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.
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)
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.
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.
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?
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?
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.
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