A standard part of the investment process is to identify a business model's key variables and to generate scenarios that test their impact on revenue and cash.
Sure signs of a thoughtful management team are:
- the ability of the management team to articulate the material business drivers in the model
- to test the impact of the variables on material financial metrics
- to sanity check the assumptions with market comps - i.e. not to base the business on a black swan outcome
- to focus the management team and company KPIs on the identified variables.
- the inclusion of scenario analyses in investor presentations
The attached example illustrates the value of data tables in analyzing
- the impact of CPM rates and
- revenue share on an ad network.
For example, the analysis illustrates that for the company to hit 2008 revenue
- at a $5 cpm, 20% revenue share
- the company needs to grow monthly impressions to
- 333.33m PVS/month
- 6.67x current traffic
- 56% of MSNBC's current monthly traffic
- However, at a $2 CPM and 10% revenue share
- the company needs to grow monthly impressions to
- 1.666bn PVS/month
- 33.33x current traffic
- 282% of MSNBC's tarffic
- Ie, the model begins to look precarious and "black swan-like, ie possible but highly improbable"