FInancial Modeling and Valuations for Startups: Telling your Story with Numbers

TELLING
YOUR
STORY
WITH
NUMBERS
Efrat Kasznik, Founder & President
Foresight Valuation Group, LLC
October 14, 2014
San Diego, CA
FINANCIAL MODELING
AND VALUATIONS FOR
STARTUPS:

“Are Accountants and CFOs
Killing Innovation?”
-- New Knowledge Online Magazine,
Foresight Valuation Group © 2014
INSEAD, March 7, 2013

About Me: Efrat Kasznik
¨ Founder and President, Foresight Valuation Group, a Silicon-
Valley based Intellectual property (IP) valuation, strategy and
start-up advisory firm.
¨ Valuation and strategy expert, with 20 years of experience
analyzing IP and technologies across industries
¨ Lecturer, Stanford Graduate School of Business
¨ Chair, Cloud Committee, Licensing Executives Society (LES)
¨ Top IP strategists, IAM 300 List 2013-2014
¨ Co-founder, CFO and Advisor to startups and incubators in
the US and Europe, including: Stanford Venture Lab, The HUB
Trieste, Astia Angel Fund
Foresight Valuation Group © 2014 3

Guess the Company?

The Valuation-Information Timeline
Seed
Funding Series A Series B…
M&A
IPO
Available Information
Low High

Outline
¨ The Funding Cycle
¨ Building a Financial Model using CURVE TM
¨ The Startup Valuation Puzzle

The Funding Cycle

Sources of Cash
Debt
$
Equity
Revenues

Sources of Cash: Equity
Types Who? Return Pros Cons
• Common
Stock
• Preferred
Stock
• Private
investors
(Angels)
• Institutional
investors (VCs)
• Public investors
(IPO)
• Price
Appreciation
• Dividends
• Long term
payback
• No drag on
ST cash flow
• No
collaterals
• Not Taxable
• Ownership
dilution
• Regulatory
and reporting
compliance
• Liquidity,
voting
preferences
(preferred
stock)

Sources of Cash: Debt
• Loans
• Line of credit)
• Convertible
Notes (hybrid)
• Financial
Institutions
(Banks)
• States, Cities
• Public (bonds)
• Periodic
Interest
• Repayment of
Principal
• Collateral (in
case of
default)
• No ownership
dilution
• No
preferential
voting rights
• Not taxable
• Interest is tax
deductible
• Short term
payback
(usually)
• Burden on
monthly cash
flows
• Lien on assets
(collateral)
• Available to
revenue-producing
companies
• Extensive
disclosure to
lenders

Sources of Cash: Revenues
• Sales of
Products &
Services
• Subscriptions
• Licensing
• Advertising
• Sponsorships
• Customers
• Partners
• Channels
• Brands
• Tangible:
products or
services
• Maintenance
• Upgrades
• User
community
• No
ownership
dilution
• No
preferential
voting rights
• Access to
user/
consumer
data
• Fulfillment
liability
• Taxable
income

The Equity Funding “Triangle”:
The Right Funding at The Right Time
Funds Raised
($)
Ownership
(%)
Pre-Money
Valuation
($)
< $1M
$2M 33%

Less than 1% of New Businesses are Venture Funded
Source: The Kauffmann Firm Survey, March 2008

Total VC Investments: 2010 to Date

VC-backed Exits: 2010 to Date

Building a Financial Model

Startup Financial Management
¨ Cash management
¨ Accounting/Taxes
¨ Financial planning/budgeting
¨ Fundraising

Cash Management
¨ Startups often focused on short-term cash
management
¨ Don’t lose sight of big picture!
¤ Bootstrapping is not a financial strategy
¤ Don’t make compromises that hurt your long term goals
¤ Goal should always be increasing value of company

The CURVE TM Financial Model
COST
USERS
REVENUES
VALUATION for
ENTREPRENEURS

Goals for Financial Modeling
¨ Manage Investor Expectations
ü True for all companies, from startups to public co’s
¨ Set Foundation for Valuation
ü Understand valuation trajectory over time
¨ Create an Operating Budget:
ü Evaluate funding needs & funding sources
ü Prioritize spending to optimize return on investment

Financial Model Flow:
Telling Your Story with Numbers
User/
Customer/Unit
Rollout:
Model
Infrastructure
Revenue
Buildup:
Return on
Investment/
Valuation
Cost Buildup:
Basis for
fundraising

1. User/Customer/Unit Rollout
The User Base is the infrastructure on which the
financial model is built:
q Choose a modeling unit
q Roll out users based on:
u Go-to-Market plan
u Product/engineering roadmap
q Benchmark results against target market to
estimate penetration

User Rollout Example:
Content Aggregator Mobile App
Modeling Unit Definition: User Account

User Rollout Trajectory: Mobile Apps
Build from the Bottom UP
User rollout
trajectory is
modeled by Time
To A Million
downloads, based
on other popular
applications

