Building A FinancialModel That WorksDAN ALLRED MATT NICHOLS@dgallred @mnichols47
About Dan: Start-up “guy” -> Banker• Council for Entrepreneurial Development– March 1998 – September 2002– Start-up traini...
About Matt: Banker -> VC -> Startup CFO• Investment Banker: Morgan Stanley (CA)– Google IPO team• Morgan Stanley Venture P...
How Did We Get Here?
How Did We Get Here?
How Did We Get Here?
How Did We Get Here?
How Did We Get Here?
How Did We Get Here?
Our Goals
Our Goals• Teach key concepts around building a bottoms upfinancial model for a start-up.
Our Goals• Teach key concepts around building a bottoms upfinancial model for a start-up.• Provide guiding principles aroun...
Our Goals• Teach key concepts around building a bottoms upfinancial model for a start-up.• Provide guiding principles aroun...
Tops Down vs. Bottoms Up?• What do we mean?
Tops Down vs. Bottoms Up?• What do we mean?• Tops Down: more of a market analysis – how big isthe opportunity and what mar...
Tops Down vs. Bottoms Up?• What do we mean?• Tops Down: more of a market analysis – how big isthe opportunity and what mar...
Tops Down vs. Bottoms Up?• What do we mean?• Tops Down: more of a market analysis – how big isthe opportunity and what mar...
A Bottoms Up Financial Model will:• Force the entrepreneur to think through the keydrivers of value in the business.• Allo...
Revenue Assumptions
Revenue Assumptions• Start with the business model – how do you make money & how areopportunities converted into revenue. ...
Revenue Assumptions• Start with the business model – how do you make money & how areopportunities converted into revenue. ...
Revenue Assumptions• Start with the business model – how do you make money & how areopportunities converted into revenue. ...
Revenue Assumptions• Start with the business model – how do you make money & how areopportunities converted into revenue. ...
Revenue Assumptions• Start with the business model – how do you make money & how areopportunities converted into revenue. ...
Sales Assumptions
Sales Assumptions• How does your sales funnel work? Based on yourconversion rates, how many prospects do you need toconver...
Sales Assumptions• How does your sales funnel work? Based on yourconversion rates, how many prospects do you need toconver...
Sales Assumptions• How does your sales funnel work? Based on yourconversion rates, how many prospects do you need toconver...
Sales Assumptions• How does your sales funnel work? Based on yourconversion rates, how many prospects do you need toconver...
Sales Assumptions• How does your sales funnel work? Based on yourconversion rates, how many prospects do you need toconver...
Marketing Assumptions
Marketing Assumptions• How do you drive prospects to the top of the funnel?
Marketing Assumptions• How do you drive prospects to the top of the funnel?Channels – how long to develop channels?
Marketing Assumptions• How do you drive prospects to the top of the funnel?Channels – how long to develop channels?Inside ...
Marketing Assumptions• How do you drive prospects to the top of the funnel?Channels – how long to develop channels?Inside ...
Marketing Assumptions• How do you drive prospects to the top of the funnel?Channels – how long to develop channels?Inside ...
Marketing Assumptions• How do you drive prospects to the top of the funnel?Channels – how long to develop channels?Inside ...
General & Administrative (G&A)Assumptions
General & Administrative (G&A)Assumptions- Small in the beginning, greater over time as businessbecomes more complex. Thes...
General & Administrative (G&A)Assumptions- Small in the beginning, greater over time as businessbecomes more complex. Thes...
General & Administrative (G&A)Assumptions- Small in the beginning, greater over time as businessbecomes more complex. Thes...
General & Administrative (G&A)Assumptions- Small in the beginning, greater over time as businessbecomes more complex. Thes...
Group Breakout• Groups of 5• Identify 1 Company in your group• What are your key drivers of revenue and cost?
Big Questions• How detailed of a model?• How aggressive should my assumptions be?• Item level build up, or % of revenue• A...
How Detailed?• “The VC One (maybe two) Level Deeper Test”• Match to comparable companies• Depends on what data you have• M...
Cash Flow Statement and BalanceSheet?• No.. Unless• Income statement + cash balance estimate• Unless:– Cash flow is meaning...
Specific Line Items vs. % ofRevenue• Specific detail, as long as you can reasonablypredict it, then bail…and go to % of reve...
Key Tenets1. Consistent w/ publicly available data2. Compare drivers to YOUR historical data3. Supplement w/ cohort data4....
