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HomeSoft Solutions

Business Plan

Developed by MIT student team in 15.390x

1. Executive Summary

As of today, the single-family custom home construction industry is riddled

with inefficiencies that often stem from the interactions between clients and

contractors. Through industry research, our team has discovered that the product

selection process is typically one of the most inefficient of these interactions, and

our service is intended to mitigate this inefficiency and improve the process.

Currently, product selection typically includes visiting overwhelming showrooms

and searching for products throughout various websites, which may not make the

necessary product information available for the contractor.

HomeSoft Solutions is a web service that allows clients to make these

otherwise time-consuming product decisions online without the presence of a

business associate in a very efficient manner. With this service, businesses can

enhance organization, reduce product research and client consultation time, and

make changes to existing product orders seamlessly within a single document.

Clients will benefit in a similar manner by being presented with a wider variety of

product choices and the opportunity to make product decisions at their leisure,

reducing the possibility of stressful interactions with business associates.

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HomeSoft provides several distinct values for both businesses and clients,

which are derived from the following features:

Clients can search through thousands of products within the web

application through an advanced search engine by selecting a single product that

matches their interests, which narrows the search field. After only a few iterations,

only the most relevant options remain.

After a product is added to the clients project through the web

application, it is organized in real time within a spreadsheet that includes all

pertinent data (cost, ordering information, etc.). The spreadsheet is available to

business associates and can be modified at any time.

Both consultation and product selection time are reduced for

contractors and clients, saving considerable amounts of resources.

Primary market research has revealed that on average, the product selection

process consumes roughly 5-10 hours per week for both contractors and clients,

and contractors do not typically charge extra for this time. Our calculations have

indicated that for an average custom home construction project, over $7,000

worth of time is lost throughout this process, which can be reclaimed through the

use of HomeSoft solutions. This figure alone demonstrates the potential for the

adoption of HomeSoft, which will be required in order for contractors to remain

competitive with early adopters.

Additionally, we expect clients to become enthralled with the service,

promoting its use to contractors in order to save themselves valuable time and

resources, which will encourage further adoption of the service. Contractors serve

as our primary economic buyer, while clients (who may access the basic service

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for free) serve as the end users. While alternative services are available, none of

them currently address the inefficiency in the product selection process, instead

focusing only on providing tools for contractors or clients, without connecting

them.

Potential competitors such as Houzz allow clients to find appropriate

products and sources of inspiration, while BuilderTrend focuses exclusively on

allowing contractors to organize projects effectively. HomeSoft intends to achieve

market penetration with its unique service by marrying these two distinct features

into a single service and creating value for contractors and their respective clients

simultaneously. In order to preserve this advantage, intellectual property patents

will be filed as required and additional features for both parties will be added to

the service on a regular basis. It is anticipated that contractors will use HomeSoft

in addition to alternative services. HomeSoft is aimed specifically at clients and

construction companies/contractors interested in building new mid-value single-

family homes or performing renovations/additions to existing homes.

According to IBISWorld, there are approximately 175,000 establishments

in the United States focused on the construction of new single-family homes, and

over 95,000 establishments dedicated to remodeling single and multi-family

homes. This brings the total addressable market potential to 270,000 unique web

service subscriptions in the United States alone. Assuming subscriptions are sold

at a price of $100-200 per month, the identified target market is worth between

$324M-648M annually within the United States.

Though HomeSoft will initially target the single-family custom home

market segment, the concept can be leveraged to adjacent markets once the

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business achieves significant beachhead market penetration. The HomeSoft sales

process begins by incentivizing potential paying customers

(contractors/construction companies) to adopt the product through

advertisements and sales calls offering a free trial of the service for a single

project. Once the time and monetary savings are realized, the minimum viable

product is expected to sell itself; premium features can be accessed for an

additional fee.

Furthermore, clients using the HomeSoft service will be incentivized in a

similar manner to upgrade to a premium membership, which will likewise unlock

additional features. Our teams financial requirements include the salaries/benefits

of employees and founders, the cost of a basic IT and communications

infrastructure, and fees associated with web hosting and cloud storage services.