User Rollout Example:
Five Year Forecast Results
Company accounts at end of year
Year 1 • 0.6 million
20
18
16
14
12
10
8
6
4
2
-‐
Company
Accounts
0
5
10
15
20
25
30
35
40
45
50
55
60
Downloads
(Millions)
Months
From
Launch
ToTotatal
lB Caotmzup
aAncyc Aouccnotus
n(tMs M(M)M
)

Benchmarking Your Results
1. Compare “Apples to Apples” when showing
market penetration
¤ Choose the right market for the calculation
2. Make Sure you are “In the Range”
¤ And if not in the range you need a very good
explanation why you are an outlier!
3. Standardize your comparison units:
¤ Per User
¤ Per Employee
¤ Per Unit

User Benchmarking:
Top Down Penetration
300.00
250.00
200.00
150.00
100.00
50.00
-‐
Jan-‐13
Apr-‐13
Jul-‐13
Oct-‐13
Jan-‐14
Apr-‐14
Jul-‐14
Oct-‐14
Jan-‐15
Apr-‐15
Jul-‐15
Oct-‐15
Jan-‐16
Apr-‐16
Jul-‐16
Oct-‐16
Jan-‐17
Apr-‐17
Jul-‐17
Oct-‐17
Millions
Internet
Users
in
La?n
America
(MM)
Hispanic
ownership
of
mobile
devices,
US
&
Mexico
(MM)
Total
Batzu
Accounts
(MM)
28
Total Company Accounts (MM)

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

Sources of Revenues
¨ Product sales
¨ Services
¨ Subscriptions
¨ Licensing/Revenue Share
¨ Advertising
¨ Sponsorships
¨ Data mining

Sources of Revenue Example:
Mobile Apps
Advertising
Freemium account
Upgrades

Advertising Example: A User Session
Log In Select Channel Select Story Consume Content
Opportunity for
ad impression
Opportunity for
ad impression
We have assumed that the average account holder will
use app about 2 times per week

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

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

Revenue by Source:
Five Year Forecast Example
Revenue ($MM) Gross Premium Account Revenue ($MM), Global Interstital Ad Revenue per Month ($MM)
- -
60.0
50.0
40.0
30.0
20.0
10.0
2.9
6.0
9.9
0.5
3.1
9.9
21.5
37.2
0.5 1.0
1.5
2.0
2.5
-
Year1 Year2 Year3 Year4 Year5
Branded content channel revenue ($MM), Global
35
$14.3MM
$29.5MM
$49.6MM
$4.1MM
$1.0MM

Average Annual Revenue per User:
Benchmark Analysis
*$49.55 million gross revenue in year 5 /
13.74 million average Batzu accounts in year 5
= $3.61 average annual revenue per user
$2.96 *$3.61
$4.84
$7.04 $7.50
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$9.56
$28.56
$-
Twitter Batzu Facebook LinkedIn Pandora AOL Google
36
Company

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

Cost Modeling Overview
Cost Function:
• Cost of Goods Sold
• Engineering
• Sales and
Marketing
• General and
Administrative
Years 1 & 2 are
predicted on a
monthly “burn
rate” basis
based on actual
assumptions
Years 3 – 5 are
driven as a
percentage of
revenue using
industry
normalized
ratios

Payroll – Organizational Chart
CEO
CMO
Director of
Marketing and
PR
Marketing
manager
PR manager
PR manager
Director of Sales
and Business
Development
Director of New
Business Ventures
Business
Development
Manager
Business
Development
Manager
Sales
Representative
Sales
Representative
Chief Content
Officer
Country
Publisher
(Mexico)
Director of
Branded Content
Creation
Copywriter
Copywriter
Copywriter
Copywriter
Copywriter
Publisher (U.S.)
Director of
Content Curation
Country
Content Curator
Content Curator
Content Curator
Director of Page
Design
Page Designer
Page Designer
COO
Controller Various
Consultants
Legal Services
CTO
Project Manager
Dev Leader
Backend Dev
Backend Dev
HTML5 Dev
HTML5 Dev
Mobile Dev)
Mobile Dev)
Graphic
Designer QA Analyst
QA Analyst
System Admin
Director of
Operations
To be Hired
Immediately
To be Hired in
Year 2
To be Hired in
Year 3
Sitting in
Mexico Office Outsourced
Marketing Sales & Business
Development
Engineering
Publishing
Administrative
Key:

Communicating With Investors

Investor Communications:
Top 5 Best Practices
1. Don’t send Excel without “Voiceover” presentation
2. Clearly lay out key metrics on a Dashboard
3. Use Graphics as much as possible
4. Know your numbers inside and out!
¤ Know the micro (user level profitability)
¤ Know the macro (financial projections)
5. Know your investor’s goals and objectives and plan
your message accordingly

Financial Model Dashboard

User Engagement Metrics (SaaS)

