Introduction
Any, even the most promising business idea always requires an initial investment, which is planned to be repaid in the future. Drone delivery is essential in implementing rapid technological developments in the food and delivery sector. Since this market niche is still free, launching such a startup is an ideal moment. However, funding for this idea is an issue since drones are complex machines requiring expensive maintenance (Hwang & Choe, 2019). It is worth considering all potential risks and costs to maximize profits while minimizing costs.
Sources of Funding
Initially, the team plans to launch several parallel seed funding mechanisms for the project. Firstly, a complex of personal savings with business loans from banks should become the leading share of the initial capital, which will be classified as borrowed capital. The AMEX credit card gives a limit of up to $100,000; a line of credit will also be opened with one of the banks up to $50,000.
It is, secondly, placing the project on crowdfunding services such as Kickstarter, GoFundMe, and Indiegogo, which will fill the company with funds defined in the capital structure as its own. This mechanism is similar to placing shares on the stock market – investors will count on specific preferences, which can be expressed in dividends, receiving the organization’s services through free food delivery by drones, or others. Given the distribution of potential start-up costs, the company’s equity capital prevails over debt, which is a sustainable business strategy but involves risks at the initial stage (Harris & Roark, 2019). The project’s success will largely depend on the funds collected on these platforms.
Expenses
Products cost $50 monthly for delivery services, with unlimited deliveries per month. Given current research, 31% of Americans use third-party food delivery services at least twice a week, 34% pay up to $50 per order, and 40% pay a delivery premium; this subscription fee approach could potentially reduce customer costs for this service (Miranda, 2023; Resendes, 2022; Statista, 2023). Therefore, the main question is to attract the target audience to use this service since it provides many advantages compared to delivery carried out by people. As a result, it is necessary to allocate quite a lot of funds for marketing and related research. Table 1 reflects the full range of potential costs at the initial stage, divided into fixed and variable costs for further calculations.
Table 1 – Expenses.
As can be seen from Table 1, this project requires a starting capital of $1,250,000 for fixed costs and up to $900,000 for variable costs. Therefore, $2,150,000 is required to start the business, of which only $150,000 can be obtained as debt capital. The implementation plan and profitability of the startup may be of potential interest to crowdfunding users.
Expected Profits
This project considers several development scenarios, the first involving attracting at least 100,000 people from Los Angeles to use drone food delivery services. This approach will generate $100,000 * 50 = $5 million each month, which significantly covers all initial and variable costs.
However, a more pessimistic scenario should be considered, where only 1% of the city’s population of 3.8 million people will use the company’s services. In this case, the profit will be 1.9 million, which delays the break-even payback point. However, the adverse scenario assumes growth over three years as the startup looks to offer services to the entire Southern California region, which has a population of 23.68 million people, down to 0.42% of that number. Table 2 reflects these return scenarios.
Table 2 – Incomes.
Profitability forecasts are pretty promising, as they cover the fixed costs of starting the project and significantly exceed operating costs. However, it should be considered that as the audience grows, fixed costs will also increase due to the need to purchase drones, conduct research in cities, build routes, and create warehouses. The growth scenario should include an increase in fixed costs at the startup level since, in different proportions, the operating costs during extrapolation will be relatively the same. Such an analysis makes it possible to construct a cash flow table for two scenarios, which are given in Appendix A.
Comparison of Development Scenarios
We are analyzing these scenarios in Table A1 more comprehensively, considering costs and income. We show that attracting 100,000 people in Los Angeles gives more positive results, but this approach is less likely than the more flexible second approach. In the second scenario, the break-even point also occurs in the first year of the project’s operation, although with less income, but still quite serious profitability. The fundamental problems remain the collection of financing at the initial stage and monitoring subsequent development, which requires implementing systems for monitoring financial performance, customer involvement, and surveys on the company’s activities.
An important aspect is social and environmental responsibility, which, during the implementation of a startup, can lead to several additional costs for protecting the environment from the impact of drones and compensation for jobs while reducing the need for couriers. Additional risks lie in the economic plane: macroeconomic inflation indicators can significantly affect profitability, together with the current high key rate, which makes it difficult to replenish capital with borrowed funds (TradingEconomics, 2023). However, income has a significant reserve over the three years considered, indicating the need to implement the project.
Conclusion
In developing this business plan, the team collectively learned two crucial lessons. First, the importance of thorough market research and understanding the needs and preferences of the target audience. This knowledge has helped position drone delivery services as a cost-effective, safe, and hassle-free alternative to traditional delivery methods.
Secondly, the importance of strategic marketing and increasing brand awareness was assessed. As initial marketing investments increase, the impact on revenue needs to be closely monitored and strategies adjusted accordingly. A company can attract and retain a significant user base by constantly evaluating and adapting marketing efforts. Essential financial assessment tools provided the team with critical aspects of understanding the risks and predicting the conduct of this type of service provision.
References
Harris, C., & Roark, S. (2019). Cash flow risk and capital structure decisions. Finance Research Letters, 29, 393-397. Web.
Hwang, J., & Choe, J. Y. (2019). Exploring perceived risk in building successful drone food delivery services. International Journal of Contemporary Hospitality Management, 31(8), 3249-3269. Web.
Miranda, L. (2023). When delivery costs more than the food you ordered. Washington Post. Web.
Resendes, S. (2022). 22 online ordering statistics every restaurateur should know in 2022. Lightspeed. Web.
Statista. (2023). What do you usually pay per order when ordering food online? Web.
TradingEconomics. (2023). United States Fed Funds Interest Rate. Web.
Appendix A
Table A1 – Cash Flows.