Key Tenet 1: Compare to PublicDataSources• Public company filings• Research reports• Blog posts, etc.If Different – Need an ...
Key Tenet #2: Compare Drivers toYour Historical Data	   May	   June July	  (Est) August	  (Est) Sept.	  (Est)Traffic 	   	  ...
Key Tenet #3: Supplement w/Cohort DataMonths	  Since	  Start	  of	  CohortCumula3ve	  Repeat	  Rate
Key Tenet #4: Create a Narrativeto Explain it All• Outline reasons for changes in each major driver ofthe model• Includes ...
Tips and Tricks1. Build monthly model all the way across2. Standardize your employee build3. Clearly identify inputs4. Che...
Getting Started…• Identify key drivers (top line and bottom line)• Gather historical data• Design revenue build• Look for ...
Model TemplateSource• Founder Friendly Venture Capital (FFVC.com)• http://articles.businessinsider.com/2012-02-08/markets/...
Course TitleCourse TitleINSTRUCTOR NAME
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Building a Financial Model That Actually Works

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What is a financial model? Learn about how to create a bottoms up financial model, revenue assumptions, sales assumptions, marketing assumptions, general and administrative assumptions, and cash flow statements and balance sheets. Building a Financial Model That Actually Works. A class taught by Dan Allred (SVB) and Matt Nichols (Gemvara) at Intelligent.ly's Boston campus. To learn more from the experts, visit http://intelligent.ly/learn

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Building a Financial Model That Actually Works

  1. 1. Building A FinancialModel That WorksDAN ALLRED MATT NICHOLS@dgallred @mnichols47
  2. 2. About Dan: Start-up “guy” -> Banker• Council for Entrepreneurial Development– March 1998 – September 2002– Start-up training programs, conferences, etc.– Raised $4.5mm capital campaign• Silicon Valley Bank – Research Triangle NC– September 2002 – May 2007– Banker to NC’s tech, life science & VC community– 250% loan growth over 4 years• Silicon Valley Bank – Boston MA– May 2007 – Present– Started new early stage group, replicated as SVB “Accelerator”nationally– 400+ clients, over $100mm in loans and $1 billion in deposits
  3. 3. About Matt: Banker -> VC -> Startup CFO• Investment Banker: Morgan Stanley (CA)– Google IPO team• Morgan Stanley Venture Partners (CA)– Avamar (EMC), Tarari (LSI), Perceptive Software (Lexmark)– Cross-industry, later stage venture capital• Highland Capital Partners (MA)– Investments: Bullhorn (Vista Equity), Gemvara, OpenSky, Pixable– Founding Advisor: Boundless Learning– Digital media/Internet, early and late stage venture capital• Gemvara CFO/Board Member (MA)– Raised last two rounds of funding ($15MM then $25MM)
  4. 4. How Did We Get Here?
  5. 5. How Did We Get Here?
  6. 6. How Did We Get Here?
  7. 7. How Did We Get Here?
  8. 8. How Did We Get Here?
  9. 9. How Did We Get Here?
  10. 10. Our Goals
  11. 11. Our Goals• Teach key concepts around building a bottoms upfinancial model for a start-up.
  12. 12. Our Goals• Teach key concepts around building a bottoms upfinancial model for a start-up.• Provide guiding principles around the assumptionsyou will make in building your model.
  13. 13. Our Goals• Teach key concepts around building a bottoms upfinancial model for a start-up.• Provide guiding principles around the assumptionsyou will make in building your model.• Equip you with a model template that you can useas you build your own model.
  14. 14. Tops Down vs. Bottoms Up?• What do we mean?
  15. 15. Tops Down vs. Bottoms Up?• What do we mean?• Tops Down: more of a market analysis – how big isthe opportunity and what market share could thestart-up reasonably gain?
  16. 16. Tops Down vs. Bottoms Up?• What do we mean?• Tops Down: more of a market analysis – how big isthe opportunity and what market share could thestart-up reasonably gain?• Bottoms Up: more of a plan for HOW the start-up willgain that market share.
  17. 17. Tops Down vs. Bottoms Up?• What do we mean?• Tops Down: more of a market analysis – how big isthe opportunity and what market share could thestart-up reasonably gain?• Bottoms Up: more of a plan for HOW the start-up willgain that market share.• Do both, but spend most of your effort on theBottoms Up view of the business.
