Financial Modeling and Startup Valuations

ForesightValuationGroup©2016PaloAlto,CA(650)561-3374ForesightValuation.com

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ForesightValuationGroup,LLC

FinancialProjectionsandFundingStrategiesforStartups

August3rd,2016

EfratKasznik,President,ForesightValuationGroupLecturer,StanfordGraduateSchoolofBusiness

July30,2016


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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, IoT Committee, Licensing Executives Society (LES), USA-Canada

• World Leading IP Strategist, IAM 300 List: 2013-2016

• Co-founder, CFO and Advisor to startups, accelerators and funds in the US, Europe and Israel, including: Stanford Venture Studio, The HUB Trieste, Astia Angel Fund

• Conference speaker, author and blogger on topics related to valuations, funding and IP strategy.


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Outline

• The Funding Cycle• Startup Valuations• Financial Modeling• Funding Strategy• Questions?


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The Funding Cycle


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Guess the Company?$1 Billion

$5 Million

2012 2016

$5Million

$34Million$44Million

$174Million

$539Million

$1Billion

Q1’12

Q4,12Q2’14

Q4’14

Q3’15

Q3’16


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Sources of Startup Funding

$Equity

Debt Crowdfunding

Grants(sciences)


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The Equity Funding Cycle


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The Equity Funding “Triangle”:Funding, Valuation and Investor’s Share

FundsRaised($)

Investor’sShare(%)

Pre-MoneyValuation

($)

$1M

20%$4M


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Guess the Company?$1 Billion

$5 Million

2012 2016

$5Million

$34Million$44Million

$174Million

$539Million

$1Billion

Q1’12

Q4,12Q2’14

Q4’14

Q3’15

Q3’16

$1M

$9.8M

$13.2M

$50M

$91M

Acquired


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Funding Statistics from Venture Capitalists:Probability of Funding is 1% or Below

“Fromthe500-800businessplansreceivedandreviewedayear,somewherebetween50-100initial1

hourmeetingsareheld.Afterthis,Augustisinterestedinabout20companiesandseriousabout

4andhewillinvestin1to2deals”

-DavidHornik– Partner,AugustCapital

“FromthefundIworkfor,andahandfulofothersforwhichIhaveananecdotalanswer,Icantellyouthatabout0.6%-0.9%ofcompaniesthatseekfundingfromaVCfundendupgettinganinvestment”

-SeanOwen– PentechVentures

“Venturefundsinvestin1outofevery400companiesseekingfunding,or0.25%”

-DavidRose– CEO,Gust

“Forevery100businessplansthatcometoaVCfirmforfunding,usuallyonly10getaseriouslook

andonly1endsupbeingfunded”

-VentureCapitalYearbook


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Total US VC Investments: 2011-2015Increased Level of Funding, Higher Deal Size

Source:cbinsights.com


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VC Investment by Industry: 2015

2016NationalVentureCapitalAssociationYearbook/ThomsonReuters


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Startup Valuations


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What’s in a Billion Dollars?


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CrunchBase Unicorn Leaderboard:Top 10 US Unicorns (As of July 7, 2016)

Rank Valuation

1. Uber $62.5B

2. Airbnb $27B

3. Palantir $20.1B

4. Snapchat $19.3B

5. WeWork $16B

6. SpaceEx $12B

7. Pinterest $11B

8. Dropbox $10.35B

9. Theranos $9B

10. Lyft $5.5B

Company


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Key Performance Indicators (KPI): The New Valuation Fundamentals

KPI=MeasurableIndicatorsofScalability&Execution

• UserEngagement- activeusers• #ofInstalls• CustomerAcquisitionCost(CAC)• CustomerLifetimeValue(LTV)• AverageRevenuePerUser(ARPU)• CustomerAttrition(ChurnRate)• ConversionRate(funnel)


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Startup Valuations: The Investor Perspective