These requirements are outlined with each stage of development and operation,

as shown below:

Stage 1 - Research and Development - $1.6M (8-12 months):

During this stage, a team of 10 software developers and web designers will be

hired to design and prototype a web application that meets the needs of the

HomeSoft service.

Stage 2 - Alpha Testing - $800,000 (4-10 months): In this stage, the

web application will be heavily tested by the development team. Bugs and user

interface adjustments will be addressed as required.

Stage 3 - Beta Testing - $1.1M (2-3 months): In this stage, a team

of 12 salespeople will be brought onboard to sell subscriptions of the web

application to highly valuable companies and clients. Beta testing will be

performed, and will rely on user feedback. The user interface will likely be

adjusted in this stage. Any remaining bugs will be eliminated.

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Stage 4 - Marketing and Sales - Approximately $3.6M annually:

Advertisements will be purchased in magazines such as Builder and Better Home

and Gardens, and subscriptions will be provided free of charge to a limited

number of major companies who agree to advertise HomeSoft on their website.

Social media will be used heavily for promotion, as well as consistent presence at

expos across the country.

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2. Founding Team

Jake Avory, CEO - Jacob is a second-year graduate student at

Massachusetts Institute of Technology studying aeronautical engineering. His

prior experience includes management and process efficiency improvement of a

small custodial business, as well as web design.

Mark Sele, CFO - Marc is a senior undergraduate student at Berlin School

of Finance & Management studying finance. He has worked for two years in one

of the largest German banks and gained experience in M&A and Capital Markets.

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3. Market Segmentation and Selection of the Beachhead Market

The building construction sector was segmented into commercial,

residential, and industrial building construction industries. ABC software will

provide the greatest value to the residential building industry, and thus was

selected as the target market.

This segment was then further divided into single and multi-family

segments. The single-family segment was selected due to the relatively high rate of

custom home and remodeling jobs, and the beachhead market was identified as

the mid-value homes within this segment.

$338B is spent each year on building construction, of which nearly $114B

is dedicated to residential construction. The residential construction sector is

expected to grow through 2018 at an average of 8.3%, with growth drivers

including interest rates, value of construction, per capita disposable income, and

the national unemployment rate. The figure below illustrates the market

segmentation process and revenue streams of each identified segment.

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4. Total Addressable Market Size (TAM)

In Calculating the TAM, we took a two-pronged approach. After

interviewing a number of contractors and doing due diligence, we discovered that

the volume of work that each contractor takes on varies substantially. Feedback

we received was mixed, with smaller contractors preferring a one-time fee per

project and larger contractors having a preference for a monthly fee. Based on

this feedback, we calculated our TAM both ways to establish a price point for the

product that come to the same total. This proved that either monetization

approach is viable, as well as a hybrid approach if we deem it necessary.

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5. End User Profile and Persona

Personifications of the beachhead market were derived directly from

information gathered through interviews of single-family custom homeowners

and home building companies. Both are represented here as end-users and

economic buyers, respectively.

End-User : Jane Herthel is a 38 year-old Caucasian woman. She is on a

marketing team for Oracle Corporation, telecommuting from home in Santa

Barbara, CA. Jane has in income of $65k per year, but combined with her

husband Chris, the household income is $215k per year, pending Chris year-end

bonus which makes up 20% of his income on average. She attended the

University of California Los Angeles (UCLA), earning a BA in marketing and

communications. Jane and Chris have a newborn baby girl. Her family lives in Los

Angeles, a two hour drive South from Santa Barbara.

Jane has not been a standout employee since she decided to have a baby, at

which point, that became her number one priority. She is not expecting a

promotion nor does she want any more responsibility, but is expecting a gradual

increase in salary over time. She attends several marketing seminars and

conferences around the US every year for Oracle Corporation.

Jane listens to 80s and 90s pop and alternative music, such as Dave

Matthews Band and Madonna. Most of her friends live in the greater Los

Angeles area and have families of their own. Jane spends most of her time with

other mothers and their children who she met through social meet-up groups in

Santa Barbara. They take the kids to the beach, the park, the zoo, and other

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attractions in town. Jane goes for a walk every morning with a revolving handful

of women in the neighborhood.

