistic financial projections ranges for Y”. In the Executive Summary section of the document we ensure we answer each of these questions explicitly, referencing the detailed analysis in the document.

2.Company Analysis: the Company Analysis provides an overview of the company situation, its directors and shareholders, the types of shares held by shareholder eg. ordinary vs. preference, cash reserves with the company and any credit facilities used and the sources of any existing funds within the business. The latter is particularly important for early stage ventures where we expect to see that founders have invested in the business. Further consideration is made to any regulatory restrictions or licenses the company may require to operate.

3.Concept or Product Analysis: the aim of this section of the due diligence is to understand the product or service that the company offers. We review the core concept / hypothesis that the business is built around to be able to then drill down into the assumptions that under pin it and test them. This is particularly important for early stage ventures. The second part of the analysis is to analyse the product /service that company offers customers to understand the quality of their offering, any limitations in it and and challenges to scaling. This is then used for competitor analysis later. 

4.Market Sizing and Competitive Analysis: this section of the document focussed on understanding the market the company operated in, the size of it, any defining characteristics that could provide opportunities or threats to the business and the competitive landscape. We split it into two sections:

  • Market Sizing:It’s important to ensure that you use appropriate assumptions when sizing the market, for example, are you looking at a global market, local market, global but English speaking market, the list goes on.
  • Competitive Landscape: We then review the competitive landscape. It’s essential to understand the key features or USP’s of the company and product to benchmark against suitable competitors and assess their relative strengths and weaknesses. 

Find out more about market analysis here

5. Operating Model Analysis: the operating model analysis reviews the structure of the organisation and provides a high level overview of the design of the business through several lenses. These include customers, channels, locations, processes, key suppliers, technology, governance and organisation. The aim is to understand how the business is structured, identify and challenges to being able to grow/scale the business and identify any risks in the design. In addition, we like to understand where the investment will be spent against the operating model at a high level. Eg. do you need to build out the marketing team? Does you distribution model need to scale? Find out more about operating models here

6.Commercial Plan and Traction Data Tests: this section of the due diligence methodology is particularly useful when reviewing early stage businesses and start-ups. Typically seed to series A rounds. Traction data test are used to understand how much progress the business is making towards it’s goals. We use a series of KPI’s to understand traction against three key areas; Customer, Sales and Financials. To find out more read out guide to investment KPIs here.

7.Management and Team: this section of the analysis focussed on the people within the business. We look at two areas:

  • Management: we review the leadership of the business. Those in key roles including C-Suite leadership and any people critical to the day to day running of the organisation. We assess if these individuals have the required skills and experience and ensure that there past doesn’t contain anything of concern (eg. convictions for fraud).
  • Team: with the organisational design section of the target operating model analysis we review the key data points around the team. These include criteria such as  tenure, feelance to perm mix, key man dependencies, skills gaps amongst others. 

8.Risk Management: one of the key sections in any due diligence is Risk Management section. This section of the document brings together all of the key risks identified in the business and in the investment and include details of the mitigants that are currently in place. We assess each risk against likelihood, severity and visibility. Risks are categorised against the above chapters. For any business and any investment decision its important to fully understand the risks involved and this section highlights them. Examples include “There is a risk of slow growth caused by lack of customer acquisition causing the business to not reach it’s financial target”.

9.Investment Analysis: the investment analysis is the final part of our due diligence methodology and brings together the key finding from the review into a financial assessment of the company. For the investment analysis, we will model the projected financials, based on data points taken from the company, executive interviews and market research and assumptions to provide a valuation and financial forecast for the business. Along with the due diligence report, we also provide financial forecasts in Excel to allow for further modelling should this be required.

Final Thoughts

Due diligence isn’t straightforward but we hope that his guide to our approach to due diligence will provide some insight to how we got about our work.