IndustryBenchmarks

CompanyMetrics

InvestmentObjectives

InvestorDynamics

• FearofMissingOut(FOMO)

• Morefundingoptions(Angels,VCs,PE,Crowdfunding)

• Competitors• ValuationComps• Funding&Exits

• TargetROI(VC=10x)• ExitHorizon• PortfolioCompanies

• Team• Product• Execution(Beta)• Intellectualproperty


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Early Stage Valuation Methods:The Investor’s View

• ComparableValuationApproach

• VCValuationApproach

• HeuristicApproaches(basedoninvestors’ownbiasesandexperience)


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Comparable Valuation Approach:Pre-Money Valuation Distribution on AngelList (2010-Present):

0

100

200

300

400

500

600

700

800

900

<1M 1M 2M 3M 4M 5M 6M 7M+

204

479

625

748 730

830

487

684

NumberofSeedInvestmentatVariousPre-moneyValuation(AllIndustries)

NumberofDeals


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Median Seed Pre-Money Valuation Up 53% from 2014Highest Valuation in HALO History (Silicon Valley Bank)!


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HALO 2015 Annual Report Data (Silicon Valley Bank): 2015 Mean and Median Angel Round Sizes


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VC Valuation Approach:At Exit Point (Year 5)

Investment:$1M

Share:20%

CompanyValuation:$4MPre-Money

50%DilutionShare:10%

CompanyValuation:$100M

Investment=$10M

$1M$(4+1)M

= 20%Revenue: $20MMultiple: 5X

Today Year5(Exit)

InvestmentTimeline

10XROI


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Heuristic Approach:The Dave McClure Five “Million Dollar Points” *

• 5valuation“Points”forearlystagevaluations• Each“point”worth$1M:1. Market2. Product3. Team4. Customers5. Revenue

=> Maximum:$5Million*Efrat’s6th point:IntellectualPropertyRights>>addanother$1M


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Building a Financial Model


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The CURVE TM Financial Model

COST

USERS

REVENUES

VALUATIONforENTREPRENEURS


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Goals for Financial Modeling

• Manage Investor ExpectationsØUnderstand valuation trajectory over timeØTrue for all companies, from startups to public co’s

• Set Foundation for Funding StrategyØValuation trajectory sets up your funding strategyØManage Dilution to a Minimum: raising the right amount at the right time

• Create an Operating BudgetØEvaluate funding needs & funding sourcesØPrioritize spending to optimize return on investment


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Financial Model Flow: “Telling Your Story with Numbers”

1.User/UnitRollout:

“Unit/UserEconomics”

2.RevenueBuildup:BusinessModelMonetizationValuation

3.CostBuildup:BurnRate

PaceofGrowthFundingNeeds


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1. User/Unit Rollout


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1. User/Unit Rollout

• The User Base is the spine on which the financial model is built:Ø Identify your modeling unit: user, unit of product, subscriber, intermediary, etc.Ø Select your business model (B2B, B2c, B2B2C, licensing)Ø Model and understand the Unit Economics (based on your industry benchmarks) -

the incremental cost and revenue from adding one unit – this is critical to building a financial model!

Ø Align User/Unit rollout story with:• Go-to-Market strategy (going viral is NOT a strategy…)• Product roadmap• R&D/Engineering roadmap• IP Filing Roadmap


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2015 2016

Today

01 03 05 07 09 11 2016 03 05 07

EFV3PrototypeCompleted4/21/2015

PCT8/3/2015

VCSELDemo8/3/2015

MVPAlphaforProduction8/3/2015

UnknownEntry12/31/2015

BetaRelease4/1/2016

MarketingLaunch7/1/2016

Printer1Release7/1/2016

Milestone:PrototypeDelivery4/29/2015

Milestone:BetaTestingComplete11/29/2015

Milestone:MVPAlphaTestingComplete4/1/2016

1/1/2015- 8/1/2015Filing/IP

1/1/2015- 7/1/2016R&D/Tech

1/1/2015- 7/1/2016Product

1/1/2015- 7/1/2016Launch

Operating Timelines


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Unit Economics: SaaS Metrics Example

