Building A Financial Model That Works

DAN ALLRED MATT NICHOLS@dgallred @mnichols47

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

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)

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 up financial model for a start-up.

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.

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.

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 is the opportunity and what market share could the start-up reasonably gain?

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.

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.

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.

Revenue Assumptions

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”.

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?

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.?

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.

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?

Sales Assumptions

Sales Assumptions

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

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.?

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:

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?

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?

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 sales – how much SEM, lists, etc.?

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.

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.

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.

General & Administrative (G&A) Assumptions

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.

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.

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.

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.

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

• Are a cash flow statement or balance sheet necessary?

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

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

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

Key Tenets1. 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

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

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..

Key Tenet #3: Supplement w/ Cohort Data

Months  Since  Start  of  Cohort

Cumula3ve  Repeat  Rate

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

Tips and Tricks1. 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

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

Model TemplateSource

• 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

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