Bundle Pricing Bundle pricing sets the price on a package of services that is lower than if you bought each service individually. This generates more demand for the product since the price is lower. It can increase sales because the product bundle has more features and usability than an individual product. It can also be […]

Dynamic Pricing Dynamic pricing varies the price based on the current supply and demand. This pricing can be used to increase the price when demand is high and then lower it when supply catches up. This is often used in ride-sharing services which charge more during the rush hour. To use this pricing model consider […]

Freemium Pricing The freemium pricing model is used to expedite customer adoption of the product. Many companies use this as part of a tiered pricing model. The freemium model gives users some experience with the product. These are the advantages of a freemium model: It’s easy to implement as the price is zero for a […]

Flat-Rate Pricing Flat rate pricing is the simplest pricing model. There’s one price for the product or service no matter what features are included or how often the product is used. It acts similarly to the traditional software licensing model. It’s often used as a premium pricing model that includes everything the company has to […]

Tiered Pricing Tiered pricing offers multiple price points for a product with varying levels of functionality or service. It is the most often used pricing model. The advantage of tiered pricing is as follows: It gives the user multiple options to choose from.   The better the fit to the customer’s budget the more likely the […]

Number of User-Based Pricing The number of user-based pricing sets the price based on users. This works for enterprise customers where there are a number of workers who need to access the platform. This makes it easy to forecast and budget the cost of the product. The downside is that the customer may end up […]

Usage-based pricing Usage-based pricing focuses on how much of the product or service the customer uses. The more the customer uses the product the greater the price they will pay. To apply usage-based pricing to your product, identify your value metric and then assign a price to it.   Those using the service at a high […]

Value-Based Pricing Value-based pricing focuses on what value the customer derives from the product rather than the cost for the producer to build and deliver it. This pricing model focuses on how the customer perceives the product and what problem it solves for them. To apply value-based pricing to your product assess what price the […]

Promotional Pricing Promotional pricing gives your product an immediate sales boost. This is often used around holidays and special events. Offering a flash sale or a short-time-only discount can generate some immediate revenue for your business. Holiday specials can also be used to spur additional sales. Typical examples include the following: Buy one get one […]

Competitor-Based Pricing In pricing your product consider the competition. In well-established markets where the competition is entrenched, you may need to set the price in the same range as the competition. Review the competitors for their pricing structure. Take note of the price per unit and positioning of the competitors’ products in the market. Premium […]

Good Better Best Pricing In pricing your product consider the Good, Better, Best model. This model gives you three price points with which to cover the market. The Good price is set to capture the low end of the market. The key here is the core feature the customer wants and will pay for. For […]

How To Price a SaaS Product Pricing a SaaS product is different from a traditional product. A SaaS customer pays on a recurring basis such as every month or year. Since the customer is paying for a service for a period of time, then the price must reflect that usage. There are two pricing considerations […]

Calculating Your Value Metric Your value proposition is what the customer is buying from you. Stating it in unit economic terms is called your value metric. It could be storage space usage, transactions on a marketplace or other. Sometimes the metric is clearly assessed such as traffic driven to a website while at other times […]

Identifying Your Customer Profiles Your value proposition is what the customer is buying from you which drives the pricing for your product. In setting the price for your product first segment your customers and identify their personas and how they will use the product. Figure out their key care-about and match them to the features […]

Pricing Based on Strategy Your product strategy drives your pricing model. There are three strategies to consider which are driving revenue growth, gaining market share, or driving profits. For startups raising funding, driving revenue growth is the best strategy as investors want to see traction and growth. Regardless of the competition or the state of […]

Bad Revenue Not all revenue is the same. In fact, some revenue is bad revenue. Bad revenue comes from products that are underpriced. Without enough revenue to cover the costs of delivering the product, the company struggles. Customers become unhappy when they fail to receive the expected product or service. If done over a long […]

Contribution Margin vs. Gross Margin The contribution margin is the same as the gross margin but without the fixed costs included. It includes only direct costs and variable costs. This means the contribution margin will always be the same or higher than the gross margin. The contribution margin is used for setting the selling price […]

