How to Manage & Model Early-Stage Startup Finances, with Finmark CEO Rami Essaid

Hey everybody, welcome to this Founder Institute webinar. My name is Jonathan Gretchen, co-founder of the Founder Institute. We have an amazing event for you today. Nearly 1,000 people registered for this event, so that tells me that this topic is one that is interesting for people, probably scary for some people too, but we're really happy to have you here today and I already see some people joining in right now. Let us know where you're joining in from in the chat. We try to make these events as interactive as possible. All right? There's a lot of webinars going on. There's a lot of learning that can be done just by Googling something, going onto YouTube or whatnot. Really, the value of these webinars is the interaction. So please do let us know where you're joining in from. And I already see here Sri Lanka, Portland, Brazil, Brooklyn, Dublin, Hamburg, Israel, Croatia, Colombia, South Africa, Romania. This is amazing. Thank you all for joining today. I guess we could see that the scariness, the murkiness, the technicality of startup finances is one that's universal and that goes across cultures and across boundaries. So thank you all for joining. And just in one second, I'll introduce our speaker and we'll get right into the content of this event. But just a couple of housecleaning items. As I said, we want to make this as interactive as possible. So if at any time you have any question for the speaker, okay, it could be right in the middle of the presentation, it could be towards the end of the presentation, throw it into the chat. We have members of the Founder Institute team that are in there ready to take your questions, and basically we'll be taking those questions and we'll have a Q&A portion after the presentation. So again, don't be shy, throw your questions into the chat. We are here to answer them today. All right, so with that being said, I'd like to introduce our keynote speaker today. So we have Rami Assad. Rami's coming in to us from the Washington, D.C. area. Hey, Rami.

Hey, Jonathan, how are you?

I am good. Let me just unpin my face here. So Rami is the founder, CEO of Finmark. Finmark was created to help people with their startup finances. So obviously Rami has a lot of experience there. And Rami, this is— I mean, you've been in the startup game for a while now. This is, you know, tell us a little bit about number 3. Okay. All right. Tell us about number 1 and number 2 real quick.

Yeah, I keep coming back for more punishment, I guess. My first company was a telecommunications company. We got acquihired. It wasn't— we never even got up to raising venture capital. We had bootstrapped it, got acquihired. I took a couple years working in the corporate world, got some more experience, and then I started a company in 2012 called Distil Networks. Sold that for over $100 million in 2019 to Imperva. It was a web application security company. Along the way, it had a lot of ups and downs. One of the biggest pain points for me along the way was a bad financial model. Almost killed the company. We were doing things really, really well. We hired a CFO, we put together a model and took in $20 million in Series B financing. And then the model had an error in it where it was double counting 70% of our cash. Stupid linking error that nobody caught for 5 months. When we actually caught it, we realized we had half the runway that we thought we would. Less than half the runway that we thought we would. And we had to lay off a third of the company, regroup, and we never rebounded all the way to the glory that we were before, but we were able to regroup enough to still have a good exit. But after selling that company in 2019, this problem was top of mind for me, right? I remembered early on, I didn't even appreciate what a financial model was. I didn't care about my finances early on. All I cared about was getting the business right. And then by the time I cared about my finances, I still never owned them. And so I created Finmark so that founders, CEOs can always have a handle on their finances, whether they're small or large, whether they're pre-revenue or pre-IPO, that you can take ownership of your finances alongside any financial professional that you have and really understand what's going on.

Now that's— and honestly, that story you just told is kind of— it's almost like an entrepreneur's nightmare. It's like, you know, it's like a Halloween story. It's like, oh, one little equation was wrong in your Excel or something and it just threw everything off. Like, that is— that's horrifying, honestly, to hear. But it sounds like you have really great experience here and a great mission behind this company. So why don't we get into the presentation, Rami? And then, as I said, for everybody else in attendance, please don't be shy. Throw questions into the chat for Rami. As he just mentioned, he sold the company for $100 million. He screwed up on the financial side and still here to tell the tale. So excited to hear what you have for us, Rami. And we will have a long Q&A portion at the end here.

