Dan Allred and Matt Nichols provide a presentation on building an effective financial model for a startup. They discuss the importance of creating a bottoms up model that focuses on key drivers of revenue and costs. Their goals are to teach concepts for building the model, provide principles for assumptions, and equip attendees with a template. The presentation covers revenue, sales, marketing, and general cost assumptions and emphasizes comparing assumptions to historical data, public comparables, and creating clear narratives.

1. Building A Financial
Model That Works
DAN ALLRED MATT NICHOLS
@dgallred @mnichols47

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. 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. How Did We Get Here?

5. How Did We Get Here?

6. How Did We Get Here?

7. How Did We Get Here?

8. How Did We Get Here?

9. How Did We Get Here?

10. Our Goals

11. Our Goals
• Teach key concepts around building a bottoms up
financial model for a start-up.

12. Our Goals
• Teach key concepts around building a bottoms up
financial model for a start-up.
• Provide guiding principles around the assumptions
you will make in building your model.

13. Our Goals
• Teach key concepts around building a bottoms up
financial model for a start-up.
• Provide guiding principles around the assumptions
you will make in building your model.
• Equip you with a model template that you can use
as you build your own model.

14. Tops Down vs. Bottoms Up?
• What do we mean?

15. Tops Down vs. Bottoms Up?
• What do we mean?
• Tops Down: more of a market analysis – how big is
the opportunity and what market share could the
start-up reasonably gain?

16. Tops Down vs. Bottoms Up?
• What do we mean?
• Tops Down: more of a market analysis – how big is
the opportunity and what market share could the
start-up reasonably gain?
• Bottoms Up: more of a plan for HOW the start-up will
gain that market share.

17. Tops Down vs. Bottoms Up?
• What do we mean?
• Tops Down: more of a market analysis – how big is
the opportunity and what market share could the
start-up reasonably gain?
• Bottoms Up: more of a plan for HOW the start-up will
gain that market share.
• Do both, but spend most of your effort on the
Bottoms Up view of the business.

18. A Bottoms Up Financial Model will:
• Force the entrepreneur to think through the key
drivers of value in the business.
• Allow the entrepreneur to consider variability in the
business related to various costs, investments,
etc.
• Illustrate how much capital is needed and when in
order to achieve the projected results.
• Manage results versus the financial model.

19. Revenue Assumptions

20. Revenue Assumptions
• Start with the business model – how do you make money & how are
opportunities converted into revenue. Examples: direct sales, inside
sales, channels, freemium/premium, converting “traffic”.

21. Revenue Assumptions
• Start with the business model – how do you make money & how are
opportunities converted into revenue. Examples: direct sales, inside
sales, channels, freemium/premium, converting “traffic”.
• How many products? How are they priced? Which classes of clients
buy which product?

22. Revenue Assumptions
• Start with the business model – how do you make money & how are
opportunities converted into revenue. Examples: direct sales, inside
sales, channels, freemium/premium, converting “traffic”.
• How many products? How are they priced? Which classes of clients
buy which product?
• How long do you make money on customers and how? Subscription,
maintenance, upgrades, upsells, cross-sells, etc.?

23. Revenue Assumptions
• Start with the business model – how do you make money & how are
opportunities converted into revenue. Examples: direct sales, inside
sales, channels, freemium/premium, converting “traffic”.
• How many products? How are they priced? Which classes of clients
buy 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. Revenue Assumptions
• Start with the business model – how do you make money & how are
opportunities converted into revenue. Examples: direct sales, inside
sales, channels, freemium/premium, converting “traffic”.
• How many products? How are they priced? Which classes of clients
buy 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. Sales Assumptions

26. Sales Assumptions
• How does your sales funnel work? Based on your
conversion rates, how many prospects do you need to
convert the projected revenue?

27. Sales Assumptions
• How does your sales funnel work? Based on your
conversion rates, how many prospects do you need to
convert the projected revenue?
• What is the cost associated with reaching and
converting this number of prospects – sales people,
commissions, etc.?

