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January 16th, 2013

“Financial Modeling &
Business Valuation
for Start-ups”

Efrat Kasznik, Founder & President
Foresight Valuation Group, LLC
“Are Accountants and CFOs
Killing Innovation?”
-- New Knowledge Online Magazine,
INSEAD, March 7, 2013

Foresight Valuation Group © 2014
About Me: Efrat Kasznik













Founder and President, Foresight Valuation Group (Palo Alto, CA), a Silicon-Valley based
intellectual property, valuation and start-up advisory firm.
Lecturer on IP Strategy, Stanford Graduate School of Business (GSB), MBA elective class;
mentor at the Center for Entrepreneurial Studies at the GSB
Licensing Executives Society (LES), High Tech Sector - Leadership Committee; Chair,
Cloud Committee

Intellectual property (IP) valuation and strategy expert, with 20 years of experience
analyzing IP portfolios for mergers & acquisitions, financial reporting, technology
commercialization decisions, tax compliance, transfer pricing, litigation damages and
business liquidations.
Listed on IAM 300 list of top IP strategists
Co-founder, CFO and adviser to startups in the US and Europe, in the fields of
telecom, mobile, media, cleantech, nanotech and healthcare.
Member of the Astia C-Suite screening committee

Foresight Valuation Group © 2014

3
Outline


Building a Financial Model using CURVE TM
 User

Rollout
 Revenue Buildup
 Expense Buildup


Startup Valuation & Fundraising
 Why

Value your Startup?
 Valuation Example
Foresight Valuation Group © 2014

4
What’s in a Billion Dollars?

Foresight Valuation Group © 2014
The

TM
CURVE

Financial Model

VALUATION for
ENTREPRENEURS
REVENUES

USERS

COST

Foresight Valuation Group © 2014

6
Tell Your Story
with Numbers…
Goals for Startup Financial Modeling


Manage Investor Expectations



Pass Investor Due Diligence



Create a 2-Year Operating Budget

Foresight Valuation Group © 2014

8
Financial Model Flow:
Telling Your Story with Numbers

User/Customer
Rollout:
Model
Infrastructure

Foresight Valuation Group © 2014

Revenue Buildup:
Opportunity for
investors/valuation

9

Cost Buildup:
Basis for
fundraising
User Rollout
Foresight Valuation Group © 2014
1. User Rollout
•

The User Base is the infrastructure on which
the financial model is built:
•
•

•

Choose modeling unit
Roll out users based on user acquisition strategy (go
to market plan, engineering to support number)
Benchmark results against target market to
estimate penetration

Foresight Valuation Group © 2014

11
Unit of Modeling Example:
User Accounts


The modeling unit is the revenue
generating unit >> Channel to market

Foresight Valuation Group © 2014

12
User Rollout Example: Mobile Apps

User rollout
trajectory is
modeled by Time
To A Million
downloads, based
on other popular
applications

Foresight Valuation Group © 2014

13
User Rollout Example:
Five Year Forecast
Company Accounts

Company accounts at end of year
20

Year 2
Year 3

Year 4
Year 5

• 0.6 million

16

Downloads (Millions)

Year 1

18

• 2.1 million
• 5.8 million

14
12
10
8
6
4
2

• 10.4 million

-

0

Months From Launch
Total Company Accounts (MM)
Total Batzu Accounts (MM)

• 16.4 million

Foresight Valuation Group © 2014

5 10 15 20 25 30 35 40 45 50 55 60

14
User Benchmarking:
Top Down Penetration
300.00

250.00

Internet Users in Latin America (MM)

Millions

15200.00
Hispanic ownership of mobile devices,
US & Mexico (MM)

150.00

Total Batzu Accounts (MM)
Total Company Accounts (MM)
100.00

50.00

Foresight Valuation Group © 2014

15

Oct-17

Jul-17

Apr-17

Jan-17

Oct-16

Jul-16

Apr-16

Jan-16

Oct-15

Jul-15

Apr-15

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

-
Revenue Buildup
Foresight Valuation Group © 2014
2. Revenue Buildup
•

Revenues represent the opportunity for investors, and
the basis of valuation for early stage ventures
• Identify user monetization opportunities
• Focus on top 2-3 revenue sources at the most!
• Project revenues at least 3 years out (5 if possible)
• Benchmark results against comparable companies

Foresight Valuation Group © 2014

17
Sources of Revenue Example:
Mobile Apps

Advertising
Freemium account
Upgrades

Foresight Valuation Group © 2014

18
Advertising Example: A User Session
Log In

Select Channel

Select Story

Opportunity for
ad impression

Consume Content

Opportunity for
ad impression

We have assumed that the average account holder will
use app about 2 times per week
Foresight Valuation Group © 2014