Gross Margin Is the Comparator Since not all revenue is the same, how does an investor compare one company to another? Gross margin is one key comparator. It measures how much revenue is available to invest in the growth of the business. Gross profit is calculated by taking revenue minus the cost of goods sold. […]

More Characteristics of Revenue Not all revenue is the same. There are several characteristics that define the quality of revenue. Here’s an additional list to consider: Repeatable — if the revenue is not recurring but rather repeatable then it has a greater value than the revenue that is a one-time event. Strategic — if the […]

Characteristics of Revenue Not all revenue is the same. There are several characteristics that define the quality of revenue. Here’s a list to consider: Predictability — if the revenue is recurring it has higher predictability and thus a greater value. Concentration — the more sources you have the stronger the revenue as you avoid over-concentration […]

Marginal Revenue Marginal revenue is the revenue for each additional unit sold. The additional unit comes with a marginal cost which is the additional cost on that unit. As the startup scales costs will rise and at some point, the marginal cost per unit will increase. Startups should raise their prices as they grow so […]

Operating Revenue Operating revenue is revenue from the core business. Non-operating revenue is revenue that comes from other sources. For example, if the company sells a service, that revenue is considered operating revenue. If the company sells a piece of furniture, that revenue is considered non-operating revenue. By separating the operating from the non-operating revenue […]

Accrued Revenue Accrued revenue is revenue that has been earned but has not yet been paid for. This could be project work that is billed when completed. The unpaid balance for the work done is considered accrued revenue. This applies to project work as well as loans in which the interest income is considered accrued […]

Unearned Revenue SaaS businesses charge a subscription fee for the product on a monthly or annual basis.  For those charging on an annual basis, the revenue generated at the beginning of the contract is considered unearned revenue. Unearned revenue is revenue received before the service actually occurs. The unearned revenue is not an asset, but […]

Components of Revenue Revenue or sales stands for the amount of funds a company earns. This comes from the goods or services the company sells. This is often called Gross Sales or Total Sales as it’s the total amount of the proceeds. Net sales are the gross sales minus any returns, discounts, or other price […]

Types of Revenue Not all revenue is the same as there are several types of revenue. SaaS companies earn different types of revenue through their product offering. Here’s a list to consider: Software licenses are quite valuable as one can charge recurring fees for them. Maintenance fees can also be valuable as they often recur […]

What Impacts the Quality of Revenue? Not all revenue is the same. Investors look at the characteristics of the business which impacts the quality of revenue. Revenue that comes from a source that will sustain longer will have a higher value to investors. Here’s a list of characteristics investors use to assess the value of […]

Solving the Chicken and Egg Problem In launching a marketplace platform you must solve the chicken and egg problem. You must have supply to engage buyers and buyers to engage suppliers. In the early days, you’ll need to do things that don’t scale such as recruit supply that is not in the network for a […]

Marketplace Platform Evolution Marketplace platforms evolve over time. Platforms start by connecting buyers and sellers. They follow with additional services such as ratings and reviews, background checks on the buyers, and quality control on the suppliers. Over time, the marketplace can evolve further by moving into delivery of the products and services. By controlling the […]

Marketplace Services In setting up a marketplace business, the more services you offer will lead to a better customer experience, leading to better retention. Consider adding these services to your marketplace platform: Manage the transaction from discovery to fulfillment of the service. Provide ratings of the buyers and sellers to foster transparency. Review the content […]

Metrics for Marketplaces In running a marketplace business there are several metrics for measuring the performance of the market and platform. Here are some key metrics to consider: Gross Volume — this is the total amount of goods and services transacted on the platform. Activity — the number of times a buyer engages the platform […]

Network Effects in Marketplace Businesses Marketplace businesses derive value from the network effects that come with matching buyers and sellers. The greater the number of buyers and sellers the more attractive the platform. One side of the marketplace can attract the other side. If one side is using the software platform, then the other side […]

Expanding a Marketplace Business After launching your marketplace business you’ll start work on expanding it. For the supply side, you want to increase the engagement with the suppliers.  Instead of being one source of many to your suppliers, you want to become their primary source. You can do so by setting up technical connections with […]

Narrow Marketplaces Marketplaces can be built vertically targeting one sector or horizontally targeting multiple sectors.  It’s best to start with a narrow marketplace focused on one vertical. The cost of starting it is much less than a broad one. By going narrow, you don’t have to generate a huge amount of supply.   You can start […]