All right. Well, let's jump into it. As I'm pulling this up, you know, to Jonathan's point of screwing up, you know, that was one of many mistakes. In my journey, right? I talked a little bit about my background, raised across my companies, this one and last, you know, $60 million of venture capital from people like Bessemer, Foundry, Tim Draper, and others. I had a successful exit, but it wasn't a linear journey where all things were good. It actually started off, my Distill journey, started off with us being sued before we raised our seed round. We were sued by my previous employer for IP infringement. They said that I came up with the idea for Distill while I worked there. And so I had signed a piece of paper that said any idea that I have belonged to them. And because of that, they owned the company. And that took us 6 months to resolve and it almost killed the company. It ended up, forcing us to part ways with one of our co-founders. So I've had to fire a co-founder, had to deal with a lawsuit. We got over those things, started raising capital, started doing well, and really scaled up a business. And this, some of the information here is about how I scaled up Distill. We got it to over 250 employees. And along the way, we've had a number of hiccups, right? I told you we made a mistake in the financial model. That almost killed us and we had to lay off about 60 employees there. We've had issues with the technology where we took down major websites like Delta and American Airlines, took them offline. The startup path that you guys are on is not easy, right? I've been there. I understand it. It is very, very hard, but we're built a little bit differently. I think for founders, for you guys out there in the audience, I appreciate what you guys are going through. I know a lot of you guys are, early stage and it feels insurmountable. The challenges that you guys have ahead feel like they're always hard, that you don't know how to get through them. Hopefully, I can paint a little bit of a picture around your finances, around fundraising to help guide you through that journey. Trust me when I tell you that when you zoom out and you look at your entire journey, a lot of the problems that you're facing today will seem like little blips relative to the overall thing. But just make sure you're passionate about what you're doing. Make sure you really care about the problem that you're solving and the people that you're working with. And together, you guys can get over it. If I can get through a lawsuit, taking websites offline, software crashing, running out of money, laying off employees, and still sell a company for $100 million, you guys can too. So today we're gonna talk about the financial aspects of building your company, right? Knowing that a lot of you guys are at a seed or pre-seed stage, I'm gonna focus a lot of that, a lot of the conversation around that, but I'm gonna give you guys tastes of what the future also looks like, what you should be thinking about up ahead when you're going to go raise either seed round, whether you're gonna go raise your Series A, how this stuff scales across. So we're gonna talk about first why a financial model is important. Things that I didn't really grasp until I got the experience under my belt to understand the importance of a financial model. Then talking about the different financial models that you should have, how you should think about them, the level of detail that you need, and also what other financial services do you need to think about and how does that play into fundraising, right? We'll talk about that. Then we'll talk about the nitty-gritty of like, how do you build up a model? And then we'll do some best practices and some things to avoid. And as Jonathan said, we'll open it up to Q&A. So let's dive right in, right? The first thing, before I even go into why you should have a financial model, I want to talk about what is a financial model. What are we talking about here today, right? A lot of people get the, the, the, the nomenclature a little confused. So First of all, financial reporting is a view of the past. So somebody asks for, can I get your financials? Oftentimes they are thinking about the past. They're thinking about your profit loss statement, your income, or your income statement, right? Your balance sheet and your cash flow, right? Your income statement tells you how much money you made and how much money you've spent. Your balance sheet tells you how much money you have And then the cash flow shows how money moves between those two. It's a little bit more complicated than that, but that's a general view of what financial reporting is. That's a view of the past. Now, in the now, you often think about financial KPIs, right? These are the metrics that govern you right now. Things like, if you've heard customer acquisition costs, your current MRR number, your lifetime value of customers, your churn, your margin, All of these things are snapshots in time. You can look at those snapshots in time in the past or forecast what those snapshots in time are in the future, but oftentimes they're most important, most relevant in the now. And then your financial model is the future. You take your past history, you look at your KPIs, and then you layer on some assumptions to what the future is going to look like based on what you're going to do with your company. That's all it is. You take your past revenue, you take your past expenses, and you layer on some expenses of some assumptions to say, in the future, we're going to increase revenue by doing this. In the future, we're going to increase expenses or decrease expenses by doing Y. Those are the things that you're going to do in your financial model. Today, I'm going to talk about financial modeling as it pertains to all of this. To have a good financial model, Oftentimes you need to combine all of these things together so that you can show how the past influences the future. And so you can show what the future KPIs will look like relative to what they are today. So with that, why should you care about your financial model? I love, love, love seeing that there's almost 1,000 people that have signed up, 500 people in here that care about their finances. That warms my heart because I'll be the first to say, I didn't give two shits about my financial model when I was raising my first rounds of capital. I didn't care. I used my financial model just to create a hockey stick so that investors would give me money. But what I didn't realize is, your financial model tells the story of your startup through numbers. It helps you put your ideas on paper. Right? And if you don't think through those ideas, you don't think through those things properly in the numbers, then several years down the line, you're going to face some issues that you're like, oops, I should have done this properly. I should have thought through this. I'll give you a personal example. When we built Distill, we had a very heavy-handed onboarding process. The way we built our technology, it required us to sit in line with website traffic. So we had to install software in customer environments. We had to route traffic through our software and then back to the customer's application. It was very difficult to get our software installed and up and running. And then anytime we had to do any updates, we then had to go in, move the website traffic off of our software, go in, update our software, and then move website traffic back to our software. That meant that I had a really big ops team. Early on, we didn't have a lot of customers. We had only 1 or 2 ops people that did this for every new customer. It seemed innocuous. But what we didn't put down on paper is that for every 10 customers or every 15 customers, we needed 1 ops person to be able to maintain that software on the customer's instances. And so when we got to a couple hundred customers, I had more ops engineers than I had actual engineers building the product. It made our margins look like crap. We had to spend a year re-architecting our technology because I didn't think— we didn't think about it day one. So if you put your ideas on paper and you think about how your business is going to scale, it makes sure that you get it right in the long term. The next thing that— the reason why you should care is that it helps you keep yourself accountable. Right? There's the old adage, you can't improve what you don't measure. Right? And so if you every month come in and you do a certain amount of revenue and you say, hey, like, we want to do better next month, but you don't really put a plan together, you don't put numbers on paper, how are you going to really hold yourself accountable to say, I wanted to do this, but instead we did— why? And then how are you going to then dig into what you're going to improve? Right? Putting numbers down helps you helps you dig deeper into how to figure out what to do differently, right, and hold yourself accountable. Because frankly, we're busy, right? We have so many things as startup founders going on that at the end of the day, it's very easy to get lost into the day-to-day startup life and forget about holding ourselves accountable month to month. The next thing is avoiding disaster before it's too late. A good financial model is not going to help you not run out of money, but what it's going to do is it's going to tell you, it's going to give you a heads up that you're running out of money much earlier than you would otherwise realize. Most companies fail because they run out of money, mind you. That's the number one reason that startups fail. Now, if you don't realize that you're running out of money until 2 or 3 months out, that gives you very little wiggle room to figure out how to adjust. You're going to have to do a really deep cut of employees. You're going to have to do a really big pivot. You're going to have to do like a shotgun fundraise. But if you know 6 to 9 months, this is where the end of the cliff is, that gives you more time to prepare and more opportunity to avoid running out of money and shutting down your company. The other thing that's really interesting that most founders