How to Figure out your Company's Financial Model | Chartered Financial Analyst Nathan Beckford

So let's start, kind of talk about frameworks for modeling. This sounds sort of esoteric and metaphorical, but like, what kind of company are you? What is the core value you're providing to customers? This sounds very abstract, but it's what we're trying to model. And then of course, how do we monetize that value? It's not always an A to B. If you're selling a product, that's the value, but in other businesses, Facebook is providing value to consumers and monetizing it in a completely different way. This is the framework I like to use. It's the 4 golden questions. It really boils down a model into step 1. The way we start building a model is what are you doing to get people on board? What are you doing to get customers— if you're a consumer internet business, what are you doing to get people on the site? That can mean any number of things. It can mean marketing, it can be trade shows, it can be running advertising on Facebook or advertising on Google. But what do you do to get people on your platform or in your store? Step number 2, once you get them there, what do they do? So we're trying modeling activity engagement. Again, sticking with a consumer internet business as an example. You're running Google Ads to get people to come to your site, you're converting X percent of those people. Once they're on your site, how frequently do they come back? How much time are they spending on your site? What else are they doing? Are they inviting their friends? Are they posting content? So we try and model typical engagement. Step number 3, once we've modeled what they're doing on the site, then we start to layer on revenue streams. And there's a great blog post, I think I have a link in here to Wired Magazine, I think it's like the 16 different freemium revenue models, right? So you start to think about, we've got this user activity stream, how can we start to monetize that? Is it serving up ads, is it charging subscriptions? And then number 4, once we've modeled steps 1, 2, 3, what is it actually going to take to do this, what we just described, in terms of cost of goods sold. So every time a new user comes on the system, we have to maybe pay more for support or database or video streaming. What are the actual costs of it? And then the operating expenses are things like salaries, rent, stuff like that. So we kind of— if you can tackle these 4 steps in the process, you've got pretty much the framework for building a model. What does it result in? It tells you what is left over at the end of the day. We've got our revenue, less expenses is cash flow, and then that tells us how much we need to raise money from. And I assume most of you are— what percent of you guys will actively try and raise money? In other words, how many of your startups are venture type of businesses? Half. So more than half, and I assume the others are maybe more bootstrapped type type or self-funded types. Okay. Got it. All right, good. Any questions on this 4-step framework? I'm going really fast. Just let me know if I'm speeding through this. Let me show you a couple of quick examples. This would be probably not as relevant for everyone here, but maybe if you're in enterprise Business or enterprise software, for example. I think Kelly mentioned that as one of the growth drivers. What we're doing here, this top row, is we're saying we're going to hire 1 person in March, 1 person in April, 1 person in May. So we're making tangible assumptions of how fast we'll hire people. Step number 2, we're making assumptions on each salesperson's quota. So we've got this enterprise software we're building, we're hiring people, we're saying they're going to sell a subscription to this to large companies on the order of 10 subscriptions per month. And we probably would also factor in a ramp-up or training period, right? We're applying a price to that. Every subscription is $2,500 in the early years, and then it goes up to $5,000 in later years, or we have multiple tiers of products. We're making assumptions on the pricing increase, so we're raising prices every year. And then from that we've got a basic sales forecast. Number of salespeople times quota per salesperson times price per unit. Pretty simple. And we can grow and scale the business by hiring more salespeople or by adjusting their quotas. Pretty straightforward. So really modeling, I like to tell people, sometimes folks are intimidated by doing big comprehensive Excel spreadsheets. It's really just one big multiplication table. Not that hard. Let me show you another one. This is again a consumer web example. In this case, we're making assumptions on what we're doing to get people in the door, top of the line. We're saying we're spending money on online advertising. We're making some assumptions on what percent of— so we're driving traffic to our website by buying traffic. Then we're making assumptions on what percent of those folks we're converting into members or users, right? Just as a hypothetical example, we're saying 5%. Yes, please. Will you please send this to Kara or Andrea so we can study it later? Mm-hmm, yeah, sure. Yes, I will. And I'll give you a few models too. That you can play around with. So we're buying traffic, we're converting 5% of those people that we're sending to our site into members. Once those members are on the site, we're assuming they are coming back 3 times a month and they're seeing 6 page views every time they come back, right? So they're clicking through 6 times and we know we can, we have premium, members, or we have good members, so we can charge $5 per CPM or $5 per 1,000 impressions. Yes, sir? Where's the 5% number come from? Is that just something you come up with? This is just a hypothetical example. Yeah, I mean, you know, web businesses convert at different rates. It's usually in the single digits. Some of that, ideally you've got some actual data because you have maybe a website up and you can run, you know, you can spend $1,000 on Google Ads See what that traffic drove and you can see what you convert. So hopefully you can— but sometimes you can also find some of that data on like Quora, right? You can find comps and benchmarks in the market for what— 5% is probably a pretty reasonable rate though. That's probably high depending on the type of business you are. But again, in a nutshell, driving traffic, converting those into members and users, they're coming back 3 times a month, They're seeing 6 pages every time they come back. From that we can serve up ads and we have a revenue forecast. It's as simple as that. Any other business models someone would want to just quickly talk about? Like if they have a unique business model we want to run through live? No? Okay. I think we've covered this pretty much. What are the activities that bring in? Customer traffic, what are reasonable conversion assumptions? Dave McClure has a great slideshow called Startup Metrics for Pirates where he has the AAR something or other, but it's acquisition, activation, engagement, retention, and then if you have a viral coefficient, that's interesting to model too. And then, oh yeah, here's the— So I was mentioning, what are appropriate revenue models to layer on? There's a Wired magazine article that has all the different type of web revenue models, especially for web businesses.