Financial Modeling Tips for Startups Plug and Play Tech Center

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Financial Modeling for Startups

Plug & Play Tech Center

VentureArchetypes, LLCSeptember 24, 2008




Why bother?

A good financial model is an operating plan and roadmap for your business…sales targets, hiring plan, marketing, etc.

A financial model is a framework for thinking through key assumptions regarding growth rates, pricing, costs, etc.

A good financial model is a mark of credibility and can help convince investors of the overall potential of your opportunity

A well thought out financial model gives youan idea of how much money you need to raiseand when, as well as overall ROI.




…But don’t take my word for it.

“I look at financials because they are a credibility test for theentrepreneur … A good entrepreneur understands both the technical and business opportunities and how to flesh out the numbers behind it”

- Russel Siegelman, Kleiner Perkins Caufiled & Byers

“I look at financials to see if they make sense. I actually look at them more for mistakes. If someone thinks they will have 40% after-tax margin after 5 years, they clearly do not understand the cost of running a business”

- Sonja Hoel, Managing Director, Menlo Ventures

“The financial model discussion is more often a good insight intohow smart a team is.”

- Fred Wang, Trinity Ventures




Philosophy of Modeling:Top 10 To-Do’s 1. Build it bottoms-up

2. Detail your assumptions

3. Make it easy to change

4. Build it to scale (+/-)

5. Use benchmarks & comps

6. Focus on headcount

7. Emphasize first two years

8. “Over-scenario-lize”

9. Apply multiple sanity checks

10. Cash flow is king + Never run out of cash!




What Type of Company Are You?

Very briefly, around the room…Who are you?

What type of business?

What are you looking to do?

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Getting Started: Revenue Build-Up

Approach #1: Sales Targets by channel, vertical, or geographyNew customer wins X ASP or per-seat licenseBuild in revenue lines for upsells, ancillary revenue, maintenance, etc.

Approach #2: Salesperson RampBuild a realistic hiring plan and establish per-rep quotas

Approach #3: Existing PipelineTake historical or pending sales and grow by reasonable % over time

Approach #4: User Growth & Take Rate (Web/SNW/SaaS)Build a realistic user adoption curve and % that “buy”

Approach #5: Percent of Total Market“Top down” approach (not recommended)




Approach #4: Web, SNW, & SaaS

Step 1: Forecast channels that bring in trafficPaid search marketing, PR, advertising, etc. Grassroots & guerilla marketingViral mechanisms/metrics if appropriate

Step 2: Form reasonable conversion assumptionsWhat percent of raw visitors become members, subscribers, purchasers, active contributors?Think: acquisition activation engagement + virality or WOM

Step 3: Apply your relevant monetization model (s)CPM/CPC/CPA text & banner ads; Video & audio ads; “Freemium” (free version + premium version upsell)Subscription fees, custom servicesAffiliate revenue, lead-gen revenue, licensingSponsorships & paid inclusionAuctions, ecommerce, widgets, souvenirs…etc etc etc…




Notes

Notes for all approachesFocus on sales / adoption cycle and how customers actually buy

A good model captures realistic customer behavior, not “idealized”Track & study key “success metrics”– visits per month, page views per visit, abandonment rates & triggersUse analogous firms to benchmark growth rates, CPMs, marginsDon’t forget churn– not all customers stick around or re-up!




Forecasting Expenses

1. Match your COGS (Per-unit variable expenses)Product firms: materials, labor, raw inputs, customer supportSoftware/Internet firms: bandwidth, hosting, licensing fees, etc.

2. Build your hiring plan (Who, when, how much per head)R&D, COS/ Support, Sales & Marketing, G&A + benefits**See SKM Worksheet: “Hiring Plan Hat Check”

3. Build your marketing & sales budgetsSEO/PPC, PR, events, trade shows, mailers, sponsorships, etc.Commissions, referral fees, spiffs, etc.

4. Add-in other OpEx and CapExLegal/IP, rent, HR, outsourced/offshore work Computer hardware, travel, “miscellaneous”

Tip: What can be driven off / linked to revenue?




Roll It Up & Analyze

Summarize:1. Roll monthly into quarterly, quarterly into annual2. Combine revenue lines and expenses into summary

categories3. Adjust net income to get cash flow

• CapEx, Depreciation and Amortization

Analyze:Tie it all together + Sanity Check

(Does it “look right?”)Focus on growth rates, margins, headcount

Parse into per-user, per unit, per-customer metricsParse into common-size, and benchmark margins vs. peers




Adjusting Forecasts for the Real World

Cash Flow EffectsExpenses Arrive On Time or Early

Minimize Spending In Advance of RevenueRevenue Can Be Hard to Pin Down

Cash Even HarderBooking vs. Billing vs. CollectionReturns & Allowance for Bad Credit

“Sales Learning Curve”Do You Have a Reliable Scalable ModelWhat Does it Look Like for a New Sales Rep?




Build a killer summary slide (but have the model handy to refer to during Q&A)

Know your model, own your model(prepare for likely questions in advance + have cheat sheet handy)

Show how you use their $$ to make them money(detailed budget + “what’s in it for them?”)

“Instant Credibility” for raising capital and maintaining negotiating leverage

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Pitching the numbers




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Financial Modeling Tips for Startups Plug and Play Tech Center