don't think about is not— most founders understand, hey, I want to make sure I have enough money to get to the next milestone. But what they don't think about is making sure you don't raise too much money. Right? That's just as bad for you. If you raise 3 times as much money as you need to get to your Series A, then when you get to your Series A, you've effectively diluted yourself 3x more than you need to. At an early stage, at your pre-seed, seed, and your Series A, those are the most dilutive rounds of capital you will ever take. And being precise on how much you need to raise to get to the next milestone is really important so that you don't over-dilute yourself. I've seen founders dilute themselves 40%, 50% by the time they get to their Series A. And at that point, you've already given away half of your money, your company, sometimes even more, right? And so being really efficient with your capital raises is what a financial model can help you do. And the last piece that I can't harp on enough is helping you align your entire team, right? It's great that you understand or you have a vision for what the company is doing, but making sure that your co-founders are aligned with you on that same goal, that your executive team, when you start hiring other employees, that they understand what the goals are. I share our finances with the entire company. Once a month, I go through the finances, and it's so helpful. I can talk to the team and say, this is when we run out of money in 12 months. Before we run out of money, we need to raise our next round of capital at this point. To be able to raise our next round of capital, we need to have this profile of a customer. We need to have this many bigger customers. To get these bigger customers, we need these features. And so it makes it tangible. Engineers understand that the features they're working on today are going to prevent us from running out of money in 12 months. And that helps align everybody around the team. Hopefully, I've belabored this enough. I want to hammer in, if you take nothing else away, care about your financials. Care about your financial model. Please, please, please, however you do it, that is a very, very important thing to help align you. Now let's talk a little bit about what, what do you need to build in a financial model, right? If you've seen a fully built financial model of a publicly traded company or of a later stage startup, it could feel overwhelming. They're usually 20+ tabs, they're intertwined, they're very, very detailed. But early on, you don't need that. You don't have to get to that level of detail to get value out of a financial model. And at a pre-seed stage, or maybe even at a seed stage, but definitely before you have a significant amount of fundraising, you should be able to do your own finances. You should be able to build your own financial model. All you need in a financial model before you raise your seed round is what I call a pro forma model, right? It should talk about this is how much money we're gonna roughly spend each month. These are the employees we're gonna hire, and this is our estimated timeline for when we're gonna make revenue. That's it, right? You could build that in a single sheet in Excel and show, here are the 20 things we pay for every month, here are the 5 employees we have, or the 3 co-founders, and how much we're paying each person. And then here's where we're gonna expect to make revenue and how much revenue we're gonna start making. That's it. Right. Then every month, you update how much money do you have in the bank and are you spending more or less than what you thought you were, and make sure that those numbers align. That'll give you an idea of how much runway you have with the capital that you have. That'll be enough to get— investors will be— good investors will be fine with that level of detail at your pre-seed round. Right. At a seed stage, you're going to want to get a little bit more granular than that. After your seed stage round, you're gonna wanna be able to deliver a three-statement model. Remember at the beginning what I talked about, an income statement, cash flow, and balance sheet? You're gonna wanna be able to show that three-statement model alongside the detail of your expenses, right? You're gonna get, you wanna get your expenses a little bit more granular than, you know, the 10 line items. You wanna make sure that they ramp up as the number of customers you have ramp up, you wanna think about those expenses in a little bit more detail. And then at that point, you wanna start being able to talk more concretely about revenue and how much money you're gonna make. Not just how much money you're gonna make, but what you think the customers look like that make up that revenue, right? So a lot of people just say, oh, I'm gonna make $5,000 this month and it's gonna go to $10,000, it's gonna go to $15,000. Well, how is that? Is that 5,000 $1 customers? Is that 5,000— is it one $5,000 customer? You got to be able to give an estimate to say, my customers, my target customer looks like this. They pay me $1,000 a month. And I think we're going to be able to get 5 of them every month. That's the level of detail that you need to mature to as a seed stage company to talk about your customers and your revenue. Then when you get to your Series A, what you're then going to take the added step to in your financial model is to explain how you're going to get those customers. Now, remember we said our customer pays us $1,000 a month. We're going to get 5 of them. How do I get those 5 of them? My Series A model will say that I have 2 salespeople. Each salespeople— each salesperson brings in 2 to 3 customers a month. And so that drives my, my customer acquisition, which means that those 2 salespeople bring in 5 customers a month, and that's how I get to $5,000 a month. At that point, at your Series A, you need to have an understanding of your drivers that drive the customers that drive the revenue. And the same thing needs to happen on the expenses and costs side of things, right? You need to be able to say, As we get more customers, we will have more hosting bills, and our hosting bill will increase in this fashion, right, relative to the number of customers that we say we're gonna get. For every X number of customers, I need this many support people. And so those support people are going to scale again in conjunction to how many customers I say we're gonna get. At that point, you need to start building out those growth and expense drivers that make the model automated, right? That allows you at that point to say, well, if we hire 3 more salespeople, then those 3 salespeople generate this much revenue, and that turns into this many more support people and this much more hosting costs, right? By just changing one little lever, everything percolates throughout the model. And that's the level of detail that we need to get to. But early on, can be as simple as one sheet. Now I wanna take a minute here. A lot of you guys, a lot of questions that I get come into what else do I need to show to fundraise, right? A lot of people think about financial modeling as it relates to fundraising. And I'll tell you, that's a small part. That should be a very small part of your fundraise process at a pre-seed and seed stage, right? Investors that understand your business, that are excited about the opportunity, just want to see that you've thought about it. And they want to understand how you're thinking about your business. And they want to make sure that you are— the money that they give you is enough to get you to the next stage. That's the extent of what they care to see in your financials at that point. But what they really want to see is, one, that you have a big market opportunity, right? And this is the most important lesson that I can give to any early-stage founders. Is to understand the dynamics of venture capital. 60% of venture capital returns come from 10% of invested capital. Take that in. That means 60% of the profits come in from 10% of the investments. The next 30% of profits come from the next 20% of investments. So what that means is every single investor, It's shooting for a home run, right? Those unicorns make up 60% of venture returns. So if they don't think that you're going to be a unicorn, they don't think that you have a chance at being a billion-dollar company, then there's no reason for them to fund you because that's the model. That's the whole venture capital model. They invest in companies they think they're going to be unicorns, 1 in 10 turns into a unicorn, and that makes up 60% of their returns. And then a number of them miss the mark, but then come in to, you know, make up the next 30% of returns, right. And then a bunch of them go to zero, right. So making sure that you tell a narrative, you tell a story of why there's a big opportunity is critical. Then in every stage, what you need to do is a little bit different, right. At a pre-seed stage, You need to be able to show that you have a new novel way to solve the problem that you're talking about. This big problem, big market opportunity, we're gonna solve this differently. And you should be able to demonstrate how you're gonna solve it with an MVP. It could be a mockup, it could be a working MVP. You need to be able to show that you are a talented group of founders that are uniquely situated to solve this problem, and that you have a good novel new way of tackling this big problem. Then when you raise your seed round, you need to then show that there are— you have something built at this point that solves this problem, that solves this problem statement, addresses this market opportunity with some level of users that love the way that you've solved this problem, right? It doesn't have to necessarily mean revenue, although revenue is a great, great indicator that you found some early product-market fit. Right? But you need to have users that say, "I love their approach to tackling this problem. I know the product's early. It still has a long way to go, but I love the way that they're addressing this problem." So somewhere between $0 and $200,000 of