  • Be Logical – it’s essential for all due diligence to follow a logical flow with key assumptions and data points flowing through the document. All recommendations made should easily be able to be traced through the analysis within the document to the data points that underpin them.
  • Experience Matters –a strong due diligence methodology is important however it’s only as good as the team that executes on it. No two pieces of due diligence are the same and ensuring your team have the experience and flexibility required is essential. Utilising an experienced team to conduct you due diligence is the best way to ensure a robust analysis and set of recommendations.
  • Strategic Options: it’s important to not just present finding but also provide clear recommendations again agreed scope questions. This helps provide a clear steer to your audience as to what the extensive analysis means for them.

Our Experience in Commercial Due Diligence

At Prussel & Co we’re experts in Due Diligence. We work with investors to help them review potential investments. To get in touch with us and discuss your requirements and how we can help please email at hello@prussel.com

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Market Analysis: How to Evaluate the Potential Market for Your Business http://prussel.com/market-analysis-evaluate-potential-market-business/ http://prussel.com/market-analysis-evaluate-potential-market-business/#comments Wed, 18 May 2016 14:24:37 +0000 http://prussel.co.uk/?p=13755 Perhaps the most important part of your business plan and pitch from an investor’s point of view is your market analysis. They might love your product and be ready to bank on you as an entrepreneur, but the make-or-break question will always be whether the market opportunity exists to make money on their investment. Market analysis might sound intimidating (and […]

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Perhaps the most important part of your business plan and pitch from an investor’s point of view is your market analysis. They might love your product and be ready to bank on you as an entrepreneur, but the make-or-break question will always be whether the market opportunity exists to make money on their investment.

Market analysis might sound intimidating (and expensive!) but at its most basic, it’s simply a presentation of how you are going to make money, based on the reality of the market you’re selling to.

Even if you’re not going for investment, market analysis can help with everything from forward planning and progress evaluation to product development and marketing strategy. But how do you conduct a useful and thorough market analysis? Your data has to go well beyond the first stats that pop up from a Google search; you’ll need reliable figures, and you’ll need to know how to use them to show your business’s growth potential.

A good market analysis should show:

  • The size of your potential market
  • Information about your target customer
  • What your customer currently spends in your market
  • Trends, growth predictions and industry changes
  • Barriers to market entry
  • Gaps in the market
  • Competitor information
  • Your predicted market share

 

Identifying your market

When asked about their target market, inexperienced entrepreneurs often come up with the stock ‘it will appeal to everyone’ answer. But the truth is, no product or service appeals to everyone, and any investor will immediately dismiss such a claim. A business that identifies with laser-point accuracy its specific market and customer is in a far stronger position than a business whose approach is too broad. Your target market will be a subdivision of a larger market, and the first task is to identify this niche.

Market analysis covers your entire target market, both current and future. If you’re already trading, this is not just current customers, but also customers you might sell to in future.

Within your market niche, you’ll need to find data on your target customer. This doesn’t just mean demographics (age, sex, location etc.), but also more intangible information such as hobbies, buying habits, and most importantly, pain points – the things that annoy them that they will pay to fix, and that you can fix for them.

 

Where to start

Your first stop should be publicly available statistics on your target market. You might find useful information in government statistics; in the UK, you can start with the statistics section of the gov.uk website, or the Office of National Statistics. You can also look for commercial market research reports from companies such as Mintel, Ipsos Mori, Frost & Sullivan or Datamonitor.

 

Professional market research

If publicly available reports don’t give you the information you need, you could also consider paying for a market research company to conduct research for you. But this approach can involve high costs, which may be prohibitive for a start up company.

 

Current customers

If you’re already trading, your existing customers are an important source of information. As well as gathering sales and behaviour data from your web analytics, you could also use questionnaires and other feedback tools to gather data on customer pain points, pricing and competitors.

 

Minimum viable product

If you’re not yet trading, you can still gather information from customers by testing a minimum viable product – a stripped-back version of your product or service that communicates your core value and allows customers to give feedback. This could be a beta version of a new app or even as simple as gauging demand through an email signup page or crowdfunding campaign.

 

Researching the competition

Your market analysis should cover your competition and where possible show their market share, sales figures and recent growth. You should also look at what they’re not doing, the gaps in product or service you could fill.