KEYSAASMETRICS:CAC=CustomerAcquisitionCostLTV=LifetimeValueMRR=MonthlyRecurringRevenueChurn=%leavingthismonth


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Key SaaS Metrics: the “Holy” Ratios


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Simple Example: Managing Ratios

• CAC = $1,000Ø$100,000/year sales person, 100 customers a year

• MRR = $50 (monthly price)• Monthly Churn = 2% (leaving every month)

Ratios:• LTV = 50/2% = $2,500• Months to recover CAC = 1,000/50 = 20 (too long – should be <12)• LTV/CAC = 2.5 (too low – should be >3)


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Improving SaaS Metrics

• Lower CAC:ØIncreasing the sales quotaØReducing the Salary

• Higher LTV:ØIncreasing MRR (charging more per customer)ØReducing Churn (key metric for SaaS companies)


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2. Revenue & Cost Modeling


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2. Revenue Buildup

• Revenues represent the opportunity for investors, and the basis of valuation for early stage venturesØ Select business model/revenue sourcesØ Identify all monetization opportunities• Focus on top 2-3 revenue sources at the most!

Ø Project revenues at least 3 years out (5 if possible)Ø Benchmark results against comparable companies


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Common Sources of Revenues

ProductSalesServices

Subscriptions

Freemium

In-AppSales

Advertising

Sponsorships

DataMining

Licensing

RevenueShare


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Identifying the Right Revenue Model

• What revenue models are common in your industry?

• What is the criteria for revenue model selection?ØType of User ØIndustry NormsØType of Product

• Any innovative revenue models that you have seen recently?


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3. Cost Buildup Overview

CostFunction:• CostofGoodsSold• R&D• SalesandMarketing

• GeneralandAdministrative

Years1&2arepredictedonamonthly“burnrate”basisbased

onactualassumptions

LaterYearsaredrivenasa

percentageofrevenueusing

industrynormalizedratios,

asrevenuesstabilize


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Principles of Cost Planning

• Minimize overhead, and make cost as variable as possible, so you only pay when you make moneyØ Variable Cost >> vary with revenues (COGS)Ø Fixed Cost >> payroll, marketing, overhead

• Focus on your org. chart as payroll is the largest cost item in an early stage company (non-manufacturing)

• Fund the overhead, and your working capital gaps (critical in manufacturing/supply chain situations), so you don’t dilute your shareholders


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Cost Buildup: Cost Functions

• Modeling by Cost Function:ØCost of Goods Sold: direct cost related to goods or services sold

• Vary with revenues, for examples: raw materials, sales commissions, etc

ØResearch & Development (R&D):• Engineering salaries, facility operating cost

ØSales and Marketing:• Sales (cost related to selling products or services), marketing (advertising, cost related to

branding)

ØGeneral and Administrative• All overhead: rent, other office expenses, legal, services insurance, admin salaries,

management salaries (unless allocated to other functions)


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Cost Buildup: Org. Chart and Payroll

• Payroll is the largest cost item:ØBuild org, chart for next two years by hiring date and function, for

easy allocation to cost itemsØUse salary surveys, by regionsØFully loaded: benefits, taxes, workers’ comp insurance, healthcare,

bonuses, raisesØEmployees v. contractorsØCash v. equity compensation


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Org. Chart ExampleCEO

CMO

DirectorofMarketingandPR

Marketingmanager

PRmanager

PRmanager

DirectorofSalesandBusinessDevelopment

DirectorofNewBusinessVentures

BusinessDevelopmentManager

BusinessDevelopmentManager

SalesRepresentative

SalesRepresentative

ChiefContentOfficer

CountryPublisher(Mexico)

DirectorofBrandedContent

Creation

Copywriter

Copywriter

Copywriter

Copywriter

Copywriter

DirectorofContentCuration

ContentCurator

ContentCurator

ContentCurator

DirectorofPageDesign

PageDesigner

PageDesigner

CountryPublisher(U.S.)

