Financial Modeling Tips For Startups Plug and Play Tech Center

COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com
www.venturearchetypes.com
415-370-5060
Financial Modeling for Startups
Plug & Play Tech Center
VentureArchetypes, LLC
September 24, 2008
We build great startups.™

Why bother?
415-370-5060
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 you

an idea of how much money you need to raise
and when, as well as overall ROI.

…But don’t take my word for it.

415-370-5060
“I look at financials because they are a credibility test for the

entrepreneur … 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 into

how smart a team is.”
- Fred Wang, Trinity Ventures

Philosophy of Modeling:Top 10 To-Do’s

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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!

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What Type of Company Are You?
Very briefly, around the room…

Who are you?
What type of business?
What are you looking to do?
--

Getting Started: Revenue Build-Up

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Approach #1: Sales Targets by channel, vertical, or geography

New customer wins X ASP or per-seat license
Build in revenue lines for upsells, ancillary revenue, maintenance, etc.
Approach #2: Salesperson Ramp

Build a realistic hiring plan and establish per-rep quotas
Approach #3: Existing Pipeline

Take 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

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Step 1: Forecast channels that bring in traffic

Paid search marketing, PR, advertising, etc.
Grassroots & guerilla marketing
Viral mechanisms/metrics if appropriate
Step 2: Form reasonable conversion assumptions

What percent of raw visitors become members, subscribers,
purchasers, active contributors?
Think: acquisitionÆ activationÆ 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 services
Affiliate revenue, lead-gen revenue, licensing
Sponsorships & paid inclusion
Auctions, ecommerce, widgets, souvenirs…etc etc etc…

Notes
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Notes for all approaches

Focus 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 & triggers
Use analogous firms to benchmark growth rates, CPMs, margins
Don’t forget churn– not all customers stick around or re-up!

Forecasting Expenses
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1. Match your COGS (Per-unit variable expenses)

Product firms: materials, labor, raw inputs, customer support
Software/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 budgets

SEO/PPC, PR, events, trade shows, mailers, sponsorships, etc.
Commissions, referral fees, spiffs, etc.
4. Add-in other OpEx and CapEx

Legal/IP, rent, HR, outsourced/offshore work
Computer hardware, travel, “miscellaneous”
Tip: What can be driven off / linked to revenue?

Roll It Up & Analyze

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Summarize:
1. Roll monthly into quarterly, quarterly into annual
2. Combine revenue lines and expenses into summary
categories
3. 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 metrics
Parse into common-size, and benchmark margins vs. peers

Adjusting Forecasts for the Real World

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Cash Flow Effects

Expenses Arrive On Time or Early
Minimize Spending In Advance of Revenue
Revenue Can Be Hard to Pin Down
Cash Even Harder
Booking vs. Billing vs. Collection
Returns & Allowance for Bad Credit
“Sales Learning Curve”
Do You Have a Reliable Scalable Model
What Does it Look Like for a New Sales Rep?

Pitching the numbers

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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

Questions? Contact Us
415-370-5060
P: 415-370-5060

Financial Modeling Tips For Startups Plug and Play Tech Center

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COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC

Financial Modeling for Startups

Plug & Play Tech Center

We build great startups.™

A good financial model is an operating plan and roadmap for

A financial model is a framework for thinking through key

A good financial model is a mark of credibility and can help

A well thought out financial model gives you

We build great startups.™

…But don’t take my word for it.

“I look at financials because they are a credibility test for the

“I look at financials to see if they make sense. I actually look at

“The financial model discussion is more often a good insight into

We build great startups.™

Philosophy of Modeling:Top 10 To-Do’s

We build great startups.™

What Type of Company Are You?

Very briefly, around the room…

We build great startups.™

Getting Started: Revenue Build-Up

Approach #1: Sales Targets by channel, vertical, or geography

Approach #2: Salesperson Ramp

Approach #3: Existing Pipeline

Approach #4: User Growth & Take Rate (Web/SNW/SaaS)

Approach #5: Percent of Total Market

We build great startups.™

Approach #4: Web, SNW, & SaaS

Step 1: Forecast channels that bring in traffic

Step 2: Form reasonable conversion assumptions

Step 3: Apply your relevant monetization model (s)

We build great startups.™

Notes for all approaches

We build great startups.™

1. Match your COGS (Per-unit variable expenses)

3. Build your marketing & sales budgets

4. Add-in other OpEx and CapEx

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

We build great startups.™

Roll It Up & Analyze

We build great startups.™

Adjusting Forecasts for the Real World

Cash Flow Effects

We build great startups.™

Pitching the numbers

Build a killer summary slide

We build great startups.™

We build great startups.™

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