 

What to do when there is no data

Competitors don’t tend to broadcast their sales data or customer complaint statistics to the world if they can help it, and you may find it difficult to get the information you want through publicly available sources. This means that competitor analysis can involve some guesswork, but if your guesswork is informed then it still has value. Alternative methods of getting information might include:

  • Price comparison sites that can give you information on pricing, but also on services or products that competitors are targeting with offers.
  • Review sites and social media – many businesses today have customer feedback out in the open for anyone to see, from review sites to their own public social media pages. Bear in mind that you won’t be seeing a full picture of competitor satisfaction from these sources, but intellegent analysis may point towards gaps in service or potential issues.
  • Indirect business data – news reports, census data, population maps or business density data might offer indirect insights.

 

Presenting your market analysis

Industry overview

The market analysis section of your business plan should start with an overview of your industry, covering the following points:

  • Size of the industry, for example total annual sales
  • Size of customer base
  • Details of how the market is moving – is it growing or shrinking?
  • Trends, technology or changes in the law that may effect the industry
  • Barriers to entry, including compliance requirements and regulations
  • Growth opportunities
  • Gaps within your market for new products or services

 

Competitors

Information on your competitors should cover:

  • Market share
  • Growth information
  • Sales figures
  • Recent trends and changes
  • Strengths and weaknesses

 

Timescale

Is your business proposition time sensitive? Does it rely on being first to market with new technology, or anticipate changes to the law, or capitalise on an emerging market?

 

Market share

Your predictions on the market share you anticipate taking should be realistic. Your starting point should be how many customers you can reach and how many you predict will switch to you from your competition, but you should also consider what volume you can deliver, and what restrictions there might be on increasing your customer base.

 

Are you investment-worthy?

Remember that key investor question – what is the opportunity here? Your market analysis should demonstrate in concrete terms exactly what that opportunity is. It should answer the question of who will you sell to and what they will pay.

 

Market analysis is an on-going activity, not just something you do for your investment pitch. The right information will help you shape your company, plan for expansion and target new customers. Successful businesses know their market inside out. Make sure you’re one of them.

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Investment KPI’s: How to Measure Business Performance http://prussel.com/measure-business-performance/ Mon, 16 May 2016 18:46:09 +0000 http://prussel.co.uk/?p=13719 Understanding the performance of a business isn’t easy. There are hundreds of different metrics that can be considered, to measure business performance, each with its own strengths and weaknesses and each able to tell the reader about a specific component of the business. When we’re asked to review the performance and the future direction of a business, we have a […]

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Understanding the performance of a business isn’t easy. There are hundreds of different metrics that can be considered, to measure business performance, each with its own strengths and weaknesses and each able to tell the reader about a specific component of the business.

When we’re asked to review the performance and the future direction of a business, we have a set of due diligence metrics that we favour. Which metrics’s or metric we choose to use depends on the specific business and the drivers behind the review but we’ve pulled together some of our favourites to help you navigate the most popular business metrics’s.

 

Why do metrics matter?

Metrics help founders, team members and investors make more informed decisions. For a founder and a leader, this can mean having the right data to see what’s working and what isn’t, the make the right decisions  to make best use of the resources available.

For an investor, due diligence metrics’s provide the data points needed to make informed investment decisions and to help the companies that you’ve already invested in perform to the best of their ability.  

 

What metrics should we be tracking?Key lenses to measure business performance

There are a huge number of business metrics and metrics that can be tracked and the relative importance of each one will depend on the business and the question that’s being asked of it. At Prussel & Co we classify due diligence metrics into three main categories; Customer, Sales and Financial. Each of theses is then viewed in the context of key Market metrics.

1. Customer Metrics 

Our view is that Customer comes first in any business. When we look at any company we start off by understanding their customers, who they are, how many of them there are, their behaviour and how they are changing.