Janes hero is her mother. She is motivated to mold the environment in

which she will raise her daughter. What Jane fears most is her family being broken

up in any way as well as losing any financial income stream, on which they so

heavily depend. Her priority is raising her daughter, having the perfect home,

and having her parents visit and stay in her manicured guest bedroom.

Economic Buyer : Bryan Henson, a 40 year-old Caucasian male, is the

President of Allen Associates Construction in Santa Barbara, California. Bryan

makes $200k per year, pending his sales bonus, which makes up the majority of

his salary. Bryan earned a BA in business management from Humboldt State and

a Masters of Science in Environmental Business Management from the

University of California, Santa Barbara. Bryan has a wife, two daughters, and a

newborn son. He is married to his job and the idyllic scenario that the company

grows into something magnificent. Bryan has done well for himself, starting with

the company as a project manager and working his way into the role of president.

His aspirations have changed to growing the company and making it more

profitable. He is an active member of the community in Santa Barbara, the US

Green Building Council, National Association of Home Builders, and The Young

Presidents Organization. Bryan attends many conferences and presentations each

year. He is constantly seeking ways to increase the bottom line of his company.

Bryan listens to Van Morrison and other similar soft rock music. A good

segment of his social life is work-related, as his bread and butter is getting jobs

from his community. The rest of his time is spent at his home in Ojai, California,

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sitting by the pool with his family and trying to relax, winding down from the

high stress environment of homebuilding. Bryans heroes are young & successful

CEOs of companies akin to Allen Associates, clever Authors such as Malcolm

Gladwell, and famous clients he has had in the past.

Bryan is motivated by money, increasing his companys bottom line and

decreasing his stress level, figuring out clever management techniques to delegate

responsibility to other people in the company, and the overall growth of his

company, aiming at branching out to satellite cities in California. Bryans biggest

fears are the next housing bubble bursting, lawsuits from past or current clients

that could wipe out the company, the safety of his children, and insubordination

from people that work for him. His priorities include increasing his bottom line

and breadth in the marketplace, continuing to make strides forward in his career

path no matter what direction it takes him, making time for raising his kids, and

making his wife happy.

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6. Value Proposition

The market for HomeSoft Solutions is two-sided, with single-family

custom home contractors as the economic buyers and their respective clients as

the end users. The Figure 1 below illustrates how HomeSoft streamlines the

process of selecting and ordering products, with the transparent steps being

eliminated from the process, reducing it to a 4 step process.

Primary market research has indicated the when building a new home, the top

priorities of the end users are to make the perfect product selection and keeping

cost and time consumption as low as possible. Current construction clients will be

propelled to adopt HomeSoft because it provides them with more product

options, greater pricing transparency, a reduced level of stress throughout the

process, and is expected to reduce product selection time by at least 50%. The

transparent red steps show how clients currently make product selections, all of

which are replaced through using the HomeSoft website. The end users priorities

are in saving time and reducing stress during product selection, and HomeSoft

satisfies both of these simply and elegantly.

Figure 1: The current product selection cycle (transparent) and the product

selection cycle with HomeSoft.

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Figure 2: Time consumption and cost of the product selection process in

the as is state versus the possible state with HomeSoft.

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The value proposition to the contractor comes in the form of reducing the

time and energy spent on assisting the client to make product decisions, resulting

in reduced overhead and faster job completion. Our survey broke the project into

5 phases, and contractors allocated time spent on making and organizing the

decisions in each phase. This quantified total time spent on the existing inefficient

process. Management labor rates were applied to hours spent to generate a

monetary value to execute the process for a 12 month project. Using industry

knowledge and feedback, HomeSoft percent reduction multipliers were generated.

Utilizing the percent reduction multipliers, time and money saved was quantified.

Worthy of note, are the value-adds that are difficult to quantify. These include but

are not limited to; powerful sales tool, central format for organization within the

company, generating as built information for past jobs, generating user manuals

for clients, and relieving high stress level of clientele and contractor which creates

symbiotic relationships. The cost and time savings shown in figure 2 satisfy the

contractors main priorities.

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Given this value proposition, contractors will happily leave behind their

inefficient processes for a streamlined and easy to use software. HomeSoft will

have strategic partnerships with big name brands, instilling full confidence in the

contractor.

