Financial Modeling for an Early Stage Startup
In an earlier post, I informed you that my startup is currently raising capital. In this post, I talk about my process in creating our financial model and provide a working copy of the model below. Because of my educational background and experience in finance, I was responsible for creating the financial model. However, I quickly learned it very different from investment banking modeling.In i-banking, the company you are valuating has a financial history, in this case, I had to start from scratch.
I began with a little research, hoping for an Excel template that could act as a foundation for the formatting. I soon found out that resources on startup financial models was limited. There were a lot of websites out there trying to persuade me that creating a financial model was important (tell me something I don’t know), but didn’t explain the steps to build one. Regardless, here are a couple of websites I found helpful:
- This website has a ton of Excel templates. I used it to calculate my FCFs (free cash flows)- http://www.exinfm.com/free_spreadsheets.html
- Discusses interesting accounting measures needed for SAAS (software as a service) companies- http://www.beyondvc.com/2009/12/startups-and-financial-models-for-saas-companies.html
- The most popular slideshow I found on the explaining the basics of a financial model- http://www.slideshare.net/botteri/cloudonomics-101-creating-a-financial-plan-for-your-saas-or-cloud-computing-business
- A good source for more templates (look at the comments) - http://www.finance30.com/forum/topics/enterprise-software-company?commentId=1987892%3AComment%3A970711
- A more professional article on SAAS financials- http://www.sterlinghoffman.com/newsletter/articles/article339.html
I found this information with a few searches on Google. However, after reading them, I still had no idea how to create one. It was then that I decided to stop looking and start building. Here are the steps I took to create my model:
- Started with the Income Statement for my first year. I took the total revenues by each source and subtracted them by my sales and administrative costs, research and development costs, and sales and marketing costs. The difference was my earnings before income and tax (EBIT). This step really allowed me to get familiar with all the facets of my company.
- Worked on the assumptions section. This is where my investment banking background came in handy. By discounting my user-base and costs over over a span of 3 years, I was able to get a conservative estimation of my future growth. (Please look at the “Working Excel Template” at the end to get more information on this section.) My assumptions are unique for my industry and product.
- Then I created an expected income statement, an upside income statement, and downside income statement. The difference in degree is reflected in the assumptions section.
- I added two graphs: expected earnings (3 lines- expected, downside, and upside) and revenue by source.
- Lastly, I created an exit opportunity worksheet. I calculated free cash flows and internal rate of return (a common measure VCs use to calculate return on their investment).
- I also added a comparable analysis section to the same exit opportunity worksheet. In it I chose comparable public companies to give the venture capitalists something to drool over.
- I ended by formatting all the user numbers in blue, calculations in black, and averages in brown. Also, I changed the theme to reflect our PowerPoint slides.
Without further delay, here is a link to the model: http://www.mediafire.com/view/?nbm1a130o3vvd5v
The file is titled: “Working Excel Template”. Hope this post was helpful. Enjoy and I look forward to any questions, comments, and suggestions.
Disclaimers:
- Not all of the number values are accurate. This is partly due to me wanting to stay anonymous.
- Each start-up will vary (by stage, industry, and company)
- The EV values are incorrect
- Download the file so that you can see and edit the model