Fintech’s Role in Marketplace Businesses Fintech can play an enabling role in a marketplace business. In addition to matching suppliers and buyers on a platform, fintech tools enable additional services that provide stickiness to the business. As the regulatory nature of fintech continues to constrain the growth of businesses, alternative financing becomes more prevalent.  Marketplace […]

How To Launch B2B Marketplaces In addition to B2C marketplaces, there are B2B marketplaces that are gaining rapid adoption. To launch a B2B marketplace consider the following tactics: Find participants who are not monetizing their value and help them capture it through a marketplace. Look for disruptions in the marketplace or economy as an opportunity […]

Assessing a Marketplace In setting up a marketplace business here are some key points to consider in choosing a potential marketplace.  The marketplace business model provides an advantage for the buyer, the seller, or both. The more often the buyers and sellers use the platform — daily, weekly monthly, or more —  the more valuable […]

Launching a Marketplace Business In launching your marketplace consider starting with a niche. Focus on what your team does best. Choose a niche in the sector that you can easily gain access to the supply side. This could be either by geography or by service offering. Offer above-average service to launch the marketplace.  As Paul […]

How To Start a Marketplace Business In starting a marketplace business you must consider how to structure it and then how to build the supply and demand sides of it. For the structure, you can target a specific vertical by focusing on one segment or go horizontal and cover the entire space. To go horizontal […]

What Is a Marketplace Business Model? The marketplace business model is becoming increasingly popular among startups. A marketplace business connects buyers and sellers through a platform. The platform facilitates the transaction and does not produce or provide the product or service. The platform often handles the payment, facilitates the logistics, and more. Examples of companies […]

Preparing for a Secondary Sale Transaction A secondary sale is important to the founders and employees of a company. It gives them the opportunity to sell their shares to gain liquidity in advance of the company’s exit. Here are some key issues to consider: Founders normally receive common shares when launching the company. There are […]

What Companies Should Know Before Allowing Secondary Sales? Companies who want to give their employees the opportunity to sell their shares should consider the following: Set specific timeframes to allow for stock sales by the employees. This limits the distraction of employees and reduces the amount of disclosure the company must do. Prepare disclosure statements […]

Valuation Method for a Secondary Sale In pricing a secondary sale here are some valuation techniques: Estimate the value of the equity by multiplying the revenue by the multiple for similar companies. For example, SaaS companies are sold for a multiple of 10X revenues. Reduce the value of any debt the company has. Divide the […]

Types of Buyers of Secondary Shares There are several types of buyers for secondary shares. Each has its own motivation for doing so. Here’s a list to consider: Employees often want more shares of a startup that is doing well. They may also want to sell their shares to pay for expenses such as college […]

Tax Issues With Secondaries There are tax issues associated with a secondary sale. Here’s a list of issues to consider: Gains on secondary sales are taxed based on the holding time of the shares. If less than one year, then ordinary income tax rates apply.  If longer than one year then the capital gains tax […]

Pricing Secondary Shares In selling secondary shares a price must be set. Since the shares are in a private firm there’s no market to review for a list price. Here are some factors to consider in pricing a secondary sale: Are the shares preferred stock or common stock? Preferred stock has preferences such as liquidation […]

Type of Secondary Transactions There are several types of secondary transactions as follows: Confidentially marketed public offerings — these offerings go to institutional investors. These transactions use an S3 form to provide shares to known buyers. Bought deal — these shares are bought by an underwriter who takes the risk of the transaction. Since the […]

How Do Secondary Sales Work? Secondary sales typically occur with later-stage startups. Investors who want shares in a company will buy the shares from founders, employees, or other investors. The price is typically at a discount to the last priced round such as 15 to 30%. The seller must find a buyer for the stock. […]

Customize the Pitch for the Investor Customize the pitch for each investor.  Research the investor before the pitch to learn more about their investment thesis. Review their portfolio of startups to see what is common about them and how your deal fits. For each investor choose three points to highlight that you think will connect […]

Challenges in Secondary Sales There are several obstacles to overcome in completing a secondary sale. Here are some challenges to consider: Board approval — In many cases, the company must approve any founder shares being sold.  Right of First Refusal — companies that have raised funding have Rights of First Refusal on any offers of […]

