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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.™


COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com

Why bother?
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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.

We build great startups.™


COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com

…But don’t take my word for it.


www.venturearchetypes.com
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

We build great startups.™


COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com

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!

We build great startups.™


COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com
www.venturearchetypes.com
415-370-5060

What Type of Company Are You?

Very briefly, around the room…


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

We build great startups.™


COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com

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)

We build great startups.™


COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com

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…

We build great startups.™


COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com

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!

We build great startups.™


COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com

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?

We build great startups.™


COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com

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:
ƒ Tie it all together + Sanity Check
ƒ (Does it “look right?”)
ƒ Focus on growth rates, margins, headcount
ƒ Parse into per-user, per unit,
per-customer metrics
ƒ Parse into common-size, and benchmark margins vs. peers

We build great startups.™


COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com

Adjusting Forecasts for the Real World


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415-370-5060

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?

We build great startups.™


COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com

Pitching the numbers


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415-370-5060

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

We build great startups.™


COPYRIGHT 2007-2009 VENTUREARCHETYPES, LLC
Nathan@venturearchetypes.com

Questions? Contact Us
www.venturearchetypes.com
415-370-5060

www.venturearchetypes.com
Nathan@venturearchetypes.com
P: 415-370-5060

We build great startups.™