NSLC Business & Entrepreneurship · University of Michigan
The Engine Completing Your Plan
Lecture 3 · Professor Danny Ellis
⚙️
Before we talk about your money…
🎤 Danny's story — to fill in
The cold open: the closest SkySpecs ever came to running out of cash — or what raising your first round actually felt like.
Drop them into the moment: the bank balance, the payroll date, the phone call — pick the scene with the most tension
Make the numbers concrete: how many weeks of runway, how many salaries on the line
End on the cliffhanger: “…and the reason we got out of it is the exact math I'm going to teach you in the next hour.”
🖼️IMAGE SLOTPhoto from that era — early team, the office, a whiteboard of runway math, or the term sheet moment
Today's roadmap
You have an idea and an edge. Now we prove it makes money.
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1 · One Unit
What exactly are you selling?
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2 · Expenses
Startup, fixed, and variable costs
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3 · Unit Economics
COGS & contribution margin
⚖️
4 · Break-Even
How many sales until you survive?
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5 · Funding
Where the starting money comes from
Why this matters Friday: the rubric line judges poke hardest is Cost Structure — “price is profitable and competitive; feasible break-even plan.” Today is that slide.
Block 1 · One Unit
Profitability starts with a microscope, not a telescope
Forget the whole company for a second. Ask: do I make money on ONE single sale?
A unit of sale is what a customer actually buys from you — one item, one bundle, one hour, one month.
For a service business, the unit is based on how the customer is charged — per hour, per session, per month.
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The logic
If one unit loses money, a million units lose a million times more. “We'll make it up in volume” is how businesses die with a straight face.
One Unit · Interactive
Same pizzeria, three possible units — flip each card
🍕Slice + drink $3.99
The lunch-counter lens: one hungry student, one transaction. Great for tracking daily foot traffic.
🥡Whole pizza $9.99
The takeout lens: one family, one dinner. Different costs, different margin, same ovens.
🎉Party for 8 $100
The catering lens: one event, one big ticket. Fewer sales needed — but each one is harder to win.
Same business, three lenses. You choose the unit — then every number in your plan speaks that language. Services too: 1-month subscription $25 · 1 hour of tutoring $40.
🎮 Pop quiz: a car wash charges $15 per wash or $30/month unlimited. What's the unit?
Trick question — both turn green. Each is a valid unit. The only wrong answer is refusing to choose a lens. Many real businesses track both.
Block 2 · Expenses
Startup expenses: the price of opening the doors
One-time costs to get the business running — think minimum to get off the ground, not a wish list.
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Large equipment
Reusable gear: ovens, machines, vehicles
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Licenses
Business licenses & permits
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Furniture & office
Desks, chairs, office equipment
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Initial materials
Your first batch of inventory
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Technology
Hardware & software to operate
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Website build
Getting your storefront online
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Initial marketing
The launch push that announces you exist
✂️
The rule
Every dollar here delays break-even. Cut ruthlessly.
🎤 Danny's story — to fill in
What SkySpecs' actual startup expenses were — drones aren't cheap.
What the very first hardware, tools, and workspace really cost — and what you scrounged or borrowed instead of buying
One purchase you're glad you made, one you'd take back
Block 2 · Expenses
After launch, every expense is one of two kinds
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Fixed expenses
Paid regularly even if you sell nothing. Insurance, salaries, advertising, interest, utilities, rent, website hosting.
You pay fixed costs no matter what. They're the treadmill that never stops.
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Variable expenses
Change with how much you sell. Materials, ingredients, labor per order, shipping, logistics, packaging.
Sell more, spend more. Sell nothing, spend nothing.
Why split them? Because fixed costs set your break-even and variable costs set your margin. Two different diseases, two different cures.
Expenses · Interactive
Fixed or variable? Click a card, then click its bucket.
🧱 Fixed
The bill arrives whether you sell 0 or 10,000
🌊 Variable
Grows and shrinks with every sale
Block 3 · Unit Economics
What does ONE unit cost to make?
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COGS — Cost of Goods Sold
The total expenses of making each unit of a product: the materials in it + the labor to make it.
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COSS — Cost of Services Sold
The same idea for services: what it costs you to deliver one unit of the service.
Materials + Labor = COGS (per unit, always)
Always stated per unit. Not “we spend $500 on flour a month” — but “each pizza carries $1.40 of ingredients and $1.10 of labor.”
Deeper dive · Unit Economics
🧮 One slice-and-drink, fully costed
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Materials
Dough, sauce, cheese, cup, soda syrup: $0.85
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Labor
4 minutes of a $15/hr worker's time: $1.00
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COGS
$0.85 + $1.00 = $1.85 per unit
$3.99 − $1.85 = $2.14 kept from every sale
Notice what's missing: rent, insurance, the oven. Those are fixed — they get paid out of the $2.14, and that's exactly where break-even comes from.