Benefits of a Secondary Sale A secondary sale brings several benefits to the stakeholders in a startup. Companies stay private much longer than before.   Those in the company need access to capital.  For founders, a secondary sale provides some liquidity in the near term giving them the opportunity to continue growing their business for a […]

Why Do Investors Want Secondaries Secondaries stands for secondary sales which refers to selling privately held stock in startups to other buyers. Investors buy secondaries instead of waiting for the next fundraise round. By buying now rather than later the investor can lock in a lower valuation. Investors in secondaries provide liquidity to other investors […]

Why Companies Delay IPOs Companies stay private much longer than they used to. Previously companies ran an Initial Public Offering to gain access to the public markets for financing. Companies delay their IPOs for any of the following reasons: Avoid the cost of going public which is fairly high given the regulatory requirements. Maintain a […]

What Are Secondaries Secondaries stands for secondary sales which refers to selling privately held stock in startups to other buyers. This arises from several sources such as investors who want to get into the deal after the fundraise is complete or employees who want to sell some of their shares. Secondary sales are on the […]

Preparing the Diligence Documents Investors interested in your startup will want to perform due diligence on the deal. Diligence is a standard process investors go through to review all the relevant documents and checkmark all the boxes before investing. In preparing your diligence documents consider the following: Start with a checklist of potential items to […]

Customize the Pitch for Your Investor Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing. In pitching investors, you’ll find that each investor is unique. Customize the pitch for the investor by emphasizing the elements of your deal that intrigue the investor. If the […]

Preparing the Pitchdeck In preparing your pitchdeck consider the following: Start with a template slide deck.  This ensures you cover all the key points. Each slide is one section of the executive summary.  Problem/Opportunity, Solution, Product, Team, etc. Write out on each slide what you want to say about that topic. Use the short bullet […]

Identify the Target Investors Once you’ve identified the ideal investor type for your business you’ll need to build a target list of investors to pursue. Research potential investors for their criteria and how it matches your deal. Key areas to look for are industry sector, stage of investment, and geographic preference. Look at the portfolio […]

Profiling the Ideal Investor There are several types of accredited investors in the startup world.  These include angels, venture capitalists, and family offices. Angels write smaller checks compared to the other two but can provide support for your business as advisors and networkers to raise more capital. Venture capitalists write bigger checks and often take […]

Valuation Methods To Consider In preparing your fundraise you need to consider your current valuation even if you’re using a SAFE or Convertible Note. There are several methods to use to estimate your valuation. The most often used method is comparables. This method looks at similar companies that recently raised funding and uses that as […]

Preparing the Business Metrics Investors are looking for a high-growth company with good unit economics. In preparing for your fundraise you need to identify a handful of key metrics that show your growth story. For the seed stage, you must have a run rate that is above 10K revenue per month. For the growth stage, […]

When To Raise Funding Most founders go out for a fundraise prematurely because they need money, not because they are ready for fundraising. Consider the following to understand when to raise funding. Have a compelling idea that you can clearly articulate. Have a validated customer, market, and product lineup. Have the investor documents prepared.  While […]

Milestone the Raise Founders often want to compress their fundraising into one round for the sake of efficiency. While this may sound like a good idea, it’s actually an expensive one for the founder. Raising too much money in the early stages will cost the founder equity dilution. The valuation of the startup is low […]

How Much Funding To Raise When raising funding consider how much you should raise. Start with the overall amount of funding required to take the business to cash flow positive. This is often a fairly large number for platform-based businesses in a high-growth sector. Take the overall amount of funding and break it down into […]

Fundraising Timeline For every $1M of funding you want to raise, it will take one year to raise it for early-stage startups. This includes time to prepare the company, the investor documents, and the pitch as well as contacting, pitching, and following up with investors.  It’s best to have your pitch deck and financial projections […]

Fundraise Differences by Stage In raising funding over the life of the startup you’ll find there are differences in the fundraise at each stage. The goal at the Seed stage is to show you can sell the product. At this stage, the investors will look primarily at the team since there’s little in the way […]

