Chapter 16: Profit and Harvest

Tom Byers, Stanford University,
Andrew Nelson, University of Oregon
and Richard Dorf, University of California, Davis

A new firm creates a sales model describing how it will generate revenues from its customers. Then it determines a cost model and how to generate profits from its revenues. The revenue and profit engines show how the firm will create value for its customers and how customers will enable the new firm to profit. Many new ventures assume that profit will flow naturally from sales but discover that profits are not guaranteed. It is especially challenging to operate in markets that are often unprofitable.

Except in circumstances where market dominance is a priority, most ventures seek positive cash flow as soon as is feasible. Managing revenue growth is important since uncontrolled growth can lead to negative cash flow and the need to constantly raise new funds from outside investors. Furthermore, a firm needs a plan to harvest the benefits of its growing venture for all owners. Entrepreneurs must also be realistic and accept that termination of the new venture is a possibility.

1. “Critical Early Decisions with Long-Lasting Results” with Robin Li, GGV Capital

2. “Why Google Won Desktop Search” with Chi-Hua Chien and Dan Rosensweig, Goodwater Capital and Chegg

3. “Being Real About Entrepreneurship” with Derek Belch, STRIVR Labs

Continue to Chapter 17