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7. Competitive Advantage

HomeSoft Solutions intends to fill a void in the home construction

industry by offering a service that combines powerful organizational capacity with

an effective and user-friendly interface.

Existing services that have attained appreciable market penetration typically

focus on one feature or another, with none excelling in both aspects. Three major

competitors have been identified in the market: Procore, Build.com, and

BuilderTrend. Procore centralizes their service on providing exceptional

organizational tools, but fails to allow users to make product selections.

Build.com allows limited organization, and focuses primarily on decision-making.

BuilderTrend strikes a balance between these two features, but does not provide

either to an adequate degree. Products are available for viewing by contractors,

but unlike HomeSoft, they are unavailable to clients. Additionally, BuilderTrend

does not automatically generate purchase spreadsheets. The figure below visually

describes the value position of competing companies, as well as the anticipated

position of HomeSoft Solutions.

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HOMESOFT COMPETITION

HomeSoft, at its core, is primarily focused on simplifying the arduous task

of client decision making as it relates to products. Furthermore, the key focus of

the software is to focus on the synthesis between client decisions and

organizational records of the contractor. Rather than address project management

as a whole, HomeSoft focuses on this glaring inefficiency in the marketplace. The

key focus of the software will always be to shave time off of the decision making

process, rendering it unique to other software that takes a more broad approach

at the project as a whole. Though HomeSofts anticipated contractor subscription

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fee of $200 per month (free for clients) is greater than BuilderTrends starting

price, BuilderTrends price rapidly expands with project volume while

HomeSofts cost remains flat. After doing some investigation, we were quoted

$40,000 per year to utilize the Procore software, which puts them out of range of

our product as they are clearly going for another market.

The network effect also has the potential to exist within our core. We

anticipate that clients and contractors alike will begin referring other users from

both sides, which will necessitate the use of HomeSoft for other contractors to

remain competitive. The core of HomeSoft will need to be protected by resisting

the temptation to generate additional profit by increasing subscription fees,

continually updating product and inspiration images, and responding

appropriately to all constructive criticism with service updates in order to keep the

HomeSoft service both exciting and competitive. In regard to the tangential space

of the decision making and organizational synthesis, the most likely new entrants

into this space are Build.com and Houzz. Both are big companies that would have

the funding to make the shift, and the content to back it up.

Since the virtues of HomeSoft do not rely on intellectual property or

proprietary technology, measures to protect them will not be required. Looking

forward, one area that IP will arise is the algorithm and macro driven process of

populating contractor forms that record all the data generated from HomeSoft

software. The figure below identifies many important characteristic of potential

competing companies.

After analyzing the competition for HomeSoft, we have determined that

we have no direct competitors as of now. However, it has become abundantly

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clear that there are many companies operating in the same space, focusing on the

same inefficiency in the marketplace. In order to successfully enter the market,

HomeSoft will have to keep focused on the primary task at hand, solving

the decision making inefficiencies in a way that is engaging and fun for the end-

user. Knowledge of the industry will be key in this process, and will be

HomeSofts competitive advantage over other competitors, as they focus on only

one side of the contractor/client synthesis to solve the problem. Creating value

for the contractor and client alike, and responding to each of their needs, will be

HomeSofts unique key to success.

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8. Business Model and Pricing

The HomeSoft Solutions team has spent a great deal of time deliberating

on the best business model to maximize both profits and customer

satisfaction. While the market for HomeSoft is two-sided and includes

contractors and their respective clients, the value created by the HomeSoft

platform is heavily weighted in the favor of the contractor, who is the primary

economic buyer. Primary market analysis has shown that on an average project of

9 months in length, a contractor utilizing HomeSoft can expect to save

an average of $7,000. We intend to harness roughly 3% of this created value by

charging contractors $200, using a per-project basis as the primary element

of our business model, which is a hybrid of several mainstream business models.

Through primary market research, the team discovered that similar

services typically employ a monthly subscription business model

(Build.com, BuilderTrend, ProCore), beginning at an average price of $150 per

month, but quickly escalating with respect to project volume. While still

effective, this model fails to capture the value of smaller companies, many of

which have extended project completion times and are thus unwilling to pay a

premium on a per-month basis. The per-project business model makes the

service attractive to smaller companies, while still remaining attractive to

larger companies which typically operate at a higher profit margin. The per-

project basis allows major companies to pick and choose which jobs theyll use

HomeSoft on, providing a level of flexibility unfound in a per-month

subscription fee and essentially allowing contractors to set their own total

price.