COO

Controller VariousConsultants

LegalServices

CTO

ProjectManager

DevLeader

BackendDev

BackendDev

HTML5Dev

HTML5Dev

MobileDev)

MobileDev)

GraphicDesigner QAAnalyst

QAAnalyst

SystemAdmin

DirectorofOperations

TobeHiredImmediately

TobeHiredinYear2

TobeHiredinYear3

SittinginMexicoOffice Outsourced

Marketing Sales&BusinessDevelopment

EngineeringPublishing

Administrative

Key:


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Cost Buildup: Over Time

• Years 1 & 2 are predicted on a monthly basis to estimate “burn rate” based on actual assumptions• Years 3 and beyond are driven as a percentage of revenue using

industry normalized ratiosØAs revenue is generated more consistently, expenses should converge to

industry ratiosØBefore revenues are stabilized, expenses cannot be expected to have a ratio

correlation to revenues, therefore expenses in the early years need to be estimated from scratch


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Bringing It All Together:Financial Model and Funding Simulation


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Time 1 New Subscriptions 10,000 Monthly New Subscription Growth 10%Salesperson Annual Salary 120,000$ Sales Quota (# of Subscriptions) 5,000 Churn Rate 2%Monthly Subscription Fee 5.00$

Model Inputs

10% Growth

Year 1 Year 2 Year 3 Year 4 Year 5Subcriptions (in units)Opening Subscriptions 0 196,149 404063 2249188 7828780New Subscriptions 213,850 671,183 2,106,469 6,611,012 20,748,185 Monthly Churn Rate 2% 2% 2% 2% 2%Churned Subscriptions 17,701 463,269 261,344 1,031,420 3,402,774 Closing Subscriptions 196,149 404,063 2,249,188 7,828,780 25,174,191

Financials ($000) - Except HeadcountOpening Cash -$ 1,070,293$ 2,035,083$ 23,812,748$ 147,918,062$

Sales Headcount 68 215 675 2,117 6,644 Sales & Marketing Costs 5,130,000 16,090,000 50,560,000 158,660,000 497,960,000 Fixed Costs 500,004 500,004 500,004 874,999 2,250,000 Total Costs 5,630,004 16,590,004 51,060,004 159,534,999 500,210,000

Subscription Revenue 4,425,090 15,442,340 65,336,160 257,854,830 850,693,530 Other Revenue 442,509 1,544,234 6,533,616 25,785,483 85,069,353 Total Revenue 4,867,599 16,986,574 71,869,776 283,640,313 935,762,883

Annual Funding 1,832,698 568,220 967,894 - - Cumulative 1,832,698 2,400,918 3,368,811 3,368,811 3,368,811

Closing Cash 1,070,293 2,035,083 23,812,748 147,918,062 583,470,945

Valuation Multiple of Revenues 20 20 20 20 20Pre-Money Valuation 1,000,000 3,922,980 8,081,260 44,983,760 156,575,600 Post-Money-Valuation 2,832,698 4,491,200 9,049,154 44,983,760 156,575,600

Founder Share Pre-Funding (%) 100% 35% 31% 28% 28%Founder Share Post-Funding 35% 31% 28% 28% 28%


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5% Growth

Year 1 Year 2 Year 3 Year 4 Year 5Subcriptions (in units)Opening Subscriptions 0 144,451 169045 598563 1306401New Subscriptions 159,175 285,879 513,400 921,977 1,655,725 Monthly Churn Rate 2% 2% 2% 2% 2%Churned Subscriptions 14,724 261,285 83,882 214,139 434,395 Closing Subscriptions 144,451 169,045 598,563 1,306,401 2,527,731

