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.
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