Financial Modeling and Startup Valuations

Foresight Valuation Group © 2016
Palo Alto, CA
(650) 561-3374
ForesightValuation.com
1
Palo Alto, CA
(650) 561-3374
Foresight Valuation Group, LLC
Financial Projections and Funding Strategies
for Startups
August 3rd, 2016
Efrat Kasznik, President, Foresight Valuation Group
Lecturer, Stanford Graduate School of Business
July 30, 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
$5 Million
$34 Million
$44 Million
$174 Million
$539 Million
$1 Billion
Q1’12
Q4,12
Q2’14
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
Funds Raised
($)
Investor’s
Share
(%)
Pre-Money
Valuation
($)
$1M
20%$4M

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Guess the Company?
$1 Billion
$5 Million
2012 2016
$5 Million
$34 Million
$44 Million
$174 Million
$539 Million
$1 Billion
Q1’12
Q4,12
Q2’14
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
“From the 500-800 business plans received and
reviewed a year, somewhere between 50-100 initial 1
hour meetings are held. After this, August is
interested in about 20 companies and serious about
4 and he will invest in 1 to 2 deals”
-David Hornik – Partner, August Capital
“From the fund I work for, and a handful of others for
which I have an anecdotal answer, I can tell you that
about 0.6%-0.9% of companies that seek funding
from a VC fund end up getting an investment”
-Sean Owen – Pentech Ventures
“Venture funds invest in 1 out of every 400
companies seeking funding, or 0.25%”
-David Rose – CEO, Gust
“For every 100 business plans that come to a VC
firm for funding, usually only 10 get a serious look
and only 1 ends up being funded”
-Venture Capital Yearbook

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

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VC Investment by Industry: 2015
2016 National Venture Capital Association
Yearbook/Thomson Reuters

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Palo Alto, CA
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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 = 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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Startup Valuations:
The Investor Perspective
Industry
Benchmarks
Company
Metrics
Investment
Objectives
Investor
Dynamics
• Fear of Missing
Out (FOMO)
• More funding
options (Angels,
VCs, PE,
Crowdfunding)
• Competitors
• Valuation Comps
• Funding & Exits
• Target ROI (VC = 10x)
• Exit Horizon
• Portfolio Companies
• Team
• Product
• Execution (Beta)
• Intellectual property

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Early Stage Valuation Methods:
The Investor’s View
• Comparable Valuation Approach
• VC Valuation Approach
• Heuristic Approaches (based on investors’
own biases and experience)

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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
Number of Seed Investment at Various Pre-money
Valuation (All Industries)
Number of Deals

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Median Seed Pre-Money Valuation Up 53% from 2014
Highest 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%
Company Valuation:
$4M Pre-Money
50% Dilution
Share: 10%
Company Valuation:
$100M
Investment = $10M
$1M
$(4+1)M
= 20%
Revenue: $20M
Multiple: 5X
Today Year 5
(Exit)
Investment Timeline
10X ROI

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Heuristic Approach:
The Dave McClure Five “Million Dollar Points” *
• 5 valuation “Points” for early stage valuations
• Each “point” worth $1M:
1. Market
2. Product
3. Team
4. Customers
5. Revenue
=> Maximum: $5 Million
* Efrat’s 6th point: Intellectual Property Rights>>
add another $1M

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Building a Financial Model

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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
ØUnderstand valuation trajectory over time
ØTrue for all companies, from startups to public co’s
• Set Foundation for Funding Strategy
ØValuation trajectory sets up your funding strategy
ØManage Dilution to a Minimum: raising the right amount at the right time
• Create an Operating Budget
ØEvaluate funding needs & funding sources
ØPrioritize spending to optimize return on investment

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Financial Model Flow:
“Telling Your Story with Numbers”
1. User/Unit
Rollout:
“Unit/User
Economics”
2. Revenue Buildup:
Business Model
Monetization
Valuation
3. Cost Buildup:
Burn Rate
Pace of Growth
Funding Needs

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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
EFV3 Prototype Completed
4/21/2015
PCT
8/3/2015
VCSEL Demo
8/3/2015
MVP Alpha for Production
8/3/2015
Unknown Entry
12/31/2015
Beta Release
4/1/2016
Marketing Launch
7/1/2016
Printer 1 Release
7/1/2016
Milestone: Prototype Delivery
4/29/2015
Milestone: Beta Testing Complete
11/29/2015
Milestone: MVP Alpha Testing Complete
4/1/2016
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
KEY SAAS METRICS:
CAC = Customer Acquisition Cost
LTV = Lifetime Value
MRR = Monthly Recurring Revenue
Churn = % leaving this month

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Key SaaS Metrics: the “Holy” Ratios

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Simple Example: Managing Ratios
• CAC = $1,000
Ø$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 quota
ØReducing 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 ventures
Ø Select business model/revenue sources
Ø 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
Product SalesServices
Subscriptions
Freemium
In-App Sales
Advertising
Sponsorships
Data Mining
Licensing
Revenue
Share

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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 Norms
ØType of Product
• Any innovative revenue models that you have seen recently?

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3. Cost Buildup Overview
Cost Function:
• Cost of Goods Sold
• R&D
• Sales and
Marketing
• General and
Administrative
Years 1 & 2 are
predicted on a
monthly “burn
rate” basis based
on actual
assumptions
Later Years are
driven as a
percentage of
revenue using
industry
normalized ratios,
as revenues
stabilize

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Principles of Cost Planning
• Minimize overhead, and make cost as variable as possible, so you only
pay when you make money
Ø 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 items
ØUse salary surveys, by regions
ØFully loaded: benefits, taxes, workers’ comp insurance, healthcare,
bonuses, raises
ØEmployees v. contractors
ØCash v. equity compensation

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Org. Chart Example
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
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 ratios
ØAs revenue is generated more consistently, expenses should converge to
industry ratios
ØBefore 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 5
Subcriptions (in units)
Opening Subscriptions 0 196,149 404063 2249188 7828780
New 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 ($000) - Except Headcount
Opening Cash -$ 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 20
Pre-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 5
Subcriptions (in units)
Opening Subscriptions 0 144,451 169045 598563 1306401
New 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 ($000) - Except Headcount
Opening Cash -$ 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 20
Pre-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 Assessment
2. Financial Modeling
3. Valuation
4. Funding Strategy
5. 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.
“Vision without action is a daydream. Action without vision is a nightmare.”

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Questions?

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Startup Valuation Resources
• Angel Resource Institute
Ø www.angelresourceinstitute.org
• Fenwick & West
Ø Seed Financing Survey 2012 of Internet/Digital Media and Software Industries
• Silicon Valley Bank
Ø The HALO Report 2013
• The Kauffman Foundation
Ø Valuing Pre-Revenue Companies
• Center for Venture Research
Ø https://paulcollege.unh.edu/cvr
• PitchBook
Ø The Series A, B & C valuation distribution for U.S. companies is moving
• Mahesh VC
Ø This is Why Public and Private Market Valuations Are Completely Different

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Contact Us
Foresight Valuation Group
425 Sherman Avenue, Suite 200
Palo Alto, CA 94306
Phone: (650) 561-3374
ekasznik@foresightvaluation.com
info@foresightvaluation.com
LinkedIn.com/Company/Foresight-Valuation-Group
Twitter.com/ForesightValue

Financial Modeling and Startup Valuations

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