annual revenue is what you need at a seed stage. And then you need to be able to show in your financial model a plan to get to a million-dollar run rate, and then maybe a $2 million run rate, right? Somewhere between $1 and $2 million run rate in the next 18 months, right? They want to give you seed money to be able to go from, you know, under $1 million in revenue to $1 million in revenue. That's kind of the base mile marker, the traditional mile marker, the average, if you will, or median for when you're going to raise your Series A. So they want to make sure that whatever money they give you in your seed round gets you to your Series A. And for your Series A, you could be a little bit under, right? Some companies raise with $400,000 of annualized revenue. Some companies wait till $3, $4 million of revenue. The median is about $1 million of annualized revenue. That's the point that you need to have to raise a Series A. And what you're going to do, then you want to be able to show that you're going to be, you know, you're growing at a fast clip, right? The traditional way of getting to a billion dollars, a billion-dollar valuation is to triple, triple, double, double, double. That means to go from 1 to 3, 3 to 9, 9 to 18, 18 to 36, 36 to 72, 72 to 144, right? You do that and you're now a billion-dollar company in under 7 years, right? So the— you want to be able to show to raise your Series A that you're about a million dollars run rate, give or take, and that you're planning on tripling in the next 12 to 18 months. Hopefully this is helpful as it relates to fundraising, your finances, and your financial model, how— what you have to demonstrate in your model to get to each round of financing. Now, let's talk a little bit about how to build a model, right? What is a model? How do you build it out, right? So a model is about money in, right, and money out. I talked about at a high level expenses and revenue, right? Money out comes from employees and expenses mostly. Money in is usually revenue and funding. It could be grants. It could be you know, rebates. There's a lot of ways that you have money in, but that's the baseline of the components, right? So let's talk about the most important parts, right? You want to be able to explain your headcount. What are— what is the makeup of your— the employees that you're looking to hire? So to do that, you want to be able to say, here is who we have, the role, the department, and how much we're going to pay them and when they start and when we terminate them, right? In fact, I will ad-lib here and I'm going to show you guys in Finmark how we put this up there and the importance of doing it. You can do this in an Excel sheet. It's pretty straightforward. But if you go in here, you can see we put in— here's a software engineer, That front-end engineer is getting paid— is gonna start on this date, is getting paid this dollar amount. And don't forget benefits and taxes. That's a really, really critical part. A lot of people think about salary, but we recommend averaging about 20% on top of that for benefits and taxes. You might be able to get it a little bit lower, but better be safe than sorry. Make sure that you're thinking about benefits and taxes. The reason this is so important is because, again, it tells the story of who you are as a company, right? And so early on in your development lifecycle as a company, you're going to be— I'm going to show you guys here what it looks like. Early on in your development lifecycle, most of your money is going towards building a product. So if you look at this, most of my money, 68%, almost 70%, goes to research and development. Right? That's, that's where we're building the product early on. That's where we're going. Now, as you scale, as you get bigger as a company, as you start capturing customers, most companies start transitioning. And then you start seeing your sales and marketing spend go up and up and up. And so now, if I look to 2023, 40% of my, my overall expenses, the money that I pay overall, is going to go towards research and development, engineering, right? And 45%, the majority bulk item that we're going to be spending money on is sales and marketing, because I will be at that point purely focused on customer acquisition, right? So the makeup of your headcount explains, tells the story about what stage of a company you're in, right? Same thing with expenses. Expenses helps people understand what you're spending money on, right? There's a couple of details about expenses that we want to talk about. Um, there's CapEx and OpEx expenses. CapEx means that you're spending money one time and then that's all you need to spend. So an example is you bought a laptop for an employee. When you hire, every time you hire an employee, you need to spend money to get them a laptop. And that's it. That's not a repeating cost. Operational expenses are your Google subscription, your Zoom subscription, all of those operational expenses. Nowadays, there's a lot more operational expenses because we subscribe to a lot of software as a service companies. One of the tricks to think about, one of the things that I recommend doing is not trying to be a pennywise and a pound foolish by prepaying for too many subscription services. Right? The subscription services try to give you a 5%, 10% discount to pay for a year in advance. Well, a lot of shit happens in a year. Right? Don't get sucked into that. Pay for them monthly because the cost of capital, right, now versus a year from now is vastly different because you're going to be raising money at a higher valuation later on. And when you raise money at a higher valuation, that means the equity that you've given up to get that money is much, much lower. And so I think about my expenses as a percentage of equity, not as a pure dollar amount, so that I can keep things in line. And it helps me be more agile, right? And the most important thing, going back to my example that I gave earlier, is thinking about the COGS of your business, right? The cost of goods sold or the cost of revenue. You could see it spelled out two different ways or abbreviated two different ways, COGS, cost of goods sold, or COR, cost of revenue. And that is the most important part to think about when it comes to your expenses, to make sure that you know that you have a business that scales, right? The, the best example I can give is a company called MoviePass, if you've ever heard of it, that has gone bankrupt in the past couple of years. They created a product where I think for like 10, $15, they would pay for you to see unlimited movies in the movie theater every month. It was like a Netflix for movie theaters, but they didn't own the movie theaters. They would just go pay for the movie tickets out of pocket and then charge you $10 a month. Well, anybody that signed up for it went and saw more than one movie a month. And so their cost of revenue was higher than they made out of the company. So the more customers they got, the more money they lost. That's a bad business model fundamentally, right? If you're losing money for every customer you get, probably not a scalable thing, but they kept scaling it up until they hit a point where they couldn't keep up with the expenses and they had to go bankrupt. So thinking about your COGS early, super, super important. Next thing that's really important, and this is where investors are really going to dig into your financial model, is understanding your revenue, right? Now, early on, I wanna reiterate what I talked about. Early on, it is about explaining what your customers look like and how many customers you're gonna get, right? It's not enough to show, hey, we're gonna get $5,000, $10,000, $20,000 of revenue. You have to be able to say, this revenue is made up of these customers. And you wanna think about how your customer cohorts look. Most companies, they early on, you're focused on one customer persona, right? One type of customer that looks very uniform, or maybe 2 or 3. There's an entry-level plan and a basic professional plan and an enterprise plan, right? And you can say my enterprise customers look like this, my SMB customers look like this, my individuals look like this, right? If you have a piece of software where you have 20 individuals paying $10 a month for it, And then you have another 10 companies paying $100 a month for it. And then you have 2 companies that are paying $10,000 a month for it. It doesn't make sense to say all of my, every customer I'm going to get is going to look like this, this, or this. You have to break them apart and say, there's no blend between those 3. You have to kind of break them apart. And that'll help you focus and understand which one should I go after? Which ones are more economical for me to go after? How do we want to scale this business up? It's actually really hard to go out and capture all 3 of those, right? And so by making sure that you understand what your customer makeup looks like will help inform how you go to market, will help inform what features you build, right? By breaking apart your customer cohorts, you can understand which cohorts are most profitable and fastest growing, and you can make sure to build features for that type of customer, right? So all of this, being able to analyze and put this down on paper is so, so important. To being able to be successful in what, what you even build. Last piece here, funding. I think it's pretty self-explanatory, right? Figure out how much money you need to last 18 to 24 months to get to the next milestone. Refer back to my slides, right? Make sure you have money to get to that next milestone. The biggest mistake I see founders make in figuring out how much they need to raise is arbitrarily setting the next milestone, right? Oh, well, we're gonna take $200,000 and we're gonna build out our product and then we're gonna raise our seed round. Well, you think that just because you built out the product that somebody's gonna give you money, but that's an arbitrary next step. Reality is people not only wanna see the product built, but they wanna see the product built with some users using the product, right? So you wanna