  • K-Value: The k-value measures the virality of the growth of the customer base for a business. Marketing is an expensive activity and high virality offers high potential for growth a low cost. Calculation: take the number of customers today plus all new users invites by our existing users (as of today) then calculate the ratio of new to old users and add one.
  • Cohort Analysis:  businesses and investors want to “sticky” customers. Customers that don’t just interact once but keep coming back for more. Cohort analysis is a measure of how customers “drop off” the product and allows us to deduce with a few other data points, how much it will cost to grow the business and the options open for growth. Calculation: take the number of customers joined in a week and analyse how many time they engage with the product/service every successive week.
  • Churn / Customer Attrition Rate: the attrition rate/churn shows not just the number of customer that no longer interact, but the number of customers that actively choose the leave the business. Growing businesses need to be retaining existing customers as well as attracting new ones. Calculation: take the number of customers who leave / total number of customers
  •  Long Term Value (LTV): The LTV of a Customer is a metric that works in partnership with churn to show the ROI for each customer over their lifetime and the potential for growth. The challenge is that measuring “value” is notoriously hard. Calculation: take the total sales from the customer of there entire relationship with the business.
  • Cost of Acquiring a Customer and Payback (CPA/CAC): The CPA/CAC tells us how expensive it is to attract a new customer. Investment is often used to acquire new customers and drive growth and hence the CPA / CAC allows us to understand what it will cost the business to grow. For our commercial due diligence, we like to understand CPA and CAC for each channel / marketing activity over time to see that the team are reviewing their activities and adapting behaviour accordingly. Calculation: total marketing spend / number of new users within given period of spend.
  • Daily / Monthly Active Users: Simply having a large number of users doesn’t mean that they actually use a product or service. App based businesses are prone to this by attracting a large number of downloads driven buy a marketing campaign but quickly resulting in very few active users. Looking at Daily / Monthly Active Users shows us how engaged the customers is with the product and gives an indication of the trajectory of travel. Calculation: take the number of active customers in a given time period over total number of customers.
  • Net Promoter Score: Although this required direct customer feedback which is more difficult and expensive to source, NPS shows the potential for virality and customer advocacy by understanding how customers feel about a brand or product and their likelihood to recommend it to friends. Calculation: take the proportion of customers that would recommend the product and business

 

2. Sales Metrics

Users are one thing but it’s important to understand how efficiently a company can people from prospects to paying customers. This is where sales metrics come in. These give us the underlying drivers of the current and potential future success of a company and are essential to driving and accurate valuation.

  • Total vs. New Sales: Understanding historical and projected sales growth is essential to understanding the trajectory of the company. Percentages and actuals of new vs. existing customers add colour to see how the business is growing. Calculation: take the total number of sales to existing customers and the total number of sales to new customers in a given time period, each per day, week, month.
  • Magic Number: A great metric for showing how effectively a company can scale sales and marketing to build sustainable profit growth. A magic number of 1 means that the last quarters sales and marketing spend will be earned back over the next 4 quarters in incremental revenue. A number above 1 shows our growth of revenue is greater than your cost of sales and marketing. Calculation: take the net growth of revenue over two quarters, times it by 4, and divided by total spend on sales and marketing in quarter one.
  • Conversion Rate: the conversion rate for a business shows us how efficiently the business can turn a prospect into a paying customer. This can then be benchmarked against the industry in which it operates to show how competitive it is. This is particularly useful for online businesses where we can clearly see the total traffic and conversions to sales. Calculation: the percentage of potential customers that buy your product or service.
  •  Average Sales Price (ASP): This metric is useful to put others in context. High ASP typically means less frequent orders but more flexibility in CPA. Calculation: the averages price of a typical order.
  • Average Sales Cycle (ASC): similar to ASP, this metric is contextual to help us understand the fundamentals of the business and the cycles in which a Customer buys. Calculation: The date the customer is first contacted to the date of the first purchase.

 

3. Financial Metrics

Financials should be at the heart of any business. While many start ups may be pre-revenue, it’s still important to have a clear view of how the business will make money, have a good grasp of the company’s balance sheet, P&L and statement of cash flows and be able to demonstrate traction to meeting you’re goals.