19
Advertising Revenue Unit:
cost per mille (CPM)






The cost of an online advertising campaigns is
determined by the total number of impressions (=
pages that users see)
The impressions are sold as advertising space in
units of 1,000 (mille) display ad impressions
The rate quoted for impressions is the cost per mille,
abbreviated as CPM
 CPM

= the cost for 1,000 display ad impressions

Foresight Valuation Group © 2014

20
Premium Subscription Example:
Revenue Assumptions


Upgraded account allows access to additional
premium content and other premium features
 $2

monthly subscription price for premium accounts
 3% of users become premium subscribers
 Cost of premium content is 20% of the upgrade
subscription
 Premium accounts will be offered starting in Year 2

Foresight Valuation Group © 2014

21
Average Annual Revenue per User:
Benchmark Analysis Example
$30.00

$28.56

$25.00

$20.00

$15.00

$9.56

$10.00

$7.04
$5.00

$2.96

*$3.61

$7.50

LinkedIn

Pandora

$4.84

$-

Twitter

Foresight Valuation Group © 2014

Batzu
Company

Facebook

22

AOL

Google
Expense Buildup

Foresight Valuation Group © 2014
3. Expense Buildup
•

Expenses represent the basis for fundraising :
• Direct Cost >> vary with revenues (COGS)
• Fixed Cost >> mostly payroll (org chart)
• Other fixed cost: IT, office expenses, marketing,
licensing, legal, professional fees
• Benchmark Cost against expenses, industry ratios

Foresight Valuation Group © 2014

24
Cost Modeling Overview

Cost by Function:
•
•
•
•

Cost of Goods Sold
Engineering
Sales and Marketing
General and
Administrative

Foresight Valuation Group © 2014

Years 1 & 2 are
predicted on a
monthly basis based
on actual assumptions

25

Years 3 – 5 are
driven as a
percentage of
revenue using industry
normalized ratios
Principals of Cost Planning




Minimize the overhead (and inventory), and make
cost as variable as possible, so you only pay when
you make money
Funding the overhead, and your working capital
gaps, so you don’t dilute your shareholders

Foresight Valuation Group © 2014

26
Payroll – Organizational Chart
CEO

Director of Sales
and Business
Development

CMO

Marketing
Director of
Marketing and PR

Chief Content
Officer

COO

Sales & Business
Development

Administrative

Director of New
Business Ventures

Country Publisher
(Mexico)

Marketing
manager

Business
Development
Manager

PR manager

Business
Development
Manager

Director of
Branded Content
Creation

PR manager

Sales
Representative

Copywriter

Sales
Representative

Copywriter

Copywriter

Country Publisher
(U.S.)

Director of Content
Curation

Copywriter

Director of Page
Design

Controller

Various Consultants

Legal Services

Project Manager

Dev Leader

Content Curator

Backend Dev

Content Curator

Copywriter

Page Designer

Page Designer

Backend Dev

Publishing
Content Curator

HTML5 Dev

HTML5 Dev

Key:

To be Hired
Immediately

Foresight Valuation Group © 2014

Director of
Operations

CTO

To be Hired
in Year 2

To be Hired
in Year 3

Sitting in
Mexico
Office

27

Outsourced

Mobile Dev)

Graphic Designer

Mobile Dev)

Engineering

QA Analyst

QA Analyst

System Admin
Financial Model Aggregation Example

Foresight Valuation Group © 2014

28
Revenue vs. Cost:
Five Year Forecast
60.0
49.6

50.0

Dollars ($MM)

Breakeven Point
40.0
29.5

30.0

28.2

18.3

20.0
14.3
10.3

10.0
4.9

4.1

6.6

1.0
Year1

Year2

Year3

Gross Revenue
Foresight Valuation Group © 2014

Total Operating Costs
29

Year4

Year5
Outline




Building a Financial Model
 User Rollout
 Revenue Buildup
 Expense Buildup

Startup Valuation & Fundraising
 Why

Value your Startup?
 Valuation Example
Foresight Valuation Group © 2014

30
The Valuation Puzzle
Foresight Valuation Group © 2014
What’s in a Billion Dollars?

Foresight Valuation Group © 2014
Key Performance Indicators (KPI):
The New Valuation Fundamentals
KPI = Measurable Success Factors> Driving ProductMarket Iteration Cycle
Customer Acquisition Cost (CAC)
 Customer Lifetime Value (LTV)
 Average Revenue Per User (ARPU)
 Customer Stickiness
 Customer Attrition (Churn Rate)
 Viral Coefficient
 Conversion Rate


