Business Plan for Internet Service Provider
This business plan is for the creation of a new Internet Service Provider in Michigan. The new company, XYZ.Net, will offer access to the Internet via high speed modems for home and business users. This plan outlines the market in this area, the investment required, and the launch and operation strategy of an Internet Service Provider (ISP). Financial projections are included as well as an "exit strategy" for establishing a value for the venture after two years of growth.
2. Executive Summary
1997 is going to be a benchmark year for the Internet. This industry has been doubling in size every 6 months for the last 4 years. As major communications companies such as ATT, MCI, Ameritech, and Uunet have been formulating their Internet Strategies an explosion of smaller firms have begun to offer dial-up access to the Internet. Over 3,000 new ISPs were created in 1996. This growth in small entrepreneurial ISPs will continue because the large companies have to invest tens of millions of dollars to reach their current customer base. Whereas, a smaller firm can justify investing less than $150,000 to meet the demands of a local population.
There are several ways to look at the Internet. For an ISP the model of interest is the "distribution" model. An ISP is a service based company that resells bandwidth. It pays a monthly or annual fee to an upstream provider for a high speed link to the Internet Backbones, and resells connectivity in smaller chunks to its customer base. A dial-up ISP in this market usually has a T1 (1.54 Mbps) connection to an upstream provider and sells 28.8 Kbps connections via modem. A T1 connection allows the ISP to support 200 modems simultaneously. Because all subscribers do not use the service at once, a subscriber to modem ratio of ten is possible. This means that a customer base of 2,000 subscribers can be supported with one T1 connection. As the ISP grows beyond this, and as it offers higher speed services it purchases more bandwidth from its upstream provider.
This plan is for the creation of a single Point Of Presence (POP) dial- up Internet Service Provider (ISP). The services that will be provided to the local calling area include:
-High speed reliable Internet connectivity at 28.8 Kbps. -Web page hosting -Email accounts -Domain Name Service -Network News Service
The launch of this enterprise can be accomplished in as little as six weeks from ordering equipment and lines. New subscribers will be added at the rate of 100/month after the initial ramp up. The assumptions in the attached pro-forma spread sheets are that the subscriber base will reach 1,060 by the end of the first 12 months of operation, and 2,000 by the end of the second year. Break even cash flow will be achieved in the ninth month. Sales in the second year will be $415,000, profits will be $145,400.
The investment in this venture will consist of capital equipment $83,000 and working capital of $74,000. An investment of $157,000 will thus generate a return of 92% in the second year.
There are several ways to value a subscriber based business for eventual sale. One way is multiple of cash flow. Internet businesses are commanding over 20 times cash flow today but it is hard to predict what the "market" will be in two years. If a figure of 10 times cash flow is used the value of the company would be $2.04 Million (based on projected 3rd year cash flow). Another way is to look at other industries such as cable television. The going rate in that industry is $2,000/subscriber. Since internet revenue is similar to cable subscription revenue per user this factor could be used. Based on that the value of the company would be $4 Million. These valuations are good returns on an initial investment of $157 Thousand (12 to 24 times return).
3. The Internet
4. The Market
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