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Business Modelling and Strategic Decision-Making for Enterprise Growth

Hilton Nicosia, 25-26 September 2018

One of the most frequent challenges small enterprises and start-ups encounter is expressing their online growth plans to internal shareholders and external investors. To solve this problem, we have developed a strategic training programme introducing five business modelling strategies for online growth.  The training involves development of dynamic business modelling using MS Excel, and is oriented towards small enterprises and start-ups in Cyprus that want to explore different growth options and valuations.

The training content will include methods for:

  1. Setting a growth strategy: There are a number of business models for growth today, ranging from buying market share via advertising to organic growth. We will explore different options available to B2B and B2C-oriented enterprises.

  2. Developing a 5-year customer acquisitions and revenue plan, including key indicators such as cost of acquisition, lifetime cost of acquisition, churn rate, defect rate, renewal rate, annual revenue, lifetime revenue, and showing this properly in MS Excel and business planning documents.

  3. Developing a 5-year product/service development plan, including freemium models for online products/services.

  4. Developing a 5-year profit-loss model and plan together with the key indicators needed to attract funding or finance. There will be a detailed explanation of different funding vehicles involved: grants, angel investors, venture capital, private equity, bank loans, IPOs.

  5. Review of key technology and policy issues that will affect future growth in Cyprus and the EU: big data, augmented & virtual reality, blockchain, GDPR, fintech regulation and others. These both create growth opportunities and also new requirements.

We will provide business modelling tools and tactics based on five distinct growth strategies:

  1. Organic Online Growth: This develops an organic growth model using commonly-accepted metrics such as # visitors, source per visitor, inquiry rate, conversion rate, retention rates, customer acquisition costs, customer lifetime value. It explores the links between the standard, accounting-based profit/loss statement and how online growth influences this business model.

  2. Sponsored Online Growth. This approach enhances the organic model by adding sponsored growth metrics based on (a) capital invested, (b) advertising type (PPC or PPM/impressions), (c) keyword bidding and selection (d) click-through and conversion rates. It further enhances the business model and serves as a powerful business planning tool.

  3. Mergers & Acquisitions: This approach explores the metrics used in company valuation, including pre- and post-money valuation and valuation methods: IRR/exit value and EBITDA multiple methods.

  4. Venture Capital: This approach will demonstrate the factors used by VC firms in analyzing a company. It will provide methods to calculate key ratios such as cash burn rate, revenue run rate and make a first attempt at pre- and post-money valuation.

  5. Debt: This approach explores what growth criteria are sought by investment and commercial banks, and demonstrates how to calculate debt disbursement and repayment calculations and some debt service ratios.

Each scenario includes a MS Excel dynamic modelling session which can be used by each participating enterprise to model their own growth strategy.

The training modules include:

1. Introduction (105 min)

We live in a time of highly competitive and rapidly-changing online growth. Today, there are multiple pathways to growing an enterprise online, and multiple exit strategies. We will examine five fundamental methods for growing online today, together with their offline impacts and requirements.

  1. Organic Growth Strategies (Content and inbound marketing-driven using own cash flow and operations)
  2. Sponsored Growth Strategies (Advertising-driven)
  3. Mergers & Acquisitions
  4. Venture Capital-driven growth
  5. Other Capital Means (IPOs, ICOs, Debt)

Each of these strategies has a specific starting and end point and specific campaign tactics and tools that need to be developed. Each strategy is:

  1. Documented using a Microsoft Excel business model
  2. Budgeted in terms of online activities, costs and results
  3. Monitored in terms of actual results and conversions

These growth strategies are complementary and describe methods of using channels, tools and resources. By channels and tools, we refer to:

  1. Websites (and ecosystems of websites, microsites, etc.) and Blogging
  2. Content Marketing & A/B Testing
  3. Search Engine Advertising (PPC), including retargeting & A/B Testing
  4. Display Advertising, including Retargetting and A/B Testing
  5. Social Media Promotion and Marketing
  6. Newsletter & Email Marketing
  7. Search Engine Optimisation
  8. Selling on Third-party ecommerce Sites, including Daily Deal sites
  9. Other online channels and tools.

 

2. Organic Growth Strategies (105 min)

Organic Growth strategy refers to growth that is driven by like-for-like sales of products or services generated internally by the enterprise. This calls for tools and tactics such as:

  1. Search engine optimisation, calls to action, and online sales conversion (organic sales funnel activities);
  2. Online sales discounting;
  3. Online loyalty programmes and similar tools;
  4. Content or inbound marketing as tools supporting entry into the sales funnel at the top end;
  5. Social media dissemination (via free promotion)
  6. Cross-listing and other tactics (via free promotion)

We start with organic growth because it provides the truest picture of the “as is” situation in the company.

The business modelling on MS Excel focuses on top line and middle line indicators. In addition to the online sales and marketing tactics, we provide an action-learning session on MS Excel, including:

  1. Basics of the profit/loss statement
  2. Sales forecasting: # units sold, cost of goods sold, gross sales revenue
  3. Cost of customer acquisition and customer acquisition rate
  4. Lifetime customer revenue
  5. Customer defection or loss rate
  6. Conversion metrics

We will also implement a brief operating cost modelling touching on main cost points such as staff, facilities, marketing & promotion, service, and other costs.

 

3. Sponsored Growth Strategies (105 min)

Sponsored growth strategies refer to those driven by online advertising, whether on the web, or on social media. We differentiate sponsored from organic growth in order to gain a clear understanding of:

  1. The organic business model, conversion rates and basic attractiveness;
  2. The sponsored business model: how much does advertising lead to better results?
  3. Issues in terms of efficiency (e.g. A/B testing), keyword choice, image choice, channels, click-through rates and display rates, conversation rates and other issues.

