Published on March 1, 2014
January 16th, 2013 “Financial Modeling & Business Valuation for Start-ups” Efrat Kasznik, Founder & President Foresight Valuation Group, LLC
“Are Accountants and CFOs Killing Innovation?” -- New Knowledge Online Magazine, INSEAD, March 7, 2013 Foresight Valuation Group © 2014
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 Foresight Valuation Group © 2014 3
Outline Building a Financial Model using CURVE TM User Rollout Revenue Buildup Expense Buildup Startup Valuation & Fundraising Why Value your Startup? Valuation Example Foresight Valuation Group © 2014 4
What’s in a Billion Dollars? Foresight Valuation Group © 2014
The TM CURVE Financial Model VALUATION for ENTREPRENEURS REVENUES USERS COST Foresight Valuation Group © 2014 6
Tell Your Story with Numbers…
Goals for Startup Financial Modeling Manage Investor Expectations Pass Investor Due Diligence Create a 2-Year Operating Budget Foresight Valuation Group © 2014 8
Financial Model Flow: Telling Your Story with Numbers User/Customer Rollout: Model Infrastructure Foresight Valuation Group © 2014 Revenue Buildup: Opportunity for investors/valuation 9 Cost Buildup: Basis for fundraising
User Rollout Foresight Valuation Group © 2014
1. 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 Foresight Valuation Group © 2014 11
Unit of Modeling Example: User Accounts The modeling unit is the revenue generating unit >> Channel to market Foresight Valuation Group © 2014 12
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 13
User Rollout Example: Five Year Forecast Company Accounts Company accounts at end of year 20 Year 2 Year 3 Year 4 Year 5 • 0.6 million 16 Downloads (Millions) Year 1 18 • 2.1 million • 5.8 million 14 12 10 8 6 4 2 • 10.4 million - 0 Months From Launch Total Company Accounts (MM) Total Batzu Accounts (MM) • 16.4 million Foresight Valuation Group © 2014 5 10 15 20 25 30 35 40 45 50 55 60 14
User Benchmarking: Top Down Penetration 300.00 250.00 Internet Users in Latin America (MM) Millions 15200.00 Hispanic ownership of mobile devices, US & Mexico (MM) 150.00 Total Batzu Accounts (MM) Total Company Accounts (MM) 100.00 50.00 Foresight Valuation Group © 2014 15 Oct-17 Jul-17 Apr-17 Jan-17 Oct-16 Jul-16 Apr-16 Jan-16 Oct-15 Jul-15 Apr-15 Jan-15 Oct-14 Jul-14 Apr-14 Jan-14 Oct-13 Jul-13 Apr-13 Jan-13 -
Revenue Buildup Foresight Valuation Group © 2014
2. 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 Foresight Valuation Group © 2014 17
Sources of Revenue Example: Mobile Apps Advertising Freemium account Upgrades Foresight Valuation Group © 2014 18
Advertising Example: A User Session Log In Select Channel Select Story Opportunity for ad impression Consume Content Opportunity for ad impression We have assumed that the average account holder will use app about 2 times per week Foresight Valuation Group © 2014 19
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 Foresight Valuation Group © 2014 20
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 Foresight Valuation Group © 2014 21
Average Annual Revenue per User: Benchmark Analysis Example $30.00 $28.56 $25.00 $20.00 $15.00 $9.56 $10.00 $7.04 $5.00 $2.96 *$3.61 $7.50 LinkedIn Pandora $4.84 $- Twitter Foresight Valuation Group © 2014 Batzu Company Facebook 22 AOL Google
Expense Buildup Foresight Valuation Group © 2014
3. 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 Foresight Valuation Group © 2014 24
Cost Modeling Overview Cost by Function: • • • • Cost of Goods Sold Engineering Sales and Marketing General and Administrative Foresight Valuation Group © 2014 Years 1 & 2 are predicted on a monthly basis based on actual assumptions 25 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 Foresight Valuation Group © 2014 26