Foresight Valuation Group © 2014

33
The Startup Valuation Spectrum

Foresight Valuation Group © 2014

34
Series A Funding Example:
The Valuation “Triangle”
Cost
Model

Funds Raised ($5)

Share Given to
Investors:
5/20 =25%

Company premoney valuation
($15)

Challenge: minimizing investors’ share while not
overstating valuation
Foresight Valuation Group © 2014

35

Revenue
Model
Valuation Overview:
At Exit Point (Year 5)
$3.61

13.7 Million

Average
Revenue / User

Average accounts in
Year 5

Revenue in
Year 5

$50
Million
5X
Exit Multiple

$250 Million

40%–60%
Discount Rate
Foresight Valuation Group © 2014

36

Value in
Year 5

$24
Million

Value
Today:
Probability?
Industry Standard Discount Rates
Seed

• 80%+

Angel
Series A

• 40-60%

Series B

• 30-50%

Bridge
Sources:

• 50-70%

• 25-35%

How Venture Capital Works , Harvard Business Review
A Method for Valuing High-Risk Long-Term Investments, Harvard Business School
37

Foresight Valuation Group © 2014
Value per User Benchmarks
$90.00

$80.00

$80.00

$83.33

$75.00

$70.00

$65.20

$60.00
$50.00
$40.00
$30.00

$30.00
$17.40

$20.00
$10.00

*$18.15

$18.59

Twitter

Batzu
Company

Yelp

$32.83

$7.38

$Instagram

Foresight Valuation Group © 2014

Foursquare Facebook

38

LinkedIn

Pinterest

DropBox

Path
About Foresight Valuation Group
We Are
Foresight Valuation Group, LLC (FVG) is a Silicon-Valley based intellectual
property (IP) consulting firm, providing high quality analytical services.

We Provide
A full suite of services designed to help our clients increase their bottom-line
results through valuing, strategically managing and monetizing their IP assets.








IP Valuations
IP Strategy
Litigation Support
Business Valuations
Economic Analysis
Startup Advisory

Foresight Valuation Group © 2014

39
THANK YOU!
Efrat Kasznik
President, Foresight Valuation Group
ekasznik@foresightvaluation.com
www.linkedin.com/in/ekasznik
Office: 650-561-3374

www.foresightvaluation.com

Presentation available upon request

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Financial Modeling & Business Valuation for Start-ups

