How to build $100M business model bottom up (in < 7 years)?
VCs like to see you at $100M revenue level in 5-10 years.
In previous article, we covered how choosing the right market (TAM) is the biggest indicator of your success. At the end of the day, VCs mostly care if your business model can generate $100M revenue in 5-10 years. Most companies get to exit stage (IPO, M&A) at this point.
Throughout your interactions with investors your ultimate job is to show that you are the domain authority about your market. Explaining the pain points and creating a through empathy for your user base is way to open the door. Emotions always work better than rational/numbers approach.
Assuming you have the door wide open. Now you have to show you are on top of your market quantitively. That means you understand the value chain to serve your customers ins-and-outs. You have the product-market fit. But how are you going to bring the product to the market en masse?
This is why understanding distribution (sales) is the most crucial part of building a solid business model.
Distribution always beats the product.
When you offer your product, you need to quickly ask the following questions get a crack at understanding distribution.
Who is using my product?
Who is paying for my product?
Who is distributing my product?
For example, if you are selling breakfast cereals, kids are using your product, but parents are paying for it. Yet if you don't have partnership with Walmart or you are not a D2C branding genius none of your buyers will hear about you.
The kid is your market, but mom is the decision maker and retailer are the channel to convince.
It is the same for our business model. Our mission is to bring essential goods to 1.7 billion unbanked households. Most of our customers are unbanked but they like to pay in installments. Hence our playbook was to find all the top trusted Tupperware ladies in the village (distribution) to become our digital POS.
For our end users we knew their pain point was high delivery costs to rural locations. Our product (app, algorithm) created buying groups, and we ship the items in bulk to agent's house. This help drop delivery costs by 80% vs traditional models. Hence, an average unbanked household could afford much more with the same discretionary spending. It's like Walmart came to their village.
But it was key to incentivize agents to bring our solution to local communities. Before us they were only able to sell single category products (Tupperware etc.) so their income was capped. We offer them to become a full stack SME for their community. They were able to take commission from every single item sold such as TV, furniture, smartphones, motorbikes. We also gave access to working capital. Suddenly, most of the agents were converting to us in droves.
The real success was due to how we scale up our agent (distribution) network.
After finding your channel, then you build your revenue drivers bottom up and see how many customers you need to achieve $100M revenue.
In our example, let's say each agent generates $300 sales per month. It makes $3,600 per year. To hit $100M I need roughly 27,800 agents. In our desk research we found there are close to 2 million agents in Java Island alone. That mean we only need to penetrate 1.4% of the agent network. It's quite realistic (not necessarily easy).
Let's calculate it from other way. Each agent serves 15 households on average. An average village has 25,000 households. There are 6,500 villages in Java Island. We have $20 monthly spend per household, ~$250 per year. To hit $100M we need 400.000 households. Per village that makes ~60 households. We only need 4 agent per village to hit our exit traction target.
This is how we mapped penetration % per village.
I don't need to open any spreadsheets to come to these numbers. I know my key business drivers (e.g., HH per agent, sales per HH, agent per village etc.) like the back of my hand. This is the business driver maturity you need to have for your respective business.
However, this is only half of the job. When investors ask "If I give you 2X $ can you get to 3X traction instead? how do you answer that question?
Well, this is where CAC and unit economics come into play.
End of Part
Coming Next
Why growth vs profitability is a false dichotomy?
Why only thing you should focus on is growth?
How focusing on growth can help you raise capital easier and with higher revenue multiples?
Bonus Stuff
Join us at Fundraising Success Group on LinkedIn where we share more in-depth insights and real startup examples.