Financials ($000) - Except HeadcountOpening Cash -$ 1,145,579$ 3,355,943$ 13,613,016$ 49,881,627$

Sales Headcount 41 74 132 238 427 Sales & Marketing Costs 3,810,000 6,870,000 12,310,000 22,120,000 39,740,000 Fixed Costs 500,004 500,004 500,004 500,004 500,004 Total Costs 4,310,004 7,370,004 12,810,004 22,620,004 40,240,004

Subscription Revenue 3,680,685 8,709,425 20,970,070 53,535,105 108,598,710 Other Revenue 368,069 870,943 2,097,007 5,353,511 10,859,871 Total Revenue 4,048,754 9,580,368 23,067,077 58,888,616 119,458,581

Annual Funding 1,406,830 - - - - Cumulative 1,406,830 1,406,830 1,406,830 1,406,830 1,406,830

Closing Cash 1,145,579 3,355,943 13,613,016 49,881,627 129,100,204

Valuation Multiple of Revenues 20 20 20 20 20Pre-Money Valuation 1,000,000 2,889,020 3,380,900 11,971,260 26,128,020 Post-Money-Valuation 2,406,830 2,889,020 3,380,900 11,971,260 26,128,020

Founder Share Pre-Funding (%) 100% 42% 42% 42% 42%Founder Share Post-Funding 42% 42% 42% 42% 42%

Time 1 New Subscriptions 10,000 Monthly New Subscription Growth 5%Salesperson Annual Salary 120,000$ Sales Quota (# of Subscriptions) 5,000 Churn Rate 2%Monthly Subscription Fee 5.00$

Model Inputs


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Foresight Services


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Foresight Services

• Foresight understands the needs of Startups, and the expectations of investors, as they begin their fundraising efforts and to better assist you on this journey, we have created a set of services that we believe address these needs:

1. Business Model Assessment2. Financial Modeling3. Valuation4. Funding Strategy5. IP Strategy


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Foresight Services


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Special Offers for Our Workshop Participants

1) Introductory Consulting Session: We help identify a company’s strengths and weaknesses in an effort to enhance your company’s positioning for funding. Using our Startup Assessment Survey which is the first step in this process, which is then followed by 2 sessions focusing on the two main categories that contribute to startup success: Product and Execution. We provide guided instructions for improvement, and following that session, we could also launch any of our services (business model selection, funding strategy or IP strategy).

2) Advanced SaaS Modeling Seminar: We have developed this course to enable participants to go in-depth into SaaS modeling, as a follow up to the introductory concepts presented in class. We cap the number of participants in these seminars to a small group of 3 people, to enable us to address the individual needs of each participant while also providing a more focused tutorial on how to create a financial model for your SaaS company. These half-day seminars are typically held at our Palo Alto office but we can also hold the seminar at your company or over a web conference.

“Visionwithoutactionisadaydream.Actionwithoutvisionisanightmare.”


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Questions?


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Startup Valuation Resources

• Angel Resource Institute Ø www.angelresourceinstitute.org

• Fenwick & WestØ Seed Financing Survey 2012 of Internet/Digital Media and Software Industries

• Silicon Valley BankØ The HALO Report 2013

• The Kauffman FoundationØ Valuing Pre-Revenue Companies

• Center for Venture ResearchØ https://paulcollege.unh.edu/cvr

• PitchBookØ The Series A, B & C valuation distribution for U.S. companies is moving

• Mahesh VCØ This is Why Public and Private Market Valuations Are Completely Different


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Contact Us

ForesightValuationGroup425ShermanAvenue,Suite200

PaloAlto,CA94306

Phone:(650)[email protected]@foresightvaluation.com

LinkedIn.com/Company/Foresight-Valuation-Group

Twitter.com/ForesightValue

ForesightValuation.com

Financial Modeling and Startup Valuations

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