  • 1. January 16th, 2013 “Financial Modeling & Business Valuation for Start-ups” Efrat Kasznik, Founder & President Foresight Valuation Group, LLC
  • 2. “Are Accountants and CFOs Killing Innovation?” -- New Knowledge Online Magazine, INSEAD, March 7, 2013 Foresight Valuation Group © 2014
  • 3. About Me: Efrat Kasznik        Founder and President, Foresight Valuation Group (Palo Alto, CA), a Silicon-Valley based intellectual property, valuation and start-up advisory firm. Lecturer on IP Strategy, Stanford Graduate School of Business (GSB), MBA elective class; mentor at the Center for Entrepreneurial Studies at the GSB Licensing Executives Society (LES), High Tech Sector - Leadership Committee; Chair, Cloud Committee Intellectual property (IP) valuation and strategy expert, with 20 years of experience analyzing IP portfolios for mergers & acquisitions, financial reporting, technology commercialization decisions, tax compliance, transfer pricing, litigation damages and business liquidations. Listed on IAM 300 list of top IP strategists Co-founder, CFO and adviser to startups in the US and Europe, in the fields of telecom, mobile, media, cleantech, nanotech and healthcare. Member of the Astia C-Suite screening committee Foresight Valuation Group © 2014 3
  • 4. Outline  Building a Financial Model using CURVE TM  User Rollout  Revenue Buildup  Expense Buildup  Startup Valuation & Fundraising  Why Value your Startup?  Valuation Example Foresight Valuation Group © 2014 4
  • 5. What’s in a Billion Dollars? Foresight Valuation Group © 2014
  • 7. Tell Your Story with Numbers…
  • 8. Goals for Startup Financial Modeling  Manage Investor Expectations  Pass Investor Due Diligence  Create a 2-Year Operating Budget Foresight Valuation Group © 2014 8
  • 9. Financial Model Flow: Telling Your Story with Numbers User/Customer Rollout: Model Infrastructure Foresight Valuation Group © 2014 Revenue Buildup: Opportunity for investors/valuation 9 Cost Buildup: Basis for fundraising
  • 11. 1. User Rollout • The User Base is the infrastructure on which the financial model is built: • • • Choose modeling unit Roll out users based on user acquisition strategy (go to market plan, engineering to support number) Benchmark results against target market to estimate penetration Foresight Valuation Group © 2014 11
  • 12. Unit of Modeling Example: User Accounts  The modeling unit is the revenue generating unit >> Channel to market Foresight Valuation Group © 2014 12
  • 13. User Rollout Example: Mobile Apps User rollout trajectory is modeled by Time To A Million downloads, based on other popular applications Foresight Valuation Group © 2014 13
  • 14. User Rollout Example: Five Year Forecast Company Accounts Company accounts at end of year 20 Year 2 Year 3 Year 4 Year 5 • 0.6 million 16 Downloads (Millions) Year 1 18 • 2.1 million • 5.8 million 14 12 10 8 6 4 2 • 10.4 million - 0 Months From Launch Total Company Accounts (MM) Total Batzu Accounts (MM) • 16.4 million Foresight Valuation Group © 2014 5 10 15 20 25 30 35 40 45 50 55 60 14
  • 15. User Benchmarking: Top Down Penetration 300.00 250.00 Internet Users in Latin America (MM) Millions 15200.00 Hispanic ownership of mobile devices, US & Mexico (MM) 150.00 Total Batzu Accounts (MM) Total Company Accounts (MM) 100.00 50.00 Foresight Valuation Group © 2014 15 Oct-17 Jul-17 Apr-17 Jan-17 Oct-16 Jul-16 Apr-16 Jan-16 Oct-15 Jul-15 Apr-15 Jan-15 Oct-14 Jul-14 Apr-14 Jan-14 Oct-13 Jul-13 Apr-13 Jan-13 -
  • 17. 2. Revenue Buildup • Revenues represent the opportunity for investors, and the basis of valuation for early stage ventures • Identify user monetization opportunities • Focus on top 2-3 revenue sources at the most! • Project revenues at least 3 years out (5 if possible) • Benchmark results against comparable companies Foresight Valuation Group © 2014 17
  • 18. Sources of Revenue Example: Mobile Apps Advertising Freemium account Upgrades Foresight Valuation Group © 2014 18
  • 19. Advertising Example: A User Session Log In Select Channel Select Story Opportunity for ad impression Consume Content Opportunity for ad impression We have assumed that the average account holder will use app about 2 times per week Foresight Valuation Group © 2014 19
  • 20. Advertising Revenue Unit: cost per mille (CPM)    The cost of an online advertising campaigns is determined by the total number of impressions (= pages that users see) The impressions are sold as advertising space in units of 1,000 (mille) display ad impressions The rate quoted for impressions is the cost per mille, abbreviated as CPM  CPM = the cost for 1,000 display ad impressions Foresight Valuation Group © 2014 20
  • 21. Premium Subscription Example: Revenue Assumptions  Upgraded account allows access to additional premium content and other premium features  $2 monthly subscription price for premium accounts  3% of users become premium subscribers  Cost of premium content is 20% of the upgrade subscription  Premium accounts will be offered starting in Year 2 Foresight Valuation Group © 2014 21
