Financial modeling for startups workshop given at General Assembly class in San Francisco by Nathan Beckord, CFA, Founder of www.VentureArchetypes.com. Part of a 3-part series on raising startup capital.
Framework– it forces you to filter down the world of possibilities into thetangible + assign numbers to actionsOperating plan– literally, what you intend to do and when, especially re: salesand hiringCredibility– a good model can help seal the deal with investors. It shows howyou think about the business.Operational metrics– most businesses can be boiled down to a few keydrivers; these are the things to focus on and obsess over.Amount– shows you how much you’ll lose, thus what you need to raise 4
This is a good read to get you ﬁred up about building a startup ﬁnancial model. 6
Startup Financial Modeling Best Practices:• Bottom’s up: Literally: in Month 1 after funding, how many salespersons can you realistically hire? Whats their ramp-up period? How many customers can they call on? What is a realistic take rate and price-per-unit? etc...• Bus Drivers: these are key metrics, like sales quota per salesperson, price per sale, churn, etc. Don’t bury in Excel formulae, show them explicit.• First 2 years: VCs will scrutinize this period the most. Year-5 projections are nonsense. Build on a monthly basis for the first 24 months, and then switch to an annual basis. Your first two years are really an operating plan they’ll hold you to.• Use benchmarks: how do your margins compare to other, similar co? Tune in to what’s happening your sector.• Easy to change = dashboard or control panel. Build key assumptions in a separate tab of the workbook, to adjust the model.• Built to scale: “For every x, we do y” e.g. what can be driven by sales? Hiring, some capital equipment, some support costs, etc.• Scenarios: “Takes twice as long, costs twice as much…” Slow growth, etc.– what does this do to your cash burn and breakeven? How sensitive to your pricing model?• Focus on headcount: This is one of your largest expense items. Just figure out whom youll hire and how much youll pay and you cant go far wrong.• Run Sanity checks: particularly on margins, market share, headcount, etc. this goes back to using benchmarks.• Cash is king: Don’t let the accounting scare you. May be a delay between closing a deal and receiving cash/recognizing revenue. Running out of cash = insolvency or a down round. 7
Addressing these 7 questions gives you enough information to build a startup financial forecast.
Basically, we build a customer or user forecast, and then apply monetization strategy to these users.Approach #1: Take your actual, existing sales pipeline and model it, then grow each category over time. Advantage: based in reality; Disadvantage: most startups’ businesses are very different in the early days than when at “steady state”Approach #2: Forecast a realistic salesperson hiring schedule and also a channel partner recruitment schedule and then apply sales quotas X sales headcount. In this approach, hiring plan drives sales targets.Consider timing of new hires, ramp period, any seasonality, and sales cycle…how long to get from initial call to closed dealEspecially useful for enterprise software or “big ticket” items…where there are relatively few customersApproach #3: build forecast of adoption (free) then take rate for subscribers or purchasers (more on this later)Approach #4: Top down…if 4 million potential customers, we get 2%, 5%, 10%, so on…”billion person in china” flaw 11
COGS– think of a pen—per unit expenses are ink, rubber, plastic, etc. Each unit incurs that costs.Link headcount to sales/customers to grow in out yearsPlan X months for training and ramp upBenchmark appropriate salariesRecruiting costs, benefits & taxes, supplies, training, travel, etc. 16
1. Build a killer summary slide (annual), and also have some backup slides show key drivers, assumptions, and variables (like customer growth);2. Be ready for likely questions, such as cost to acquire customers, ARPU, breakeven point, total cash burn, etc.3. Demonstrate why raising capital generates outsized returns. 10x returns in 5 years. Show exits in the space and their multiples, and how that could translate to the investor. 1. A lot of people intuitively know it’s a big market, but the model shows how we will actually capitalize on the opportunity…