Von Restorff Effect The Von Restorff effect is defined by Wikipedia as an item that sticks out and is more likely to be remembered than other items. The startup pitch that provides something unique will be remembered more than the others. To use the Von Restorff effect in your pitch consider the following: Highlight key […]

What Type of Funding Should You Seek When raising funding consider the type of funding you should pursue. There are many types of funding such as equity funding including angels and venture capitalists. There are debt funding tools including loans and revenue-based funding. There are crowdfunding portals including rewards, equity, and peer-to-peer lending. Before choosing […]

Zeigarnik Effect The Zeigarnik effect is defined by Wikipedia as uncompleted or interrupted tasks that are remembered better than completed ones. Investors will remember the pitch that leaves them hanging more easily than those with closure. The cliffhanger in a serialized show is remembered because the action is left unfinished. It leaves the viewer with […]

Verbatim Effect The Verbatim effect is defined by Wikipedia as the “gist” of what someone has said that is better remembered than the verbatim wording. Catchphrases and taglines will help investors remember your startup and what it does. Investors remember the essential meaning rather than the specific words you say in a pitch. They will […]

Should You Raise Funding for Your Startup Before raising funding consider if you should raise funding for your startup. Ask why you need funding and see if you have a specific need for funding tied to growing the business.  If you have a business on a high growth trajectory, consider venture funding.  If the business […]

Testing Effect The testing effect is defined by Wikipedia as the fact that you more easily remember information you have read by rewriting it instead of rereading it. Investors remember what they recall from memory better than just hearing the pitch again. This comes from research showing that taking a test that requires one to […]

Spacing Effect The spacing effect is defined by Wikipedia as information is better recalled if exposure to it is repeated over a long span of time rather than a short one. A series of updates is more effective in communicating your startup story as the investor will remember more than if the story were given […]

Humor Effect The humor effect is defined by Wikipedia as humorous items that are more easily remembered than non-humorous ones, which might be explained by the distinctiveness of humor, the increased cognitive processing time to understand the humor or the emotional arousal caused by the humor. Startup pitches with humor are more memorable than those […]

Context Effect Context effect is defined by Wikipedia as cognition and memory are dependent on context, such that out-of-context memories are more difficult to retrieve than in-context memories Investors need context in order to understand the startup offering such as the problem to be solved. In pitching founders include basic concepts in the presentation. The […]

Bizarreness Effect The bizarreness effect is defined by Wikipedia as bizarre material that is better remembered than common material. Presentations that use bizarre information are more easily remembered than conventional ones. Founders can capture and maintain the interest of investors by using unusual wording or language. This works when the unusual phrase or sentence is […]

False Consensus Effect The false consensus effect is defined by Wikipedia as the tendency for people to overestimate the degree to which other people agree with them. Founders sometimes overestimate how others may share their beliefs. They often mistake silence for consent in talking with investors. Investors often nod in acknowledgment of what the founder […]

Naive Realism Naive realism is defined by Wikipedia as the belief that we see reality as it really is – objectively and without bias; that the facts are plain for all to see; that rational person will agree with us; and that those who don’t are either uninformed, lazy, irrational, or biased. Founders believe their […]

Illusory Superiority Illusory superiority is defined by Wikipedia as overestimating one’s desirable qualities and underestimating undesirable qualities, relative to other people. Every founder considers themselves superior and should be funded accordingly. This is a flawed view of the startup world in which investors can see many startups while the founder sees far fewer. In fundraising, […]

Illusion of External Agency Illusion of external agency is defined by Wikipedia as when people view self-generated preferences as instead being caused by insightful, effective, and benevolent agents. Founders often believe someone else can make their fundraiser successful. The responsibility of fundraising for startups lies solely on the founder’s shoulders. While others may help through […]

Group Attribution Error Group attribution error is defined by Wikipedia as the biased belief that the characteristics of an individual group member are reflective of the group as a whole. Startups often project the characteristics of one investor on the entire group when the group is much more diverse. Angel groups for example are composed […]

Zero-Risk Bias Zero-risk bias is defined by Wikipedia as the preference for reducing a small risk to zero over a greater reduction in a larger risk. Customers will choose a product that eliminates risk over another product that has a greater price reduction. For example, you could offer two products that are similar. The first […]