  • Monthly Revenue Growth: The monthly revenue growth is similar to Total vs. new Sales above as it measures the increase in revenue per month. For the monthly revenue growth this indicates the trajectory of revenue growth however it doesn’t consider the size of revenue growth. Calculation: take the current months revenue, minus last months revenue and then divided by last months revenue.
  •  Margins: Margins show how the business can turn a £/$ of investment into profit. Theres a benchmark for most industries and investors will often compare a start-up investment to these benchmarks to understand the efficiency of the company. The challenge is that margins only show  a point in time view of metrics and does  factor in margin compression from increased competition that comes with scale over time. Calculation: take the total revenue minus the  “costs of good sold” and divide by  revenue. Net margin is similar however we also minus the total expenses for the business.
  • Burn Rate and Runway: This metric is only applicable to early stage businesses that are loss making or will be loss making once an investment is made. Burn rate is important as it shows the efficiency of the business, when it will need additional capital and that the management clearly understand their financing needs and roadmap. Calculation: take the available capital and divide by monthly operating loss.

 

Market Metrics 

The above metrics focus on a specific business however it’s essential to review in the context of the market in which they operate.  Market metrics help us do this.

  • Total Addressable Market: this is the total size of the market the business operates in. The total addressable market metric matters as it shows us the potential of the business. We can the view the above metrics in the context of where the business could scale to ie. how big it could become.
  • Average Wallet Size: this is  the total amount a customer will spend in a given period. The average wallet size matters as  this allows a business to understand where to price and for us to understand the price point of the product/service.
  • Market Demand: this is the growth rate of the market the business operates in. Market demand matters as  while some markets may be small at present, the high growth rates make them attractive target. Conversely, some large markets are in significant decline and these growth rates are important to add context to any investment decision.

 

Other considerations…

The most appropriate metrics for any business will depends on the question that’s being asked of it. When looking at a company for investment, we utilise our due diligence methodology and the most appropriate metrics for the investment candidates  business model and that fit with the questions being asked by the investor.  If you’re looking to raise investment for your business then knowing your metricss is essential. 

Remember that with any metrics data quality of king. Without quality data it’s impossible to make solid decisions.

 

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8 Ways to Prepare for Raising Startup Investment http://prussel.com/raising-startup-investment/ Fri, 04 Mar 2016 16:07:16 +0000 http://prussel.co.uk/?p=1 Investment. It’s a scary word for many entrepreneurs. It could hold the key to business success, but navigating the mysterious world of pitches, funding rounds, VCs, angels, due diligence and equity finance can be daunting. We work regularly with investors, so we know that often the difference between success and failure can be in the preparation an entrepreneur puts into […]

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Investment. It’s a scary word for many entrepreneurs. It could hold the key to business success, but navigating the mysterious world of pitches, funding rounds, VCs, angels, due diligence and equity finance can be daunting.

We work regularly with investors, so we know that often the difference between success and failure can be in the preparation an entrepreneur puts into their approach. We’ve put together a checklist of what investors are looking for so you can put yourself in the strongest possible position to win investment.

 

1. Hone your pitch

You pitch is your best opportunity to grab an investor’s attention. An investor is staking their cash not just on your idea but also on you, and a sloppy pitch does not give the impression you’ll be able to keep a tight hold on your business.

Have your ‘big idea’ honed to a couple of sentences you can recite off by heart, so that you communicate the value you offer and the money-making opportunity right up front.

Practice pitching beforehand to someone who can quiz you on your figures and plans. Ideally, you should be able to talk without prompts – your company is your baby, and you more than anyone else should be able to talk naturally and enthusiastically about it. But if you’re nervous about freezing on the day, using prompt cards with key points is fine, and certainly preferable to forgetting your figures. Avoid writing out your whole pitch – reading from a script will sound stilted and get in the way of your passion.

