Financial Modeling & Business Valuation for Start-ups

Efrat Kasznik, Founder & PresidentForesight Valuation Group, LLC

“Financial Modeling &Business Valuationfor Start-ups”

January 16th, 2013

Foresight Valuation Group © 2014

“Are Accountants and CFOs

Killing Innovation?”

-- New Knowledge Online Magazine,

INSEAD, March 7, 2013


About Me: Efrat Kasznik

Founder and President, Foresight Valuation Group (Palo Alto, CA), a Silicon-Valley based intellectual property, valuation and start-up advisory firm.

Lecturer on IP Strategy, Stanford Graduate School of Business (GSB), MBA elective class; mentor at the Center for Entrepreneurial Studies at the GSB

Licensing Executives Society (LES), High Tech Sector - Leadership Committee; Chair, Cloud Committee

Intellectual property (IP) valuation and strategy expert, with 20 years of experience analyzing IP portfolios for mergers & acquisitions, financial reporting, technology commercialization decisions, tax compliance, transfer pricing, litigation damages and business liquidations.

Listed on IAM 300 list of top IP strategists Co-founder, CFO and adviser to startups in the US and Europe,

in the fields of telecom, mobile, media, cleantech, nanotech and healthcare.

Member of the Astia C-Suite screening committee


Outline

Building a Financial Model using CURVE TM

User Rollout Revenue Buildup Expense Buildup

Startup Valuation & Fundraising Why Value your Startup? Valuation Example


What’s in a Billion Dollars?


The CURVE TM Financial Model

COST

USERS

REVENUES

VALUATION for

ENTREPRENEURS

Tell Your Story with Numbers…


Goals for Startup Financial Modeling

Manage Investor Expectations

Pass Investor Due Diligence

Create a 2-Year Operating Budget


Financial Model Flow: Telling Your Story with Numbers

User/Customer Rollout:Model

Infrastructure

Revenue Buildup:

Opportunity for

investors/valuation

Cost Buildup:Basis for

fundraising

Build model: Bottom

s up

Benchmark model: Top down


User Rollout


• The User Base is the infrastructure on which the financial model is built:• Choose modeling unit• Roll out users based on user acquisition

strategy (go to market plan, engineering to support number)

• Benchmark results against target market to estimate penetration

1. User Rollout


Unit of Modeling Example:User Accounts

The modeling unit is the revenue generating unit >> Channel to market


User Rollout Example: Mobile Apps

User rollout trajectory is

modeled by Time To A Million

downloads, based on other popular

applications

Foresight Valuation Group © 2014 14

User Rollout Example:Five Year Forecast

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

0 5 10 15 20 25 30 35 40 45 50 55 60 -

2

4

6

8

10

12

14

16

18

20 Company Accounts

Total Batzu Accounts (MM)Months From Launch

Dow

nloa

ds (M

illio

ns)

Total Company Accounts (MM)


User Benchmarking:Top Down Penetration

Jan-13

Apr-13Jul-1

3

Oct-13

Jan-14

Apr-14Jul-1

4

Oct-14

Jan-15

Apr-15Jul-1

5

Oct-15

Jan-16

Apr-16Jul-1

6

Oct-16

Jan-17

Apr-17Jul-1

7

Oct-17

-

50.00

100.00

150.00

200.00

250.00

300.00

Internet Users in Latin America (MM)

Hispanic ownership of mobile devices, US & Mexico (MM)

Total Batzu Accounts (MM)

Mill

ions

Total Company Accounts (MM)


Revenue Buildup


• Revenues represent the opportunity for investors, and the basis of valuation for early stage ventures• Identify user monetization opportunities• Focus on top 2-3 revenue sources at the

most!• Project revenues at least 3 years out (5 if

possible)• Benchmark results against comparable

companies

2. Revenue Buildup


Sources of Revenue Example:Mobile Apps

Advertising

Freemium account Upgrades


Advertising Example: A User Session

Log In Select Story Consume ContentSelect 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


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


Twitter Batzu Facebook LinkedIn Pandora AOL Google $-

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$2.96 *$3.61 $4.84

$7.04 $7.50

$9.56

$28.56

Average Annual Revenue per User: Benchmark Analysis Example

Company


Expense Buildup


• Expenses represent the basis for fundraising :• Direct Cost >> vary with revenues

(COGS)• Fixed Cost >> mostly payroll (org chart)• Other fixed cost: IT, office expenses,

marketing, licensing, legal, professional fees

• Benchmark Cost against expenses, industry ratios

3. Expense Buildup


Cost Modeling Overview

Cost by Function:• Cost of Goods Sold • Engineering• Sales and Marketing

• General and Administrative

Years 1 & 2 are predicted on a monthly basis

based on actual assumptions

Years 3 – 5 are driven as a

percentage of revenue using

industry normalized

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


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 Representa

tive

Sales Representa

tive

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

ControllerVarious

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

Payroll – Organizational Chart

Key:


Financial Model Aggregation Example


Revenue vs. Cost: Five Year Forecast

Year1 Year2 Year3 Year4 Year5 -

10.0

20.0

30.0

40.0

50.0

60.0

1.0 4.1

14.3

29.5

49.6

4.9 6.6

10.3

18.3

28.2

Gross Revenue Total Operating Costs

Dollars

($

MM

)

Breakeven Point


Outline

Building a Financial Model User Rollout Revenue Buildup Expense Buildup

Startup Valuation & Fundraising Why Value your Startup? Valuation Example


The Valuation Puzzle


What’s in a Billion Dollars?


Key Performance Indicators (KPI): The New Valuation Fundamentals

KPI = Measurable Success Factors> Driving Product-Market Iteration Cycle

Customer Acquisition Cost (CAC) Customer Lifetime Value (LTV) Average Revenue Per User (ARPU) Customer Stickiness Customer Attrition (Churn Rate) Viral Coefficient Conversion Rate


The Startup Valuation Spectrum

Foresight Valuation Group © 2014 35

Series A Funding Example:The Valuation “Triangle”

Funds Raised ($5)

Company pre-money

valuation ($15)

Share Given to Investors:5/20 =25%

Cost Model

Revenue

Model

Challenge: minimizing investors’ share while not overstating valuation


$3.61Average

Revenue / User

13.7 MillionAverage

accounts in Year 5

$50 Million

$250 Million

$24Million

5XExit Multiple

40%–60%Discount Rate

Revenue in

Year 5

Value in Year

5Value Today:

Probability?

Valuation Overview:At Exit Point (Year 5)


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 ReviewA Method for Valuing High-Risk Long-Term Investments, Harvard Business School


Value per User Benchmarks

Inst

agra

m

Twitt

er

Batzu

Yelp

Fours

quare

Face

book

Linke

dIn

Pinte

rest

DropBox

Path

$-

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

$7.38

$17.40 *$18.15 $18.59

$30.00 $32.83

$65.20

$75.00 $80.00

$83.33

Company


About Foresight Valuation GroupWe Are

Foresight Valuation Group, LLC (FVG) is a Silicon-Valley based intellectual property (IP) consulting firm, providing high quality

analytical services.

We ProvideA full suite of services designed to help our clients increase their bottom-line results through valuing, strategically managing and

monetizing their IP assets.

IP Valuations IP Strategy Litigation Support Business Valuations Economic Analysis Startup Advisory

THANK YOU!Efrat Kasznik

President, Foresight Valuation Group

[email protected]

www.linkedin.com/in/ekasznikOffice: 650-561-3374

www.foresightvaluation.com

Presentation available upon request

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Financial Modeling & Business Valuation for Start-ups

Economy & Finance