  18. 18. A Bottoms Up Financial Model will:• Force the entrepreneur to think through the keydrivers of value in the business.• Allow the entrepreneur to consider variability in thebusiness related to various costs, investments,etc.• Illustrate how much capital is needed and when inorder to achieve the projected results.• Manage results versus the financial model.
  19. 19. Revenue Assumptions
  20. 20. Revenue Assumptions• Start with the business model – how do you make money & how areopportunities converted into revenue. Examples: direct sales, insidesales, channels, freemium/premium, converting “traffic”.
  21. 21. Revenue Assumptions• Start with the business model – how do you make money & how areopportunities converted into revenue. Examples: direct sales, insidesales, channels, freemium/premium, converting “traffic”.• How many products? How are they priced? Which classes of clientsbuy which product?
  22. 22. Revenue Assumptions• Start with the business model – how do you make money & how areopportunities converted into revenue. Examples: direct sales, insidesales, channels, freemium/premium, converting “traffic”.• How many products? How are they priced? Which classes of clientsbuy which product?• How long do you make money on customers and how? Subscription,maintenance, upgrades, upsells, cross-sells, etc.?
  23. 23. Revenue Assumptions• Start with the business model – how do you make money & how areopportunities converted into revenue. Examples: direct sales, insidesales, channels, freemium/premium, converting “traffic”.• How many products? How are they priced? Which classes of clientsbuy which product?• How long do you make money on customers and how? Subscription,maintenance, upgrades, upsells, cross-sells, etc.?• COGS – what does it cost you to deliver product? Materials,implementation, customization, commissions.
  24. 24. Revenue Assumptions• Start with the business model – how do you make money & how areopportunities converted into revenue. Examples: direct sales, insidesales, channels, freemium/premium, converting “traffic”.• How many products? How are they priced? Which classes of clientsbuy which product?• How long do you make money on customers and how? Subscription,maintenance, upgrades, upsells, cross-sells, etc.?• COGS – what does it cost you to deliver product? Materials,implementation, customization, commissions.• Any network effects or inflection points that alter revenue or COGS?
  25. 25. Sales Assumptions
  26. 26. Sales Assumptions• How does your sales funnel work? Based on yourconversion rates, how many prospects do you need toconvert the projected revenue?
  27. 27. Sales Assumptions• How does your sales funnel work? Based on yourconversion rates, how many prospects do you need toconvert the projected revenue?• What is the cost associated with reaching andconverting this number of prospects – sales people,commissions, etc.?
  28. 28. Sales Assumptions• How does your sales funnel work? Based on yourconversion rates, how many prospects do you need toconvert the projected revenue?• What is the cost associated with reaching andconverting this number of prospects – sales people,commissions, etc.?• Think about cycles:
  29. 29. Sales Assumptions• How does your sales funnel work? Based on yourconversion rates, how many prospects do you need toconvert the projected revenue?• What is the cost associated with reaching andconverting this number of prospects – sales people,commissions, etc.?• Think about cycles:1) How long to get new sales people / channelsproductive?
  30. 30. Sales Assumptions• How does your sales funnel work? Based on yourconversion rates, how many prospects do you need toconvert the projected revenue?• What is the cost associated with reaching andconverting this number of prospects – sales people,commissions, etc.?• Think about cycles:1) How long to get new sales people / channelsproductive?2) How long to for a productive resource to close asale?
  31. 31. Marketing Assumptions
  32. 32. Marketing Assumptions• How do you drive prospects to the top of the funnel?
  33. 33. Marketing Assumptions• How do you drive prospects to the top of the funnel?Channels – how long to develop channels?
  34. 34. Marketing Assumptions• How do you drive prospects to the top of the funnel?Channels – how long to develop channels?Inside sales – how much SEM, lists, etc.?
  35. 35. Marketing Assumptions• How do you drive prospects to the top of the funnel?Channels – how long to develop channels?Inside sales – how much SEM, lists, etc.?Direct – see sales cycle notes on prior slide.
  36. 36. Marketing Assumptions• How do you drive prospects to the top of the funnel?Channels – how long to develop channels?Inside sales – how much SEM, lists, etc.?Direct – see sales cycle notes on prior slide.• Everything on the prior three slides (revenue assumptionsand sales & marketing expense assumptions) should worktogether to help you manage your business.