Payroll – Organizational Chart CEO Director of Sales and Business Development CMO Marketing Director of Marketing and PR Chief Content Officer COO Sales & Business Development Administrative Director of New Business Ventures Country Publisher (Mexico) Marketing manager Business Development Manager PR manager Business Development Manager Director of Branded Content Creation PR manager Sales Representative Copywriter Sales Representative Copywriter Copywriter Country Publisher (U.S.) Director of Content Curation Copywriter Director of Page Design Controller Various Consultants Legal Services Project Manager Dev Leader Content Curator Backend Dev Content Curator Copywriter Page Designer Page Designer Backend Dev Publishing Content Curator HTML5 Dev HTML5 Dev Key: To be Hired Immediately Foresight Valuation Group © 2014 Director of Operations CTO To be Hired in Year 2 To be Hired in Year 3 Sitting in Mexico Office 27 Outsourced Mobile Dev) Graphic Designer Mobile Dev) Engineering QA Analyst QA Analyst System Admin
Financial Model Aggregation Example Foresight Valuation Group © 2014 28
Revenue vs. Cost: Five Year Forecast 60.0 49.6 50.0 Dollars ($MM) Breakeven Point 40.0 29.5 30.0 28.2 18.3 20.0 14.3 10.3 10.0 4.9 4.1 6.6 1.0 Year1 Year2 Year3 Gross Revenue Foresight Valuation Group © 2014 Total Operating Costs 29 Year4 Year5
Outline Building a Financial Model User Rollout Revenue Buildup Expense Buildup Startup Valuation & Fundraising Why Value your Startup? Valuation Example Foresight Valuation Group © 2014 30
The Valuation Puzzle Foresight Valuation Group © 2014
What’s in a Billion Dollars? Foresight Valuation Group © 2014
Key Performance Indicators (KPI): The New Valuation Fundamentals KPI = Measurable Success Factors> Driving ProductMarket 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 Foresight Valuation Group © 2014 33
The Startup Valuation Spectrum Foresight Valuation Group © 2014 34
Series A Funding Example: The Valuation “Triangle” Cost Model Funds Raised ($5) Share Given to Investors: 5/20 =25% Company premoney valuation ($15) Challenge: minimizing investors’ share while not overstating valuation Foresight Valuation Group © 2014 35 Revenue Model
Valuation Overview: At Exit Point (Year 5) $3.61 13.7 Million Average Revenue / User Average accounts in Year 5 Revenue in Year 5 $50 Million 5X Exit Multiple $250 Million 40%–60% Discount Rate Foresight Valuation Group © 2014 36 Value in Year 5 $24 Million Value Today: Probability?
Industry Standard Discount Rates Seed • 80%+ Angel Series A • 40-60% Series B • 30-50% Bridge Sources: • 50-70% • 25-35% How Venture Capital Works , Harvard Business Review A Method for Valuing High-Risk Long-Term Investments, Harvard Business School 37 Foresight Valuation Group © 2014
Value per User Benchmarks $90.00 $80.00 $80.00 $83.33 $75.00 $70.00 $65.20 $60.00 $50.00 $40.00 $30.00 $30.00 $17.40 $20.00 $10.00 *$18.15 $18.59 Twitter Batzu Company Yelp $32.83 $7.38 $Instagram Foresight Valuation Group © 2014 Foursquare Facebook 38 LinkedIn Pinterest DropBox Path
About Foresight Valuation Group We Are Foresight Valuation Group, LLC (FVG) is a Silicon-Valley based intellectual property (IP) consulting firm, providing high quality analytical services. We Provide A 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 Foresight Valuation Group © 2014 39
THANK YOU! Efrat Kasznik President, Foresight Valuation Group email@example.com www.linkedin.com/in/ekasznik Office: 650-561-3374 www.foresightvaluation.com Presentation available upon request
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