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While not a genuine business model, the freemium model will be

employed on the client side. Since the value received by the clients is so much

lower relative to that received by the contractor, clients will be allowed to use

the service for free, with the option to upgrade their account to unlock

additional services and perks for a fee. This model is being employed on

the client side to ensure that their reception and feedback of the service will be

positive, making clients much more likely to refer friends and contractors to

the HomeSoft service and improving market share. We expect to charge $10

per month for a premium membership, which corresponds to the lower

end of the industrys pricing spectrum on the client side. We anticipate that

premium members are likely to cancel their membership following the completion

of their project.

Various methods will be used to quickly and effectively acquire new

customers and improve customer satisfaction/retention, including discounts for

free projects to contractors upon the successful (paid membership) referral of

other contractors. A free month of premium service will be made available to

clients upon the successful referral of other clients, and a year membership

will be provided to clients who successfully refer a contractor. This year

membership enables the client to utilize the software for free for the length of

their project. This is intended to create a positive feedback loop, reducing the

cost of customer acquisition and allowing HomeSoft to grow its market share

with a lesser investment in advertising. To reduce friction in adopting the

product, a free two-month trial membership will be made available to new

contractors considering the service.

The anticipated HomeSoft community also creates significant value for

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potential advertisers. Advertising will be made available to major suppliers of

home products and related services, and these companies are expected to jump at

the opportunity to expose their products and services to such a large and

highly targeted audience. Research has shown that Houzz.com charges a

$1,500 per month starting price for a well-placed advertisement on their website,

which is reasonably competitive with other advertising rates and on the lower

end of the pricing spectrum. HomeSoft intends to undercut this rate,

charging only $1,000 a month initially until a larger market share has been

garnered. Free or subsidized advertising will be made available to well-

established companies agreeing to reciprocate advertising of HomeSoft on their

own website at a reduced cost.

Additionally, data collected from contractors and clients may be resold to

third parties for a fee. Market research has shown that selling standard data

(gender, occupation, income, etc.) typically generates between $1,300 and $6,600

per person per year. Regularly selling collected data to third parties will serve as an

additional revenue stream to the company. The figure below serves to visually

illustrate the various revenue streams and values contributed to HomeSoft

Solutions by its array of users:

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The diversity of HomeSofts revenue streams and the various methods

employed to encourage acceptance of the new service will help ensure stability

through rapid growth, and is expected to be much more profitable than similar

one-dimensional business models. Primary market research has shown that the

total addressable market value is approximately equal when charging $200 per

month versus $200 per project, and the per-project model allows us to offer a

degree of pricing flexibility that will differentiate our company and give our

customers the power to set their own price. Appropriate pricing for the

miscellaneous HomeSoft services was identified by researching the prices of

similar and well-known services, and then reducing the proposed fee to a level

that would reduce customer friction while still allowing HomeSoft to remain

profitable. Our team is thoroughly convinced that the HomeSoft business model

is novel, profitable, and sustainable.

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9. Financial Projections

Detailed financial planning is

essential in projecting the feasibility of

HomeSoft Solutions. This document

outlines the financial needs and

strategies of the company, projects

revenue and expense streams over

time, and ultimately allows for an

analysis of the cash flow breakeven point. Additionally, a sensitivity analysis was

performed in order to determine the feasibility and sustainability of the company

in varying market environments.

HomeSoft will operate in a two-sided market, with contractors and/or

construction companies as the primary economic buyers and their respective

clients as the end users. Four potential revenue streams have been identified

throughout market research. The graphic to the right illustrates these

revenue streams in a manner similar to Maslows hierarchy of needs, with the

primary and most important revenue stream at the bottom, followed by

ancillary revenue streams of decreasing importance and magnitude above.