  • 22. Average Annual Revenue per User: Benchmark Analysis Example $30.00 $28.56 $25.00 $20.00 $15.00 $9.56 $10.00 $7.04 $5.00 $2.96 *$3.61 $7.50 LinkedIn Pandora $4.84 $- Twitter Foresight Valuation Group © 2014 Batzu Company Facebook 22 AOL Google
  • 24. 3. Expense Buildup • Expenses represent the basis for fundraising : • Direct Cost >> vary with revenues (COGS) • Fixed Cost >> mostly payroll (org chart) • Other fixed cost: IT, office expenses, marketing, licensing, legal, professional fees • Benchmark Cost against expenses, industry ratios Foresight Valuation Group © 2014 24
  • 25. Cost Modeling Overview Cost by Function: • • • • Cost of Goods Sold Engineering Sales and Marketing General and Administrative Foresight Valuation Group © 2014 Years 1 & 2 are predicted on a monthly basis based on actual assumptions 25 Years 3 – 5 are driven as a percentage of revenue using industry normalized ratios
  • 26. Principals of Cost Planning   Minimize the overhead (and inventory), and make cost as variable as possible, so you only pay when you make money Funding the overhead, and your working capital gaps, so you don’t dilute your shareholders Foresight Valuation Group © 2014 26
  • 27. Payroll – Organizational Chart CEO Director of Sales and Business Development CMO Marketing Director of Marketing and PR Chief Content Officer COO Sales & Business Development Administrative Director of New Business Ventures Country Publisher (Mexico) Marketing manager Business Development Manager PR manager Business Development Manager Director of Branded Content Creation PR manager Sales Representative Copywriter Sales Representative Copywriter Copywriter Country Publisher (U.S.) Director of Content Curation Copywriter Director of Page Design Controller Various Consultants Legal Services Project Manager Dev Leader Content Curator Backend Dev Content Curator Copywriter Page Designer Page Designer Backend Dev Publishing Content Curator HTML5 Dev HTML5 Dev Key: To be Hired Immediately Foresight Valuation Group © 2014 Director of Operations CTO To be Hired in Year 2 To be Hired in Year 3 Sitting in Mexico Office 27 Outsourced Mobile Dev) Graphic Designer Mobile Dev) Engineering QA Analyst QA Analyst System Admin
  • 28. Financial Model Aggregation Example Foresight Valuation Group © 2014 28
  • 29. Revenue vs. Cost: Five Year Forecast 60.0 49.6 50.0 Dollars ($MM) Breakeven Point 40.0 29.5 30.0 28.2 18.3 20.0 14.3 10.3 10.0 4.9 4.1 6.6 1.0 Year1 Year2 Year3 Gross Revenue Foresight Valuation Group © 2014 Total Operating Costs 29 Year4 Year5
  • 30. Outline   Building a Financial Model  User Rollout  Revenue Buildup  Expense Buildup Startup Valuation & Fundraising  Why Value your Startup?  Valuation Example Foresight Valuation Group © 2014 30
  • 31. The Valuation Puzzle Foresight Valuation Group © 2014
  • 32. What’s in a Billion Dollars? Foresight Valuation Group © 2014
  • 33. Key Performance Indicators (KPI): The New Valuation Fundamentals KPI = Measurable Success Factors> Driving ProductMarket Iteration Cycle Customer Acquisition Cost (CAC)  Customer Lifetime Value (LTV)  Average Revenue Per User (ARPU)  Customer Stickiness  Customer Attrition (Churn Rate)  Viral Coefficient  Conversion Rate  Foresight Valuation Group © 2014 33
  • 34. The Startup Valuation Spectrum Foresight Valuation Group © 2014 34
  • 35. Series A Funding Example: The Valuation “Triangle” Cost Model Funds Raised ($5) Share Given to Investors: 5/20 =25% Company premoney valuation ($15) Challenge: minimizing investors’ share while not overstating valuation Foresight Valuation Group © 2014 35 Revenue Model
  • 36. Valuation Overview: At Exit Point (Year 5) $3.61 13.7 Million Average Revenue / User Average accounts in Year 5 Revenue in Year 5 $50 Million 5X Exit Multiple $250 Million 40%–60% Discount Rate Foresight Valuation Group © 2014 36 Value in Year 5 $24 Million Value Today: Probability?
  • 37. Industry Standard Discount Rates Seed • 80%+ Angel Series A • 40-60% Series B • 30-50% Bridge Sources: • 50-70% • 25-35% How Venture Capital Works , Harvard Business Review A Method for Valuing High-Risk Long-Term Investments, Harvard Business School 37 Foresight Valuation Group © 2014
  • 38. Value per User Benchmarks $90.00 $80.00 $80.00 $83.33 $75.00 $70.00 $65.20 $60.00 $50.00 $40.00 $30.00 $30.00 $17.40 $20.00 $10.00 *$18.15 $18.59 Twitter Batzu Company Yelp $32.83 $7.38 $Instagram Foresight Valuation Group © 2014 Foursquare Facebook 38 LinkedIn Pinterest DropBox Path
  • 39. About Foresight Valuation Group We Are Foresight Valuation Group, LLC (FVG) is a Silicon-Valley based intellectual property (IP) consulting firm, providing high quality analytical services. We Provide A full suite of services designed to help our clients increase their bottom-line results through valuing, strategically managing and monetizing their IP assets.       IP Valuations IP Strategy Litigation Support Business Valuations Economic Analysis Startup Advisory Foresight Valuation Group © 2014 39
  • 40. THANK YOU! Efrat Kasznik President, Foresight Valuation Group ekasznik@foresightvaluation.com www.linkedin.com/in/ekasznik Office: 650-561-3374 www.foresightvaluation.com Presentation available upon request