Block 3 · Unit Economics
Contribution margin: what each sale contributes
Selling Price − COGS = Contribution Margin
The amount from each unit that goes toward paying fixed costs — and then becoming profit.
The higher the contribution margin, the higher your final profit. Every dollar of margin is a dollar working for you instead of leaving with the sale.
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Negative margin alarm
If price < COGS, every sale digs the hole deeper. Congratulations — you've built a machine that converts effort into losses.
Deeper dive · Unit Economics
🎚️ Three levers to fatten your margin
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Raise the price
The fastest lever — but only if your value proposition (Lecture 2) earns it. Price is a claim about value.
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Cut materials cost
Cheaper suppliers, bulk buying, less waste. Careful: cut quality and the customer notices before your spreadsheet does.
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Cut labor per unit
Faster process, better tools, batching. This is where technology quietly wins — the same person makes more units per hour.
🎤 Danny's story — to fill in
A margin lesson from SkySpecs — e.g., the difference between selling hardware, services, and software, and which margin you learned to chase.
What one turbine inspection cost to deliver early vs. later, once automated
The moment you realized which part of the business actually had the good margins
Unit Economics · Interactive
Build a pizza empire 🍕 drag the sliders
Where each sales dollar goes:
🔴 materials · 🟡 labor · 🟢 contribution margin
COGS per unit
$3.50
Contribution margin
$4.50
Every sale pushes you toward profit 💪
Block 4 · Break-Even
The monthly break-even point
The month you sell exactly enough units to cover your monthly expenses. Not winning yet — but officially not losing.
Break-Even Units = Monthly Fixed Expenses ÷ Contribution Margin
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Revenue < Expenses
Loss. The engine burns more fuel than it makes. Every business starts here.
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Revenue = Expenses
Break-even. The engine pays for itself. This is the survival line.
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Revenue > Expenses
Profit. Every extra unit's margin is now pure gain.
Break-Even · The centerpiece
The break-even simulator — find your survival line
200
units/month to break even
Where the green line crosses the red line, you stop bleeding. 🟢 revenue · 🔴 total costs · 🟡 break-even
Block 5 · Funding
Five ways to fund a startup — flip each card
🥾Bootstrapping
Self-funding: savings, family & friends, even a 401k. Pro: you keep full control. Con: all the risk is yours.
🦈Venture Capital
Equity, not debt — investors buy ownership in high-growth companies. Higher risk, higher return, longer horizon. Pro: large funding. Con: you give up ownership.
👥Crowd-funding
Many small backers online; no ownership given, no repayment expected. Pro: control + no payback. Con: idea exposed to copycats, and goals are hard to hit.
🏦Small Business Loan
Banks & credit unions — SBA-guaranteed if the bank thinks you're too risky. Pro: keep ownership. Con: must repay; costly if the business fails.
🇺🇸SBA Investment Programs
Government-backed programs for small businesses: SBIC, SBIR, and STTR. Flip to the deep dive for what each one does.
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The real question
Not “which sounds coolest” — which matches your speed, risk, and control needs.
Deeper dive · Funding
🏛️ The SBA alphabet, decoded
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SBIC
Small Business Investment Company — private investment funds licensed by the SBA that invest in small businesses, with government-backed leverage behind them.
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SBIR
Small Business Innovation Research — competitive federal grants that fund small companies doing R&D with commercial potential. Money you don't repay and don't give equity for.
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STTR
Small Business Technology Transfer — like SBIR, but you partner with a research institution (like, say, a certain university in Ann Arbor).
🎤 Danny's story — to fill in
Did grants or government programs play a role in SkySpecs' early funding — or in companies you saw around the U-M ecosystem?
How student teams and university spinouts actually stack early money: competitions, grants, angels
What "non-dilutive funding" means and why founders love that phrase
Funding · From someone who's done it
What raising venture capital is actually like
🎤 Danny's story — to fill in
You didn't read about VC — you raised it. Tell them what the room really feels like.
What a VC pitch meeting is really like: the questions, the pace, the poker faces
The trade you made — ownership for fuel — and how you decided it was worth it
What you'd tell your younger self before the first pitch
🎬MEDIA SLOTPitch-era artifact: an early pitch deck slide, term-sheet signing photo, or funding announcement headline
Pop quiz · Funding
“A slow-and-steady local bakery needs $20k for ovens.”
“A high-growth app needs $2M before it earns a dollar.”
“An inventor with a finished gadget and 50,000 superfans online.”
Your mission · Breakout 6
Build your financial plan — the checklist
Workbook p. 21+. Leave the breakout with all six boxes checked:
✅ Define your one unit — what exactly does one customer buy, at what price?
✅ List your startup expenses — the minimum one-time costs to open the doors
✅ Categorize every monthly expense — fixed or variable, using the zero-sales test
✅ Compute your contribution margin — selling price − COGS, per unit