INTRODUCTION
Starting a new business can be an exciting adventure! Who doesn't want to find themselves at the top of the next Microsoft, Apple, Facebook, Myspace, Instagram, Beanie Babies, Pet Rocks, Roto-Rooter, Enron, WorldCom, (OK, you get the point!)?
The problem with starting a new business is it carries an inherent amount of risk. (OK, a considerable amount of risk!) One-third of businesses fail within the first two years, and over half are gone in five years. That's a waste of a significant amount of toil, sweat, intellectual effort, creativity, and-oh yes-capital! Failed businesses have stripped entrepreneurs of their life savings (and the savings of others) for millennia, but the successes have also lined the pockets of a lot of savvy investors.
Since most people can't afford to fund their own startups, a popular strategy involves convincing others to get behind your great idea. Venture capital funds are always willing to chase the next big thing, but unfortunately there is a limit to the patience of the world's check-writers, and most of them didn't get rich without recognizing when it is time to cut losses.
There is hope, however! Analytics can help every new business set realistic expectations for their investors, and in fact are essential in the formulation of a business plan. Because of the uncertainties involved with startups (in terms of costs, timelines, returns, rates of success, etc.) it is often difficult to forecast the progression of a new venture, but with a sufficient knowledge of the field and the tasks required, a simulation can frequently get an entrepreneur into the right ballpark. Sometimes this is enough to start the money flowing!
PROJECT OVERVIEW
In this project you will develop a business plan for an Angel Investor in order to secure funding for your new startup. You will require funding until the point that your company generates a profit and is actually able to return capital (or positive equity) to its investors. Expenses may include payroll for developers or designers, facilities and infrastructure, marketing and sales, purchasing or collecting data, research, and a variety of other costs that you may want to identify. Obviously, you will have to identify a viable product around which to build your company. Finally, you will need to determine the cost of executing your business plan across this timeline in order to secure sufficient funding.
[As an aside, the particular product or service is not essential to this project-you may use something developed in another course, some cool idea that you might have in mind, or something entirely fictional.]
You may make any assumptions you want concerning the availability of personnel (whether you will be required to hire them or if they are already onboard as part of your venture) and you will need to calculate the rates required to retain their services (market rates for most skill sets are readily available from a variety of sources).
PROJECT REQUIREMENTS
1. Develop a timeline (flowchart) of the tasks that need to be accomplished in order to make your company profitable. Build in as much efficiency as possible by completing tasks in parallel (i.e forks). This should look like a project plan as we discussed them in a previous part of the course. It should have at least 10 tasks. At least one place in the project plan should have tasks running in parallel.
2. Identify appropriate distributions for all of the tasks on your timeline, to include sales and the potential for them to generate revenue.
3. Build an Excel-based simulation of your timeline and create a histogram of possible durations for the company to become a success.
4. Apply the "Clint Eastwood" rule to your simulation output ("How lucky do you feel?") Remember: being too aggressive can get you burnt if you don't achieve your goals, but being too conservative in your estimate and asking for too much can result in your proposal getting turned down.
5. Generate Cost and Revenue curves for your timeline from step 4.
DELIVERABLE 1. A business plan proposal and funding request for your Angel Investor or the director at your company that could fund your project. This should be brief, and should focus on specifics and results. This should be organized to be presented to an Angel Investor. In particular:
- Describe your product and why it's so great
- Quick description of the tasks needed
- How long it will take to complete your tasks
- How much money will be required to fund this venture
- How long it will take to generate a profit
- How much return can be expected on the initial investment over time
- Be use they know that you used a simulation to model the tasks needed for the project
DELIVERABLE 2. A summary of the simulation you used to support your decisions. This section of the project plan should be roughly based on the information you your created using your excel simulation.
This should include:
- A flowchart of tasks (should be a picture involved here)
- The equation you created and used based on the flowchart
- Detailed description of tasks (what is it, include start/end times, distribution you used in your simulation and why which can include pictures, associated cost and revenue)
- A summary of the simulation output (to include time to each critical point)
- The decisions you made from your output in terms of time to completion (how lucky rule)
- The cost and revenue analysis associated with the timeline (include graph and explanation)
Both parts should be submitted together on Canvas. You should also submit your Excel work that supports your written information.
Simulation Guide
1. Decide your 10 steps
2. For each step: Decide the type of distribution it will take to complete that step. How much will that step cost? (Base these on logic, market prices, internet searches, etc. - try to be accurate but don't stress if it's just an estimate for this project!)
3. Set up the excel spreadsheet. Color code and LABEL 2 columns for each step: one for the distribution and one for the random numbers. Above these: describe the distribution shape and label the alpha, beta, starting and ending points.
4. Create the random numbers for each step (10,000 trials). Lock them in place (do not allow them to change) by copying the column, right click, paste as Values (symbol has "123").
5. Now create the correct beta distributions for each step using the random numbers generated for that step
6. Run descriptives on each step - what was the mean time needed for each step? What was the min/max? Double check the distribution you chose.
7. Decide what your total formula is for Time Needed (Time = completion of each step but watch for forks in the model)
8. Calculate the time needed for each trail
9. Run descriptives on Total Time Needed including a histogram.
10. Consider the "How Lucky" rule and decide how long you want to ask the investors for. (80%, 50%, 10% of Time Needed???)
11. Now that you have the time needed for each step, open a new sheet and add in the estimated cost for each step. Report these by week 1, week 2, etc. Calculate the estimated total cost per week.
12. Create a column for estimated Revenue per week. Then make a column for Net Profit and Cumulative Profit
13. Graph these so you can tell your investor when they might see a return on their investment.
14. Create your report.