Business Model Analysis
The business model shows where the company incurs costs in order to generate revenue.
In diligencing a startup, spend some time analyzing the business model to determine how robust and profitable it is.
Check the revenue to see how much is recurring, repeating, or one-off.
The more revenue that is recurring based on contracts, the stronger the cash flow.
Check the costs for customer acquisition and lifetime value of customers, even if it’s not a recurring revenue business.
There needs to be a healthy delta between the cost of acquisition and the total revenue from the customer.
Revenue per customer should be at least 3X the cost of acquiring that customer.
Map out the gross margins and profit margins of the current business and near-term projections.
The healthier the margins, the less funding the company will need to raise and the faster the company can reach profitability.
Check the overhead costs and any other regular expenditure to determine the capital efficiency of the business.
Finally, look for unusually high general and administrative expenses.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.