The first six months of operation will not see any revenue, as is

expected for most emerging businesses. During this time, emphasis will be

placed on developing the HomeSoft web service and advertising a free

subscription to a beta version of the program (for both primary economic

buyers and end users) in order to obtain constructive feedback for

future improvement. During this period, an initial cash infusion (anticipated

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from an angel investor) of at least $852,000 will be required to cover

operational expenses and salaries of web developers. We expect our first

paying customers to be obtained at the beginning of Q3 in year one, when our

initial team of 8 salespeople are brought onboard. At this point, Series A

fundraising will begin, which will need to generate a minimum of $3.4M for

continued operation up until the expected cash flow breakeven point in Q4

of year two in the likely scenario. Because we intend to lease all required

equipment and expect to be able to receive subscription premiums in near real-

time, our income statement and cash flow statement are approximately equal.

As shown in the graphic above, our primary revenue stream will be

based on commercial subscriptions to the service by contractors and

construction companies. Around the end of year two, we expect to see an

appreciable revenue stream from user subscriptions to the premium service, and

after year three, we expect our client base to be large enough to attract advertisers,

who will benefit from a highly-targeted audience which (in most cases) is

expected to have a reasonable amount of disposable income. Finally, near the end

of year five, we expect our client base to be large enough to profit from selling the

data of our customers.

Pricing for the HomeSoft service will be initially set at $200 per

month for commercial subscriptions, and $10 per month for premium user

subscriptions.

Additional models for pricing may be considered in the future, but are

not considered in this relatively short-term analysis. Advertising opportunities

will be offered for $1,000 per month, and data is expected to be sold at the low

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end of the market rate at $100 per commercial subscription per month. In

order to remain conservative in our projections, only the revenue stream

obtained from commercial subscriptions is considered. Each of our scenarios

maintains a different set of assumptions, including growth rate, initial

customer base, and real estate cost. These assumptions are outlined in the

table below:

The following table displays projections for the number of commercial

subscriptions and revenue by year for each the three scenarios:

Incurred expenses throughout operation have been closely examined.

Because HomeSoft is considered software as a service, the cost of goods

sold (COGS) consists only of the salaries/benefits of the web developers,

in addition to software/hosting fees and the IT infrastructure. We expect

to hire 10 web developers in the beginning of Q1, year one, and maintain this

number of developers throughout year three. This results in a COGS

expenditure totaling $1.6M annually.

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In addition to the COGS, other expenses must be considered. These

expenses include sales and marketing, among others, and are listed in the

table below with the respective total expenses for each year.

A team of 8 salespeople and 4 technical support people is employed for

the last 6 months of year one, and these numbers are increased to 12 and 8

respectively at the beginning of year two. Real estate requirements are

assumed to be 100 square meters for year one, and 200 square meters

thereafter. General and administration costs are comprised of the IT

infrastructure required for sales, as well as a modest $40,000 salary for each

of the two founders.

Breakeven analysis has shown that in our most likely case, breakeven

occurs in Q4 of year two and the company will become self-sustaining. In the

best case, breakeven occurs in Q2 of year two, or about six months sooner than

the likely case. Both of these scenarios are represented by the charts below:

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An additional analysis of cumulative cash flow (most likely case) shown

below illustrates our cash flow breakeven point at the minimum of the curve

(Q4 Y2) as well as our total breakeven when the curve intersects the horizontal

axis (Q3 Y3). Cash infusions are shown by the red columns.

With respect to company ownership, we expect to allocate 15% to the

initial angel investor, with an additional 25% allocated to the investors within

Series A funding.

9% will be reserved as stock options for current and future employees,

with the remaining 51% being retained by the founders to maintain a

majority share of the company. We expect negotiations to make these figures

difficult to attain.

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Even under worst-case conditions, we expect to become profitable by

the end of year three. Furthermore, highly conservative assumptions were made

in the likely scenario analysis with respect to growth rate, customer base, and

other variables. Our funding requirements total approximately $4.0M over the

first year, and we do not expect to require additional funding, although

alternative fundraising avenues may be available if required. After year three,

we expect our customer base to exceed 6,600, which is approximately 4% of our

total addressable market. At this point, additional revenue streams are

expected to become significant, supplementing our total revenue and

accelerating our path to cash flow breakeven if it has not yet been achieved.

These financial estimates reassure our expectation that HomeSoft Solutions

can become a profitable and sustainable business within a reasonable timeframe.