28. Sales Assumptions
• How does your sales funnel work? Based on your
conversion rates, how many prospects do you need to
convert the projected revenue?
• What is the cost associated with reaching and
converting this number of prospects – sales people,
commissions, etc.?
• Think about cycles:

29. Sales Assumptions
• How does your sales funnel work? Based on your
conversion rates, how many prospects do you need to
convert the projected revenue?
• What is the cost associated with reaching and
converting this number of prospects – sales people,
commissions, etc.?
• Think about cycles:
1) How long to get new sales people / channels
productive?

30. Sales Assumptions
• How does your sales funnel work? Based on your
conversion rates, how many prospects do you need to
convert the projected revenue?
• What is the cost associated with reaching and
converting this number of prospects – sales people,
commissions, etc.?
• Think about cycles:
1) How long to get new sales people / channels
productive?
2) How long to for a productive resource to close a
sale?

31. Marketing Assumptions

32. Marketing Assumptions
• How do you drive prospects to the top of the funnel?

33. Marketing Assumptions
• How do you drive prospects to the top of the funnel?
Channels – how long to develop channels?

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. 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. 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 assumptions
and sales & marketing expense assumptions) should work
together to help you manage your business.

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 assumptions
and sales & marketing expense assumptions) should work
together to help you manage your business.
• As you compare results, it should also provide a reality
check for you relative to your business model assumptions.

38. General & Administrative (G&A)
Assumptions

39. General & Administrative (G&A)
Assumptions
- Small in the beginning, greater over time as business
becomes more complex. These are the costs to run the
business.

40. General & Administrative (G&A)
Assumptions
- Small in the beginning, greater over time as business
becomes more complex. These are the costs to run the
business.
- Consider systems, services, policies that you need in
place to operate and the costs associated with each.

41. General & Administrative (G&A)
Assumptions
- Small in the beginning, greater over time as business
becomes more complex. These are the costs to run the
business.
- Consider systems, services, policies that you need in
place to operate and the costs associated with each.
- Certain types of financing may require additional
expenses to be incurred – i.e. finance & accounting
professionals for VCs, banks, etc.

42. General & Administrative (G&A)
Assumptions
- Small in the beginning, greater over time as business
becomes more complex. These are the costs to run the
business.
- Consider systems, services, policies that you need in
place to operate and the costs associated with each.
- Certain types of financing may require additional
expenses to be incurred – i.e. finance & accounting
professionals for VCs, banks, etc.
- Much of this can be outsourced in the early days –
contract CFOs, book-keepers, HR, etc.

43. Group Breakout
• Groups of 5
• Identify 1 Company in your group
• What are your key drivers of revenue and cost?

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 sheet
necessary?

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. Cash Flow Statement and Balance
Sheet?
• 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 you
have left
– You are a later stage company

47. Specific Line Items vs. % of
Revenue
• Specific detail, as long as you can reasonably
predict it, then bail…and go to % of revenue
• Important metrics for YOUR biz, model further

48. Key Tenets
1. Consistent w/ publicly available data
2. Compare drivers to YOUR historical data
3. Supplement w/ cohort data
4. Create the narrative to explain it all

49. Key Tenet 1: Compare to Public
Data
Sources
• Public company filings
• Research reports
• Blog posts, etc.
If Different – Need an Explanation
• Difference in business model
• Technology
• Different market

50. Key Tenet #2: Compare Drivers to
Your 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. Key Tenet #3: Supplement w/
Cohort Data
Months
Since
Start
of
Cohort
Cumula3ve
Repeat
Rate

52. Key Tenet #4: Create a Narrative
to Explain it All
• Outline reasons for changes in each major driver of
the model
• Includes comparable data
• Ties back to planned initiatives/investments

53. Tips and Tricks
1. Build monthly model all the way across
2. Standardize your employee build
3. Clearly identify inputs
4. Check a random month- BY HAND
5. Spot check big jumps
6. Re-check your out years vs. public companies

54. Getting Started…
• Identify key drivers (top line and bottom line)
• Gather historical data
• Design revenue build
• Look for comparables to build out-year cost
assumptions
• Bridge gap between out years and today w/
specific assumptions

55. Model Template
Source
• Founder Friendly Venture Capital (FFVC.com)
• http://articles.businessinsider.com/2012-02-08/
markets/30381256_1_model-cash-flow-statement-
startups
My Modifications
• Removed some non-essential debt components
• Changed revenue build-up section
• Removed fundraising tabs

56. Course Title
Course Title
INSTRUCTOR NAME