Value capture is a very useful tool for modelling the path of a start-up from zero to hero, as well as a tool for simplifying the process to profitability and payback.
Break-even and pay-back are crucial concepts in business investing, whether it’s for a totally new business, or just a new venture at an existing company.
Breakeven is when the company’s margin becomes positive, generally the amount of revenue required to hit that point.
Some companies use different margin break-evens, although the most common two are operating profit or EBITDA (operating profit but with the cost of depreciating assets added back) breakeven to show that the company has turned profitable, and we are really, properly, capturing the value we deserve from the business.
That’s good. Breakeven is great news, but payback is better.
Payback is when our cost of investing in this venture has been returned to us, figuratively if not literally (because we may have chosen to re-invest it).
So if we funded a business not just with working capital for inventory, but with other assets such as computers, software, and a big van to transport us all around (who knows why?), breakeven would be the moment when our sales are starting to pay off the computers and van, while payback would be how long that process would take.
In a way, you can use value-capture and break-even to work out how much capital investment your business will need.
The longer your business will take to reach break-even, the more capital it will need invested to get it to that point: you will need cash in the bank to cover the costs that your value capture isn’t yet covering.
The more value you can capture quickly, the quicker you should reach break-even, and no longer need capital to cover your start-up costs.
Equally, the less assets you need to start a business, the quicker it will achieve pay-back, because there’s less to actually pay back.
The sooner you focus on capturing value in your business, the sooner you can achieve break-even and pay-back, the less capital you will need to borrow to set up your business.
It might even be possible to set it up without any capital at all, if you can manage your working capital tightly. We’ll discuss that later – first answer these questions.
Now let’s look at how you can build a machine that really captures value.