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
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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
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Outline
Building a Financial Model using CURVE TM
User Rollout Revenue Buildup Expense Buildup
Startup Valuation & Fundraising Why Value your Startup? Valuation Example
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What’s in a Billion Dollars?
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The CURVE TM Financial Model
COST
USERS
REVENUES
VALUATION for
ENTREPRENEURS
Tell Your Story with Numbers…
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Goals for Startup Financial Modeling
Manage Investor Expectations
Pass Investor Due Diligence
Create a 2-Year Operating Budget
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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
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User Rollout
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• 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
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Unit of Modeling Example:User Accounts
The modeling unit is the revenue generating unit >> Channel to market
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User Rollout Example: Mobile Apps
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
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)
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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)
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Revenue Buildup
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• 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
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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 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
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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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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
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Expense Buildup
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• 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
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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
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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
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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 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:
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Financial Model Aggregation Example
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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
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Outline
Building a Financial Model User Rollout Revenue Buildup Expense Buildup
Startup Valuation & Fundraising Why Value your Startup? Valuation Example
Foresight Valuation Group © 2014
The Valuation Puzzle
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What’s in a Billion Dollars?
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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
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The Startup Valuation Spectrum
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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
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$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)
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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
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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
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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
www.linkedin.com/in/ekasznikOffice: 650-561-3374
www.foresightvaluation.com
Presentation available upon request