validate that your next milestone will actually get you funded and make sure you have enough room to get there. All right. So the outputs of that, we've talked a lot about the income statement, balance sheet, and cash flow statements. I don't think I need to go in any deeper into that. But the other things that you have are metrics, right? And so I'm going to just show you some of the key metrics that I think are most important. The first one is runway, right? How much more time do you have before you die? Right? Are you, as Paul Graham would say, are you default alive or default dead? And that means that if you continue on your operating plan today and you get to a place where you have infinite runway, then you're default alive. When you're default dead, then that means as you keep going every month, there is a very specific amount of time you have left to live as a company. Right? And so be very cognizant of that to make sure that you never run out of money Every month you should update your runway. To be able to update your runway every month, then you need to know your burn rate. That's the next most important thing. To understand your burn rate, that's how much cash you spend every month. To understand your burn rate, you need to know how much cash you pay out and how much money you bring in. So the next thing that you look at is your revenue, right? That's how much cash you bring in. So you need to be able to track your revenue every month, and your overall expenses every month. By doing that, then you can subtract the two and get your burn, and dividing that by the number of— your bank balance gets you your runway. Those key things, if you do nothing else, if you just take those three things, those four things away and do those every month, I will feel a sense of relief, and I feel like my mission's accomplished. I got you guys better than 50% of seed stage startups. Because see, 50% of seed stage founders don't even do that. Now, if you want to take it up a level, then you think about how many new customers are we getting each month? How many customers are we losing each month? And then what are— what do our customers look like? What is the average revenue per customer on each cohort? Then how much does it cost us to get a customer? How long does it take us to get back our money from our customers once we get them, our CAC payback? How much is our margin on our product? Remember, think margin is the revenue minus the costs of a good sold, right? And so those are the next level of metrics that you should think about. And I'm gonna give you guys a link at the end of my presentation to read more about those metrics. Now, I'm running a little bit tight on time. I'm gonna go a little bit faster so I leave enough room for Q&A, right? One of the key things that I want to make sure that you understand is best practices for thinking about building a plan. And that's not to build a plan, that's to build 3 plans. And the reason for that is we as founders are the most optimistic set of people that you'll ever meet. Think about it, 1 in 10 startups survive, right? Like 9 out of 10 of us in this room, 9 out of 10 of the 550 people on this call are gonna fail. Yet we're all excited to go do this path. I'm doing it again and again and again, rolling the dice, thinking— knowing that I could fail. So that naturally makes me optimistic. So then that's going to percolate into the model that I build. In reality, my model is going to lean towards an optimistic view of the world because that's who we are as founders. So to calibrate for that, one, Build your first model, build your assumptions around what you think is going to happen. Then say, if everything went my way, what is the best-case scenario, right? Still have it tapped in reality, but like if things went really well, what is the best-case scenario? And let me compare my model that I built to the best-case model, and how do those two differ? And then do the same for the worst-case scenario. What happens if things really went to shit? I'm not talking about pandemic went to shit, right? Because like, in reality, like nobody built a financial model in 2019 to say there's going to be a pandemic. But people build models to say, what if we got half as many customers as we thought we would? What if it takes us twice as long to launch our product as we thought we would? What if, what if, what if? And you put those what-ifs into a downside model. And what you're going to find is that your base plan— here's your downside model, here's your upside model— your base plan is going to be like really close to your upside model. And then you go back and you say, okay, let me move it to the middle, right? Let me make it more realistic. That's one of the key mistakes I see founders make. Some other things to avoid. One, don't get cute with any definitions. Use standard definitions for metrics. Use standard definitions for churn. Do not try to get cute with interpreting these metrics or trying to spin them in any way, right? Make sure that the numbers are very, very standard and that your formatting is very standard, right? Models are the story of your company, right? And if when you're presenting to investors, when you're talking about it to your employees and your co-founders, if something doesn't make sense, then they're going to lose faith in the narrative, in the story. Right? And so the more that you can standardize everything, the better you're going to have a chance for success in getting funded or making sure that everybody's on the same page. To that end, make sure that the numbers all add up. Like, it sounds stupid, but as I mentioned, as a Series B company where we had a CFO that had taken a number of companies to exit, Mistakes still happen. Double, triple-check your numbers or use a platform that can help you make sure that the numbers get added up properly themselves, hence why I built Finmark. Here's the last tip or trick that's going to be a little controversial. Never, never, never send your financial model to an investor. Like, what? Investors want to see my model. How can you say don't send them to my model? Well, first, schedule a meeting, Walk them through the model, overlay your narrative on top of your model, and then hand it over to them. If they insist on seeing finances, send them your historical financial reporting. Remember the income statement, cash flow, balance sheet? Send them that. Don't give them the model because without the narrative, the numbers may not make as much sense. So it's really important to get that narrative right and overlay the narrative on top of the numbers so they understand what's going on in the model. Things to avoid, and then we're going to call it quits so we can get to your Q&A. Do not, do not, do not try to make the perfect model. That comes in two ways. One being too pedantic on details, right? Trying to, you know, itemize out every single software expense, right? Oh, I pay $4 a month for my coffee. I pay $10 a month for Google. I pay $15 a month for Zoom. No, like if it's less than $100 or $200 a month, lump them all together, right? The more detail that you try to put into the model, the more things that can go wrong. Honestly, the more that you have to update, the more likely it is that you don't even end up updating it. So try to make a model relatively right, right? As granular as you need to to explain the story, but not too granular. And then know that It's always going to be wrong. Every single model is wrong. Some models are useful, right? Think about that when you're trying to build it out. How can this be useful for me to keep me accountable to the things that I thought I was going to do, right? The, the biggest other mistake that people do is not updating their model. The half-life of your model, to go back to chemistry, if you think about half-life, the half-life of this financial model that you build is 1 month. So in 3 months' time, it's practically useless because things change in startup life. And if you don't keep your model up to date, it doesn't give you a good sense of where you are and where you're going. It just won't. So make sure that you at least update your burn, runway, expenses, revenue every month. Ideally, you update the whole model every month so that you have a good sense of what's going on. Again, don't be too unrealistic with your forecast. Temper your optimism. And the last piece is not sharing your model. So many founders build the model, put it in a folder, or build the model and look at it religiously themselves, but don't talk about it with the team. This is what's gonna align your team. Your co-founders should always see the model. Maybe even your executive team should see some output of the model, maybe the whole thing. Salaries get a little touchy, right, in some respect. Your investors should see the model on a regular basis. Right? The more eyes that you have on the model, the more likelihood that you get it right. Right? So don't hide it. Don't be worried about it. Don't think about spinning it. Just share it. Have some intellectual honesty about what's going on and look for feedback to help from the team and from your investors to help you get it improved. Right? With that, we have a— if you are interested in using Finmark, you know, instead of having to do it all in Excel, we have a great offer for Founders Institute. Well, you guys, we want to give you a special discount and some special handholding. So I'm going to skip past this part, but if you're interested in using Finmark, please reach out to me or us at Finmark, and we'd be happy to get you up and running to make modeling easier. We'll automatically keep your model up to date every month, and we'll make getting the model up and running easier. And then in this, we'll post this somewhere, or we'll share the deck. There's links to our blog. That talk about each aspect of this. What do I think about when I'm hiring? What should I think about with expenses? What metrics do I care about? All of these are linked to supplement what I talked through because I know I am talking way too fast. And with that, Jonathan, let's try to answer some questions.