This module provides an in-depth view of state-of-the-art in online advertising and promotion, focussing on two platforms: Google Adwords and Facebook advertising. The technical part of the training will include:

  • Setting up PPC and display advertising campaigns
  • Choosing between PPC and PPM pricing methods
  • Creating custom audiences and mirror / lookalike audiences
  • Retargetting and best practise for avoiding retargeting fatigue
  • A/B testing and analytics

The applied part of the module will develop an MS Excel model outlining the costs, conversions and income from sponsored growth. This will be done for a PPC and PPM advertising model. Conversion rates will be estimated based on best practise from multiple sectors, This will expand the growth scenario of the previous Excel model, implemented in Module 2.

 

4. Mergers & Acquisitions (105 min)

This session introduces the basic approach towards company valuation and expansion using mergers and acquisitions. This is a critical growth strategy for small enterprises in Cyprus today even though few utilise it. As economies of scale must rise due to a highly competitive market environment, it is clear that certain small companies will no longer be able to survive. This is seen very clearly in certain segments such as travel: in 2000, the Association of Cyprus Travel Agents had over 400 members, and there were 700 travel agencies in Cyprus. Today, most estimates place the number of travel agencies in operation at under 400.

It has also been included due to the focus on innovative companies and start-ups. The process of attracting capital is a core growth method for such firms. The M&A module reveals the core methodology for achieving this.

The technical part of the training includes:

  • Choosing your strategy: initiate growth or exit a business
  • Identifying likely M&A targets or strategic investors
  • Brief methods of company valuation: IRR, EBITDA multiples, free cash flow, market observation
  • Understanding how to gain synergies from operations: post-merger restructuring

This session returns to the MS Excel model being developed and adds a brief section on company valuation. This will be based solely on the profit/loss model being developed, and will use IRR and EBITDA multiple valuations.

 

5. Venture Capital-Driven Growth (105 min)

This module has been included due to the relevance of external equity investors in the start-up field. By VC-driven growth, we refer to any strategic external financial partner who injects capital into the enterprise in exchange for equity. This can be an angel investor, a VC, a business accelerator taking 8% of equity in exchange for acceleration services, and others.

The technical part of the module will include:

  • Understanding how VCs value companies: similarities and differences with the classic valuation approach explored in Module 4. The main differences are that VCs are typically more forward-oriented or growth-oriented that classic valuation, which relies on current financial performance. Moreover, VCs will integrate customer performance and behaviour into a financial valuation. This is crucial for understanding online growth.
  • Understanding key ratios such as pre-money and post-money valuation, revenue growth, revenue run rate, cash burn rate, user metrics.
  • Different funding rounds (series A, series B) and impact on equity valuation, dilution and management.

The class will calculate key ratios such as cash burn rate, revenue run rate and make a first attempt at pre- and post-money valuation.

 

5. Debt & Other Growth Methods (105 min)

This module will briefly review other means of financing growth and what implications this has on enterprise growth models in Cyprus. These include:

  • Debt
  • Convertible debt
  • Initial public offering (IPO)
  • Initial coin offering (ICO)

In each case, we will review the impact on financial statements, equity and decision-making.

The class will calculate debt service and interest costs using a hypothetical bank loan, and integrate this into the 5-year planning in MS Excel.

 

6. Decision Frameworks (105 min)

Different enterprises and management teams will find themselves confronted by different challenges and opportunities. Not every growth strategy works for every company. This module will put different strategies into context by looking at decision-making frameworks for online growth. These include:

  • The Venture Capital Framework: what data do VCs use in making investment decisions?
  • The Banking Framework: what data to bankers use in making lending decisions?
  • The Private Equity Framework: what data to PE funds use in making investment decisions?
  • The Individual Retail Investor Framework: what to small-scale, individual investors assess in deciding to invest?

 

7. Conclusions to Planning & Managing Online Growth (105 min)

This session concludes the training with a review of some key technological trends and issues that small company founders and managers need to take into account in planning and managing their online growth.

  • Exclusivity vs Inclusivity: Although we focus on Facebook and Google as typical growth partners, these are mass-market channels designed for inclusivity. Products and services are available to everyone. One key decision is whether to become exclusive: to define a niche for a limited, pre-qualified set of customers.
  • Market Domination: A rarely-understood aspect of the Silicon Valley growth model is the extent to which VCs are subsidising market share. Uber, Amazon, Paypal and many other companies grew by accepting a loss on key transactions in order to establish a monopolistic status. Today, for instance, Uber is losing between $ 4 and 6 billion every year in an attempt to establish a monopoly in “ride-sharing”. Amazon.com lost money for years in online retail, and today it’s results are flattered by high income in web services offsetting low margins in retail. This element will review how market domination and competitive effects establish your online growth model.
  • Hypergrowth: A key issue in terms of online growth is to establish rapid growth, or hypergrowth. How can this be achieved with limited resources in a conservative market? What steps should be undertaken?
  • Planning and Pivotting: In the online space, business plans are usually outmoded very fast. We will review how quickly companies should review their core plans, and how to “pivot” to offering new services or serving new niches.
  • Internationalisation: Although Cyprus is an excellent location for a business, it is restrictive in terms of domestic market potential. We will review how Cyprus-based businesses can expand internationally, and what this means for owners and managers.
  • Key technologies and requirements, including GDPR, augmented and virtual reality, big data, blockchain, fintech regulation and others.

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