Income Projections:
Five Year Forecast
45
User
Base
Summary
(millions) Year
1 Year
2 Year
3 Year
4 Year
5
Batzu
Accounts
at
End
of
Year
0.6
2.1
5.8
10.4
16.4
Average
Yearly
Accounts
0.2
1.3
4.0
8.4
13.7
Batzu
Financial
Summary
($
Millions) Year1 Year2 Year3 Year4 Year5
Revenue
Interstital
Ad
Revenue
per
Month
0.5
3.1
9.9
21.5
37.2
Gross
Premium
Account
Revenue
-‐
-‐
2.9
6.0
9.9
Branded
content
channel
revenue
0.5
1.0
1.5
2.0
2.5
Gross
Revenue
1.0
4.1
14.3
29.5
49.6
Cost
of
advertising
0.1
0.9
3.0
6.4
11.1
Cost
of
Premium
Revenue
-‐
-‐
0.6
1.2
2.0
Net
Revenue
0.8
3.2
10.7
21.9
36.4
Costs
Research
&
Development
1.3
1.3
2.1
4.4
7.4
Sales
&
Marketing
1.0
2.7
5.0
7.4
9.9
Content
Publishing
1.5
1.5
1.7
3.5
5.9
General
&
Administrative
1.1
1.1
1.4
3.0
5.0
Total
Operating
Costs
4.9
6.6
10.3
18.3
28.2
EBITDA
(4.1)
(3.4)
0.5
3.6
8.2

Revenue vs. Cost:
Five Year Forecast Aggregation
1.0
Breakeven Point
4.1
14.3
60.0
50.0
40.0
30.0
20.0
10.0
29.5
49.6
4.9
6.6
10.3
18.3
28.2
-
Year1 Year2 Year3 Year4 Year5
Dollars ($MM)
Gross Revenue Total Operating Costs

The Startup Valuation Puzzle

What’s in a Billion Dollars?

High Valuations for Pre-Revenue Startups
Raised $50M at ~$2B Valuation (Dec 2013)
$123M raised to date
60M installs, 30M active users monthly
16.5M users and 350M photos shared daily
$0 Revenues
Raised $225M at $3.8B Valuation (Oct 2013)
$338M raised to date
70M active users
$0 Revenues

Key Performance Indicators (KPI):
The New Valuation Fundamentals
KPI = Measurable Indicators of Scalability & Execution
¤ User Engagement - active users
¤ # of Installs
¤ Customer Acquisition Cost (CAC)
¤ Customer Lifetime Value (LTV)
¤ Average Revenue Per User (ARPU)
¤ Customer Attrition (Churn Rate)
¤ Conversion Rate (funnel)

The “Billion Dollar” Club (Source: WSJ)

Startup Valuations:
The Market Perspective
More Exits
In 2013
Nest Labs
User
Engagement
High
Growth
Industries
More
Funding
Options
• Angels
• VCs
• Private Equity
• Crowdfunding
• 230 IPOs; $55B US
• 10k M&As deals; $100B US
• Active Secondary Market
• Healthcare
• Internet of Things
• Social Media
$3.2B Valuation
• # Active Users
• # Installs/Subscriptions
• Conversion Rate
• Churn Rate

Startup Valuations:
The Investor Perspective
Industry
Benchmarks
Company
Metrics
Investment
Objectives
External
Factors
• Long Term
Growth
• Ecosystem:
partnership,
channels
• Regulation
• Litigation
• Competitors
• Valuation Comps
• Funding & Exits
• Target ROI
• Exit Horizon
• Portfolio Companies
• Team
• Product
• Execution (Beta)
• Intellectual property

Early Stage Valuation Methods
¨ VC Valuation Approach
¨ Comparable Valuation Approach
¨ Heuristic Approaches (experience based)
¤ Example - Dave McClure’s 5 Points

VC Valuation Approach:
At Exit Point (Year 5)
$20
Million
$100
Million
$5
Million
$2.5
Million
5X
Exit Multiple
70-80%
Discount Rate
= 20x ROI
Revenue
in Year 5
Value in
Year 5
Value
Today
50% future
dilution
Fully
Diluted
Value
Today

Sample Revenue Multiples (2012)
56

Industry Standard Discount Rates
Seed • 80%+
Angel • 50-70%
Series A • 40-60%
Series B • 30-50%
Bridge • 25-35%
Sources: How Venture Capital Works , Harvard Business Review
A Method for Valuing High-Risk Long-Term Investments, Harvard Business School

Comparables Valuation Approach:
Pre-Money Valuation Range
Source: Halo Report 2013

Heuristic Approach:
The Dave McClure Five “Million Dollar Points” *
¨ Discussed in Q&A by Dave McClure (500 Startups) at a
TechCrunch Disrupt Event (2011)
¨ Each “point” worth $1M:
1. Market
2. Product
3. Team
4. Customers
5. Revenue
>> Maximum: $5 Million
¨ * Efrat’s 6th point: IP (patents)>> add another $1M

The Startup Valuation Spectrum

Startup Valuation Resources
¨ Angel Resource Institute www.angelresourceinstitute.org
¨ Fenwick & West
Seed Financing Survey 2012 of Internet/Digital Media and
Software Industries
¨ Silicon Valley Bank: The HALO Report 2013
¨ The Kauffman Foundation: Valuing Pre-Revenue Companies
¨ Center for Venture Research https://paulcollege.unh.edu/cvr

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

FInancial Modeling and Valuations for Startups: Telling your Story with Numbers

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