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I find simple equations sometimes help frame an opportunity.
In the case of software and media companies I have a very basic formula to gauge an opportunity that goes something like this…
M = Maximum possible number of users (consumers or members) a business could capture if they had 100% of the market
C = Average Cost to acquire a user
D = Research and Development cost to develop initial software or media property
L = Lifetime value of the user (can use advertising CPMs, licensing fees, subscrition rates and lengths)
S = seed money or capital to attempt the business
R = Likely Top Market Share Attained (typically not more than 15%)
=>
M * L = Maximum Revenue Lifetime of the Business
D + (C * M) = Maximum Cost to Deliver Maximum Revenue
=>
MaxRev – MaxCost = MaxProfitLoss
You can repeat this exercise with R instead of M to get the realistic model.
I like to make some guess as to how fast a business can get to that max so that I know the rev per year and what not.  Yes, this is a trivial calculation but I think it’s a really useful rule of thumb formula for sizing up an opportunity in software and media.
The key to this equation is estimated M accurately (usually means being very honest with your market).  It’s not too tough with todays tools and open data to get a good look at demographics, buying histories, competitors and so forth.
Note that I make no attempt to account for market valuations and all that.  That way of thinking is usually a chasing after the wind.
Why does this equation help?
Well, the main point is that it gives me a great sense of scope.  Many of the media properties and software products out there cost a ton of money and have mediocre maximum markets or very low lifetime value.  Many businesses are eager to create a killer app but don’t have a grasp of what the scope of a killer app really has to be and/or they grossly underestimate how hard it is to make something.
What I find with this equation is that there’s a sweet spot in media and software.  If you optimize this equation you find that you can’t make software or media that’s too esoteric or complicated to make nor can you make complete fluff.   If you want to make something that appeals to everyone on the planet (not possible) it’s going to cost a lot and the cost to acquire users will be very high… so with this simple equation you learn you’ll be at it for a long time.  On the other hand if you want to make a high end product for a niche, you’ll find that the overall opportunity might not be that big.
Again, this is hardly rocket science, sound economic theory or anything… simple napkin math.
What it doesn’t capture, but hints at is the gross mis-estimation a good deal of entreprenuers make – software and media is more art than science and can very quickly turn into something intractable.
A few other considerations I’ve accumulated over the years in and out of businesses:
  • If your media or software is uber mass market, the big guys are just going to make it and give it away.
  • If your project takes too long (a year or more), you’re going to have many more competitors working way faster than you before you ship.
  • A killer app or killer media property is often not the thing you set out to make, it’s usually the mistake, the tangent, the oddball idea.
  • More capital doesn’t improve the chances.  Capital only helps to scale once something is built, for MOST projects.
Perhaps you’ll find this useful as you move into 2010 and kick start your projects!

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You might have seen this proposal request from Mark Cuban.

I went ahead and threw a hat into the ring with Angel Technology.

Let’s see what happens, eh?

It’s a brave new world out there, time to compete.

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We went ahead and did it.  You can now enter to have your start up built for $100.

What is $100 Start Up?

Simple, we have assembled a team of experienced industry experts with expertise in programming, user interface, traffic generation and art, who like to build cool stuff. We put our heads together and launched 100dollarstartup.com as a way to allow big ideas get off the ground without the need for big financial backers and big business infrastructure.

With 50 years combined experience in the industry (whatever that means to you!), we have seen ideas come and go and, oftentimes, good ideas fail due to poor execution, bad management or “too many cooks in the kitchen.”

We created the $100 start-up to help you avoid these pitfalls.

The concept is simple. Write your idea down, submit it to our team and pay 100 bucks. Our team will review all the submissions and we will choose ONE idea every 90 days to build. At the end of those 90 days your project is launched and is yours to keep.

If nothing else, it will give you something MORE than a powerpoint presentation, a word document or a drawing on a napkin to take to market.

Check out the site for more information and get submitting.  Sure, it’s a gimmick, but it’s highly practical if you think about the kind of work and dev shop we run.  Pool the best ideas and limit the risk to the entire pool……

We welcome your comments on this blog or the 100dollarstartup.com site.

~R

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For anyone who has a VC pitch coming up, here are the slides you will generate (whether you need them, that’s a different question):

  1. Fancy “Splash Screen” Overview
  2. Bold Statement about Changing the Way We Think
  3. History of the Internet – explains how everything came to be, includes a timeline chart
  4. Elevator Pitch for new product/company, “This changes everything” or “This is the obvious evolution”
  5. Strategic Quadrant grid that shows how this new product/company sits in a “niche” all by itself – also must prove why that niche is at least a billion dollar industry
  6. Competitive overview that shows how every other company missed the obvious billion dollar industry play
  7. 3 screenshots of a product that can’t usually ever be built, usually using screen grabs from the competition
  8. Product differentiation statements focused on Ease of Use, Connect the World, New Ways of Doing X
  9. If product has traffic, chart of how traffic has always gone up and to the right (axis without numbers if numbers are small
  10. If product has no traffic, chart from comscore for other websites in this area (opportunity)
  11. Team slide featuring all previous big named employers with at least two people associated with ivy league schools (one member will have a physical sciences degree called out)
  12. Pro forma/budget that shows how $5 million in investment leads to $ 2million loss first year and then $2-5 million in profit after 36 months.  Includes line about organic traffic = 100%.

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