The key ideas you want an investor to take away from your pitch are:

  • The problem you’re solving
  • Why your business idea is different to what’s already on the market
  • How your business will make money on a sustainable basis
  • How your concept can be protected from copycats
  • What you’ve already done to demonstrate success

 

2. Bring the buzz into the room

Investors are looking for businesses that have buzz – evidence, feedback or figures that demonstrate this concept will make money. Be prepared to demonstrate that buzz in your pitch.

Reliable market research is the first step. If you’ve already started selling, bringing in sales figures, orders and projections is essential. If you’re not yet selling, you can still demonstrate buzz by showing minimum viable product testing, evidence of demand and your product development work to date.

 

3. Own your figures

It might seem unfair for an investor to make a decision based on whether you can recite last month’s cash flow figures off the top of your head when you’re also giving them these figures on paper. But what an investor is looking for in a pitch is your familiarity with your business. And those figures are the lifeblood of that business. If you struggle to get a handle on them, you’re unlikely to be living and breathing your figures on a daily basis, which is worrying for an investor potentially staking money on your ability to manage money.
If your figures are projections, investors understand that there’s a high level of uncertainty involved. But what they are looking for is evidence of a robust process for arriving at your numbers, showing you understand your market. For more information, check out our guide to the KPI’s you should know here.

 

4. Know your investor

Knowing your potential investor before you pitch is essential. If you’re pitching to the wrong person, you’re wasting all that time you’ve spent preparing, and you’re probably wasting their time too. Investors often specialise in particular industries where they can add value, so research what similar investments they’ve made in the past and where they might be able to add value with their involvement.

 

5. Nail your business plan

You might think that if your idea is strong enough, you can just waltz in and wow them with your sales spiel. But serious investors will want to see a robust business plan to back up your idea.Many entrepreneurs are nervous of business plans, but there’s no need to be. A good business plan is just the past story of your business, with an exciting cliff-hanger to describe the current situation and a teaser chapter or two for what happens in next.

The act of putting together a business plan also helps you evaluate your business, putting you in a position of knowledge and strength when it comes to your pitch.

 

6. Be honest

Experienced investors have seen it all; fudged figures, murky dealings, convoluted company structures; they’re expert at sniffing out the holes in a pitch. All businesses have weaknesses, and it’s better to address them head on than to try and fudge them in the hope they won’t be noticed. An investor wants to know that you can deal with problems when they arise, and you can demonstrate this by talking about them.Remember, even if you did manage to sneak a gaping hole in your figures past an investor having an off day, you’d get found out during the due diligence process and be left looking very unprofessional.

Evidence of sustainable, repeatable income sources, demonstrable growth, a strong market niche, viable route to market and well-planned exit strategy are worth far more to an investor than a wildly high valuation or promises of overnight success.

 

7. Get ready for cross-examination

Bear in mind that your pitch is likely take up only a small proportion of your initial meeting. The rest of the time is likely to be dedicated to questions, so it’s crucial to be prepared for this too. Be ready to respond to tough questions about risks; your risk profile is a key consideration for an investor, so understanding it yourself, and having strategies in place to minimise risk, is key.

And don’t forget that you can ask questions too. Doing so demonstrates that you’re driven to get the best deal for your business, something an investor will appreciate. You could ask for clarification on the investment structure, their level of involvement, any fees involved and their track record.

 

8. Do the groundwork for due diligence

Once you’ve got an interested investor, the next step on the path is due diligence, the process of examining your company and the deal on the table for any potential issues.

The more you prepare for due diligence in advance, the stronger your position. Preparation shows you understand your investors’ requirements and that you have a strong grasp of your business.

You should be able to produce at short notice:

  • Detailed financial projections
  • Evidence, including reliable market research, contracts and orders
  • Copies of employment contracts, patents, trademarks, licensing agreements and other legal paperwork which underpins your business
  • Details of any funding you already have and copies of investor correspondence
  • Details of money going out, including salaries, debts and leases
  • A planned exit route

 

You should have a system to keep this information regularly updated so that you can deliver it quickly when needed. It can be a good idea to appoint one person at your company as the main point of communication so that you can build a strong relationship and make sure all queries are answered.

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