FInancial Modeling and Valuations for Startups: Telling your Story with Numbers
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Transcript of 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:
Foresight Valuation Group © 2014
“Are Accountants and CFOs Killing Innovation?”
-- New Knowledge Online Magazine,
INSEAD, March 7, 2013
3 Foresight Valuation Group © 2014
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
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Guess the Company?
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The Valuation-Information Timeline
Seed Funding Series A Series B…
M&A
IPO
Available Information
Low High
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Outline
¨ The Funding Cycle
¨ Building a Financial Model using CURVE TM
¨ The Startup Valuation Puzzle
Foresight Valuation Group © 2014
The Funding Cycle
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The Funding Cycle
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Sources of Cash
$
Equity
Debt
Revenues
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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)
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Sources of Cash: Debt
Types Who? Return Pros Cons
• 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
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Sources of Cash: Revenues
Types Who? Return Pros Cons
• 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
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The Equity Funding “Triangle”: The Right Funding at The Right Time
Funds Raised ($)
Ownership (%)
Pre-Money Valuation
($)
< $1M
33% $2M
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Less than 1% of New Businesses are Venture Funded
Source: The Kauffmann Firm Survey, March 2008
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Total VC Investments: 2010 to Date
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VC-backed Exits: 2010 to Date
Foresight Valuation Group © 2014
Building a Financial Model
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Startup Financial Management
¨ Cash management ¨ Accounting/Taxes ¨ Financial planning/budgeting ¨ Fundraising
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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
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The CURVE TM Financial Model
COST
USERS
REVENUES
VALUATION for ENTREPRENEURS
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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
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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
Foresight Valuation Group © 2014
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
1. User/Customer/Unit Rollout
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User Rollout Example: Content Aggregator Mobile App
Modeling Unit Definition: User Account
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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
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User Rollout Example: Five Year Forecast Results
Year 1 • 0.6 million
Year 2 • 2.1 million
Year 3 • 5.8 million
Year 4 • 10.4 million
Year 5 • 16.4 million
Company accounts at end of year
-‐
2
4
6
8
10
12
14
16
18
20
0 5 10 15 20 25 30 35 40 45 50 55 60 Do
wnloa
ds (M
illions)
Months From Launch
Company Accounts
Total Batzu Accounts (MM) Total Company Accounts (MM)
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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
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User Benchmarking: Top Down Penetration
-‐
50.00
100.00
150.00
200.00
250.00
300.00
Jan-‐13
Apr-‐13
Jul-‐1
3
Oct-‐13
Jan-‐14
Apr-‐14
Jul-‐1
4
Oct-‐14
Jan-‐15
Apr-‐15
Jul-‐1
5
Oct-‐15
Jan-‐16
Apr-‐16
Jul-‐1
6
Oct-‐16
Jan-‐17
Apr-‐17
Jul-‐1
7
Oct-‐17
Millions
Internet Users in La?n America (MM)
Hispanic ownership of mobile devices, US & Mexico (MM)
Total Batzu Accounts (MM)
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Total Company Accounts (MM)
Foresight Valuation Group © 2014
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
2. Revenue Buildup
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Sources of Revenues
¨ Product sales ¨ Services ¨ Subscriptions ¨ Licensing/Revenue Share ¨ Advertising ¨ Sponsorships ¨ Data mining
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Sources of Revenue Example: Mobile Apps
Advertising
Freemium account Upgrades
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Advertising Example: A User Session
Log In Select Story Consume Content Select Channel
Opportunity for ad impression
We have assumed that the average account holder will use app about 2 times per week
Opportunity for ad impression
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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
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Premium Subscription Example: Revenue Assumptions
¨ Upgraded account allows access to additional premium content and other premium features ¤ $2 monthly subscription price for premium accounts ¤ 3% of users become premium subscribers ¤ Cost of premium content is 20% of the upgrade
subscription ¤ Premium accounts will be offered starting in Year 2
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- - 2.9
6.0 9.9
0.5 3.1
9.9
21.5
37.2
0.5 1.0
1.5
2.0
2.5
-
10.0
20.0
30.0
40.0
50.0
60.0
Year1 Year2 Year3 Year4 Year5
Reve
nue
($M
M)
Gross Premium Account Revenue ($MM), Global Interstital Ad Revenue per Month ($MM) Branded content channel revenue ($MM), Global
Revenue by Source: Five Year Forecast Example
35
$14.3MM
$29.5MM
$49.6MM
$4.1MM $1.0MM
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$2.96 *$3.61 $4.84
$7.04 $7.50
$9.56
$28.56
$-
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
Twitter Batzu Facebook LinkedIn Pandora AOL Google
Average Annual Revenue per User: Benchmark Analysis
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*$49.55 million gross revenue in year 5 / 13.74 million average Batzu accounts in year 5 = $3.61 average annual revenue per user
Company
Foresight Valuation Group © 2014
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
3. Expense Buildup
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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
39 Foresight Valuation Group © 2014
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
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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
Director of Content Curation
Content Curator
Content Curator
Content Curator
Director of Page Design
Page Designer
Page Designer
Country Publisher (U.S.)
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
Payroll – Organizational Chart
Key:
Foresight Valuation Group © 2014
Communicating With Investors
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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
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Investor Communications: Financial Model Dashboard
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Investor Communications: User Engagement Metrics (SaaS)
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Income Projections: Five Year Forecast
45
User Base Summary (millions) Year 1 Year 2 Year 3 Year 4 Year 5Batzu 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 Year5RevenueInterstital 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
CostsResearch & 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
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Revenue vs. Cost: Five Year Forecast Aggregation
1.0 4.1
14.3
29.5
49.6
4.9 6.6
10.3
18.3
28.2
-
10.0
20.0
30.0
40.0
50.0
60.0
Year1 Year2 Year3 Year4 Year5
Dol
lars
($M
M)
Gross Revenue Total Operating Costs
Breakeven Point
Foresight Valuation Group © 2014
The Startup Valuation Puzzle
Foresight Valuation Group © 2014
What’s in a Billion Dollars?
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High Valuations for Pre-Revenue Startups
Raised $225M at $3.8B Valuation (Oct 2013)
$338M raised to date 70M active users $0 Revenues
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
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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)
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The “Billion Dollar” Club (Source: WSJ)
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Startup Valuations: The Market Perspective
More Exits
In 2013
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
Nest Labs
• # Active Users • # Installs/Subscriptions • Conversion Rate • Churn Rate
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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
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Early Stage Valuation Methods
¨ VC Valuation Approach
¨ Comparable Valuation Approach
¨ Heuristic Approaches (experience based) ¤ Example - Dave McClure’s 5 Points
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$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
VC Valuation Approach: At Exit Point (Year 5)
Value Today
50% future dilution
Fully Diluted Value Today
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VC Valuation Approach: Sample Revenue Multiples (2012)
56
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VC Valuation Approach: Industry Standard Discount Rates
• 80%+ Seed
• 50-70% Angel
• 40-60% Series A
• 30-50% Series B
• 25-35% Bridge
Sources: How Venture Capital Works , Harvard Business Review A Method for Valuing High-Risk Long-Term Investments, Harvard Business School
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Comparables Valuation Approach: Pre-Money Valuation Range
Source: Halo Report 2013
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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
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The Startup Valuation Spectrum
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Startup Valuation Resources
¨ Angel Resource Institute www.angelresourceinstitute.org
¨ Fenwick & WestSeed 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
[email protected] www.linkedin.com/in/ekasznik
Office: 650-561-3374
www.foresightvaluation.com
Presentation available upon request