After 2 days of heavy work, today was the day where we sketched out the term sheet. I had worked on preliminary cost estimates on the China side to establish funding level, and runway time. We also spent a few hours looking at an individual P&L of an order, and the volume of orders expected.
I realized that I had actually missed an important part of the financial model and that was the cost of customer capture. Coming from the pearl background, the cost of customer capture does not truly get cheaper with time, since there is only a limited amount of ‘staple’ good we are able to offer to the customer.
However, in the shoe business stock rotation is nearly 60% each year, and shoes are a consumable – as such the cost of customer acquisition CAN be looked at from the customer lifetime. Another words, it could make sense to spend $50 to acquire a customer, since one acquired that customer will then be with the business for next 5-10 years. So, when looked at that from a long time frame, the cost of customer capture is reduced to $5 on a pro-rated basis. Having said that, $50 to get a customer and assuming future revenue is a risky model, so for all intense and purposes I would much rather not follow, nevertheless, I missed this part of the equation. Bottom line, is that the numbers and profitability look significantly better when you assume repeat business – which in a case of consumables is there.
So, the long term value actually is going to be much better than I initially expected.
Business aside, we all where pretty tired by today, and it actually felt good to wrap things up. We need to flesh out the term sheet, and look at the corporate structure and ownership, tag along rights, exit clauses, etc. but that is basically long term protection for both parties.
We finished early today,around 6PM – and had a nice break during a day where we all went for a walk in the German woods behinds Thomas place. Thomas has a great loft outside of Darmstadt (pictures below) – truly idyllic place.
Lots of work done in last three days. Very nice atmosphere of openness, sharing, co-operation and looking after each others interests. When this level of relationship is working, the business side has no option but to succeed!
Tomorrow I’m meeting with Krause for breakfast – we will recap and debrief – and also try to finalize our relationship. All very good stuff.
Its been very good but also very tiring 3 days. Actually looking forward to the flight back – the idea of stretching out, having a glass of champagne and reading a book for 8 hours sounds very nice.