  37. 37. Marketing Assumptions• How do you drive prospects to the top of the funnel?Channels – how long to develop channels?Inside sales – how much SEM, lists, etc.?Direct – see sales cycle notes on prior slide.• Everything on the prior three slides (revenue assumptionsand sales & marketing expense assumptions) should worktogether to help you manage your business.• As you compare results, it should also provide a realitycheck for you relative to your business model assumptions.
  38. 38. General & Administrative (G&A)Assumptions
  39. 39. General & Administrative (G&A)Assumptions- Small in the beginning, greater over time as businessbecomes more complex. These are the costs to run thebusiness.
  40. 40. General & Administrative (G&A)Assumptions- Small in the beginning, greater over time as businessbecomes more complex. These are the costs to run thebusiness.- Consider systems, services, policies that you need inplace to operate and the costs associated with each.
  41. 41. General & Administrative (G&A)Assumptions- Small in the beginning, greater over time as businessbecomes more complex. These are the costs to run thebusiness.- Consider systems, services, policies that you need inplace to operate and the costs associated with each.- Certain types of financing may require additionalexpenses to be incurred – i.e. finance & accountingprofessionals for VCs, banks, etc.
  42. 42. General & Administrative (G&A)Assumptions- Small in the beginning, greater over time as businessbecomes more complex. These are the costs to run thebusiness.- Consider systems, services, policies that you need inplace to operate and the costs associated with each.- Certain types of financing may require additionalexpenses to be incurred – i.e. finance & accountingprofessionals for VCs, banks, etc.- Much of this can be outsourced in the early days –contract CFOs, book-keepers, HR, etc.
  43. 43. Group Breakout• Groups of 5• Identify 1 Company in your group• What are your key drivers of revenue and cost?
  44. 44. Big Questions• How detailed of a model?• How aggressive should my assumptions be?• Item level build up, or % of revenue• Are a cash flow statement or balance sheetnecessary?
  45. 45. How Detailed?• “The VC One (maybe two) Level Deeper Test”• Match to comparable companies• Depends on what data you have• Minimize # of complete guesses• Not all your data/buildup has to live in the model
  46. 46. Cash Flow Statement and BalanceSheet?• No.. Unless• Income statement + cash balance estimate• Unless:– Cash flow is meaningfully different from net income/EBITDA– You are trying to model exactly how many payrolls youhave left– You are a later stage company
  47. 47. Specific Line Items vs. % ofRevenue• Specific detail, as long as you can reasonablypredict it, then bail…and go to % of revenue• Important metrics for YOUR biz, model further
  48. 48. Key Tenets1. Consistent w/ publicly available data2. Compare drivers to YOUR historical data3. Supplement w/ cohort data4. Create the narrative to explain it all
  49. 49. Key Tenet 1: Compare to PublicDataSources• Public company filings• Research reports• Blog posts, etc.If Different – Need an Explanation• Difference in business model• Technology• Different market
  50. 50. Key Tenet #2: Compare Drivers toYour Historical Data   May   June July  (Est) August  (Est) Sept.  (Est)Traffic      10,000    15,000    30,000  Conversion  Rate     5% 7% 7%AOV      $30.00    $30.00    $30.00  Bookings/Rev.  $3,426    $9,566    $15,000    $31,500    $63,000  Temp3ng  to  omit..
  51. 51. Key Tenet #3: Supplement w/Cohort DataMonths  Since  Start  of  CohortCumula3ve  Repeat  Rate
  52. 52. Key Tenet #4: Create a Narrativeto Explain it All• Outline reasons for changes in each major driver ofthe model• Includes comparable data• Ties back to planned initiatives/investments
  53. 53. Tips and Tricks1. Build monthly model all the way across2. Standardize your employee build3. Clearly identify inputs4. Check a random month- BY HAND5. Spot check big jumps6. Re-check your out years vs. public companies
  54. 54. Getting Started…• Identify key drivers (top line and bottom line)• Gather historical data• Design revenue build• Look for comparables to build out-year costassumptions• Bridge gap between out years and today w/specific assumptions
  55. 55. Model TemplateSource• Founder Friendly Venture Capital (FFVC.com)• http://articles.businessinsider.com/2012-02-08/markets/30381256_1_model-cash-flow-statement-startupsMy Modifications• Removed some non-essential debt components• Changed revenue build-up section• Removed fundraising tabs
  56. 56. Course TitleCourse TitleINSTRUCTOR NAME
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