Agile Strategy Institute

Cash and valuation curve

The third tool is the cash and valuation curve. When the cumulative cashflow of a business is plotted over its lifetime, it ideally takes on the shape of the well-known S-curve (exhibit 3). 

Exhibit 3: cash and valuation curve

In the beginning of the business, the cumulative cash curve trends downward, as cash is steadily invested to build products and launch the business. Once revenue begins to come in, the cash curve turns, and begins to trend upwards. When sufficient revenue has been generated, the cash curve gets to breakeven – i.e. at this point, the business has generated sufficient positive cashflow to pay back the total investment. Thereafter, the cumulative cashflow is all surplus – i.e. pure “profit”⁸.

The valuation curve more or less follows the cash curve, because valuation is fundamentally a function of cash flow⁹. In the early stage, the valuation is typically relatively low. As the business moves into positive cashflow, the valuation increases to reflect this.

A primary goal in managing the economics of the business is to move from the blue dotted lines in exhibit 3 to the red lines. By minimizing upfront investment, accelerating revenue and increasing profit margins, you get to cashflow breakeven far more quickly and use far less capital in doing so.  Thereafter, the goal is to increase the surplus above the breakeven line, to increase the total positive cash generated over the lifetime of the business. Doing so will drive the valuation up to reflect this increased cashflow.  

*  *  *

In summary, this paper has presented an overview of the “economics” component of a business model, It has emphasized the need to see a business as an integrated economic engine, and to understand the economic impact of every business model design decision. Three useful tools have been presented:  an integrated cashflow model, a key driver analysis and the cash and valuation curve. Understanding and applying these tools will contribute significantly to business model design and business success. 

Selecting and understanding markets for technology innovation

We recently introduced a new business model framework for technology innovation comprising five primary components: markets, products, processes, people and economics (see What is a business model? A new approach). In this paper, we explore the first component of this framework – markets.

The goal of the market component is simple and clear: to focus your business on a large, growing market with urgently felt needs that are not being met by current offerings. 

However, in practice it is challenging to accomplish this ideal. In some cases, it seems that there are no unmet needs for the new technology. In other cases, innovators can be overwhelmed by the number of apparent market opportunities for their new technologies and products.

This paper discusses the importance of finding and selecting the right market, and how to go about doing so systematically and thoughtfully so that you maximize the chances for your venture’s success.