It's been an amazing fire hose. And I quote right here, hold on, I had it up a second ago. Somebody was saying that this is the most informative webinar they've seen in a very long time. And there is, yeah, this is Neil. This is by far one of the most, the best presentations I've seen in a while. Fantastic riff on the subject and excellent presentation skills. So there are so many amazing questions in here, Rami, and that was a question as well. So yes, for everybody who is on the webinar, we're gonna cut up a video. It'll take, I think you'll get the email in 48 hours exactly, and that'll include, and we'll get the presentation from Rami, There was a lot of questions as well about kind of some of the terms that Rami was using. Again, it was a firehose, right? finmark.com/glossary, right, is a really great resource that goes through a lot of the terms. I think that was one of the links that you had on there, one of those last slides.

Yep, yep, that's exactly right. And then there's a blog as well that we literally try to put up an article a week to talk about some of the fundamentals of building your model. So definitely read through the blog if you can.

Awesome. Yeah, just a couple before I get to some of these questions, just some of the things that you said that really rang true to me. I love the idea, you know, just having 3 different— the way we do it at FI, right, we always have 3 different scenarios of how things may go, right? And I think, yeah, we— some of the— one of the scenarios has a curse word in it, right? And then there's the other ones. But basically, yeah, having those 3 scenarios and kind of reevaluating, and then we always say, okay, like, let's check back in in a month and see where we are, right? COVID helped, I feel like, helped us really hone in on some of those skills for a while, but that was great. And I really just loved how, you know, a lot of this was about, 'cause I know a lot of the people on the line here are either raising funding, looking to raise funding, or have raised funding, right? And there's always that question of the finances and how that relates to the investors. And I think you did a really good job there of just explaining, look, it varies by stage, Right. This is something, especially for people who haven't raised money before, you sort of have to kind of look at it like a video game where, you know, you're raising a round to get to the next milestone, a round to get to the next milestone. And the investors want to see that, that with the money that they're giving you is going to allow you within the financial model to get to that milestone. And that a lot of times they know that sometimes the financial models, we don't really know what we're doing. Right. Like they're just trying to be directionally accurate. But they need to tell a story about how their money will help kind of fuel this engine. Right. Is there any more insight you can kind of provide on that? Because I see that a lot where people trip up, especially in the fundraising and with regards to their model and their finances.

I mean, I think, you know, going back to that triple, triple, double, double, double, that's a really good benchmark to think about. That's like That's best case scenario, honestly. Like, that's hard to do. I remember my first model, I looked back to it when I was pitching my seed investors at Distill. I told them, and somehow they didn't laugh me out of the room. I told them that I was going to be at $100 million revenue in 4 years. And like, it just, that hockey stick is unrealistic. We didn't even have like a, we didn't have any revenue at that point and barely a product built. And I was telling them, Hey, like, we're going to be $100 million in 4 years. Try to temper that and use that benchmark of triple, triple, double, double, double to help guide those mile markers. At each one of those mile markers, you can interject another fundraise round, right? Triple, raise a round. Triple, raise a round. Double, raise a round. Double, raise a round. And that's a tried and true. Now, there's a lot of variations to that. In terms of time it takes you to get to that, in terms of capital needed to get to that. But you try to make them realistic is the added thing that I would try to say about thinking about that.

Yeah. And a lot of the time it's less about the numbers and more about them just trying to understand your thought process, right? And the narrative on how you're coming up with those numbers and the assumptions that you're making and the risks that you're acknowledging and all that kind stuff, right?

That's absolutely right. That's absolutely right.

Yeah. Okay.

So let me—

I'm going to get into a couple audience questions and please keep them coming. There's a lot in here to sort through. So we have a question here from— so, okay, Rashmi is an ex-VC and this is very relevant, right? So Rashmi is saying, I didn't care for hockey sticks much. Now, as I'm a CFO in a startup, I find VCs looking for very aggressive models, almost incredible growth rates, right? Not every market supports hockey stick projections. How would you balance kind of showing these extreme aspirations, right? Like, yes, we can be a unicorn, we can return your whole fund, but also trying to stay credible. So are there any strategies that you use there, any specific rhetoric that you would recommend in those conversations?

I wish I had the data in front of me, but the median time that it has taken a company to get to a billion-dollar valuation has continued to shrink, and it's actually shrunk, I think, In the past 10, 15 years, it's almost shrunk by 50%. It really has. That is why you're seeing more aggressive expectations from investors. So there really is that expectation, right? It took Cornerstone On Demand, I think, 15 years to be a billion-dollar company. It took Lyft, you know, 6 years, and it's taken, you know, Snowflake, you know, 3 years. You know, the timelines have shifted drastically. I think less about you getting to really aggressive numbers. If you can show a very big market opportunity, I think that helps offset less aggressive numbers. Because I think every investor will understand that there are inputs and outputs to what make how aggressive you can be in terms of revenue acquisition. Those drivers can be manipulated if things are going well. You can get more aggressive. They can pour more money into you and tell you, and you guys can all agree to hire 50 new salespeople if everything's going really, really well. You may not want to show that in your plan because that's really unrealistic, but in some outlier situations, that happens. On the converse side, on the other side of it though, you can't make a bigger market if you don't have it, right? So being able to tell a big market opportunity will offset and give some confidence to the investor to say, well, hey, you know what, even if they have modest growth expectations. If you really— if we really start nailing this, look how big this opportunity is. We'll find a way to get more aggressive with these numbers.

Yep, I couldn't agree more. Uh, great, amazing growing markets have the ability to lift up mediocre companies, whereas, uh, bad and shrinking markets can kill really great companies. Uh, it's, it's just, it's unfortunate, but that's— and yeah, so that's sort of the great equalizer. So, uh, Rossen was asking, and this really gets back to— I love the slide, the what should I have at stage slide that you had. That is one that we'll definitely be screenshotting and sharing out across social because I think it's very, very informative of kind of that leveling up approach. So Royston's asking, as a pre-seed company, you know, should I focus more time on validating the product as opposed to building the financial models? And is there any tips for prioritizing that focus in the beginning, specifically if they're raising money?

Yeah. I mean, listen, at your pre-seed stage and even your seed stage, 90% of your work, 90+ percent of your work is building the product, right? Finding product-market fit is 100%, you know, is what should be your focus. That's why I broke it down at a pre-seed stage. You should be able to do this in under an hour, right? Under an hour a month. Like, just put some numbers down, right? It's not hard to figure out how much I spent, who I'm going to hire, like, when I think I'm going to get revenue. Those things are not hard to build. Like, You know, jump into Finmark, you could build it in like 20 minutes, right? And that's all the time space that should occupy in your mind, but you should do it monthly. That's the key component. It's not just about, you know, getting it up right. It's just doing it monthly. Then going back to finding product market fit is pre-seed is so much more important.

So if you're doing it monthly, as you were kind of saying before, it doesn't have to be perfect, but it's directionally accurate. Right. So, you know, okay, this is dropping. This is probably something we should take a look at, even if it's not exact. You just, you get a feel for what's going on, right? Yeah. Okay. So I got a last question here and look, this was amazing. There's been 1,000 questions in the chat. As I said, everybody's going to get the deck and the video and you should check out finmark.com as well. But last question here, and this really kind of gets to some of the fundraising side of it. Dan was asking, you know, revenue-based financing, right? Clearly you have a lot of experience raising funding, Rami. You know, what are your thoughts just on revenue-based financing, and do you think it's something that's going to grow and become a much larger option for entrepreneurs in the future? Just, you know, as kind of a a counterpoint to the, you know, that having to hit those home runs and grand slams all the time that venture capitalists are really beholden to.

Yeah, I love revenue-based financing. I will say, I think Pipe and others like it are going to be terrific businesses, but I do think that there's limited upside in how big those things get, because once you get to a certain stage, once you get to about $30 to $50 million of revenue, what you unlock is really, really, really cheap growth capital. Right. I was able to raise $20 million of debt on, like, where we paid literally nothing for 2 years, and then we paid interest only for 2 years, and then we paid back the debt at the end of the term. And that interest only was like 4%. It was just dirt cheap capital. Right. Like, interest rates are nothing. Once you get to a certain scale, you unlock a really, like, a whole world of debt financing that you don't have access to in the middle. Right. And then in an early stage, you don't have any revenue or meaningful revenue to finance the business. And so you're really talking about debt financing or revenue-based financing is really for, you know, seed to Series B and kind of a smaller cross-section in between there, or non-venture-backed businesses. I still think it's fantastic. I think it's a great non-dilutive way to do it. But you're not going to be able to fund a company at a pre-seed stage or at a seed stage with the revenue that you have because it's not going to be meaningful. So I, I wouldn't start considering it until my Series A.

Makes sense. So it's a great option for, for kind of a band of people in the middle, but it's not going to help you get started right in the beginning, and it's not going to sort of help you kind of go nuclear at the end. It's sort of in that middle stage to, to get across the hump kind of thing, right? Yeah. All right. Well, thank you so much, Rami, and thank you, everybody, for joining. Wow. I think we topped out at close to 600 people there concurrent for a moment. But thank you so much, Rami. Rami, is there anywhere else that people can follow you or learn more about this topic that you'd recommend?

Yeah. Follow me on Twitter @ramiassad. And I guess I post a little bit on LinkedIn. Twitter is more stream of thought consciousness. And then subscribe to our blog. And our blog, I post regularly on there. Contributor to TechCrunch, contributor to Forbes. So my Twitter handle will put out all of the pieces that I write and constantly trying to help. But also you can email me, ramy@finmark.com if you need help. Like the only reason I survived as an entrepreneur is thanks to a lot of people carrying me up on their shoulders and helping me get through everything we got through. And so I really do believe in giving first. And so Um, if you come to Finmark or if you reach out to us, we'll do whatever we can to help you.

Awesome. All right, thank you so much, Rami. Thank you so much, everybody, for joining. That was amazing, just a fire hose of information. Um, take care, everybody. Have a good day.

Thank you.

All right.