Rick Rasmussen - Startup Financials

1. STARTUP FINANCIALS 1
© Rick Rasmussen 2018

2. STARTUP FINANCIAL MODELS
Investors don’t put
their money into
ideas.
They put their
money into
businesses
Finance is the
language of 2
Investor

3. WE’RE GOING TO COVER:
Unit Economics
Variable and Fixed Costs
Building a basic P&L
Burn Rates
How much money do you need to raise?
Investor

4. HOW CAN YOU DO THIS?
You’re predicting the future
With little or no real evidence
Trying to reassure investors
that your guesses are valid
4

5. WHAT DO VCS WANT?
What you pitch
 Market Opportunity
 Product/Service
Overview
 Key Players
 Stage of Development
 Financial Projections
 Competitive
Landscape
 Future Plans
Investor

6. WHAT DO VCS WANT?
What you pitch
 Market Opportunity
 Product/Service
Overview
 Key Players
 Stage of Development
 Financial Projections
 Competitive
Landscape
 Future Plans
What they think:
Is there real money here?
How much money?
Are these the people who
will make me money?

7. 7
Cash flow positive

8. HOW DO YOU DO THIS?
8
in $M Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Revenu
e
$0.1 2.5 $17.4 $31.5 $49.2
COGS 0.2 1.0 7.2 11.8 16.4
Gross
Profit
(.02) 1.4 10.1 19.7 32.8
Expens
es
2.4 6.2 10.1 15.1 21.1
Net
Profit
($2.4) ($4.7) $0.05 $4.5 $11.6
?

9. Unit Economics

10. UNIT ECONOMICS
The Fundamental
building block
of any financial model
Profit and Loss of:
One product delivered
One software license
One job completed
One client serviced

11. UNIT ECONOMICS
Unit
Revenue
- Unit Costs
Unit Profit
Step One:
Define
your Unit

12. TRANSACTIONS
What’s a typical transaction?
Sale of a product?
License of software?
Conducting a trade?
Who is involved? How much money changes hands?

14. ?
Rick’s
Advice

15. WHAT’S YOUR UNIT?
One Brick One Ton of Bricks
One Contract or
One Project

16. Example:
Behold the lowly clicker

17. Retail price: $35

18. Retail price: $35
Channel Margin: - $19
Wholesale price $16

19. Retail price: $35
Channel Margin: - $19
Wholesale price $16
You typically don’t control this…
Revenue that comes to the com

20. UNIT ECONOMICS
1. Unit Price $16
2. Each unit has a Cost
This is your variable cost
Also called COGS for Cost Of Goods Sold

21. UNIT COST
Subsystem Cost
Housing $1.50
Electronics +
Laser
$2.50
Battery $0.25
Packaging,
manual
$1.00
Wireless Module $1.75
Draw a Circle around the Unit.
What does it directly cost to produce?

22. UNIT PROFIT
This is the profit you make per unit sold
Unit Price
minus Unit Cost
UNIT PROFIT

23. UNIT PROFIT
Profit made per unit sold
$16.00
minus $7.00
$9.00

24. UNIT PROFIT MARGIN %
Profit / Revenue
$9 / $16 = 56.25%
43.75%
56.25%
Revenue
Unit Costs
Unit Profits

25. UNIT PROFIT MARGIN %
Profit / Revenue
$9 / $16 = 56.25%
Is this a good margin?
43.75%
56.25%
Revenue
Unit Costs
Unit Profits

26. FIXED VS. VARIABLE
COSTS

27. TOTAL COSTS
Units Sold x
COGS = Variable
Costs
Fixed Costs
Variable costs vary with
the amount produced.
Fixed costs remain the
same, no matter how
much output a company
produces.

28. TOTAL COSTS
Units Sold x
COGS =
Variable Costs
Fixed Costs
Cost to build
Salaries
Rent
Marketing &
Sales

29. SALARIES
The people needed to
run your business
Management
Engineers
Marketing, Sales, etc.
Note:
Factory workers are considered
Direct Labor, part of COGS

30. RENT
Commercial
Store fronts
Warehouse space
Office Space:
20 sq meter per employee
Look at local lease rates
Consider co-working space for first 1-2 years

31. MARKETING & SALES
Expenses relating to
promotion and selling
Often significant for B2C
and B2B2C companies
Use 30% to 55% of
revenues if you need to
build a brand

32. EXAMPLE: TOTAL FIXED
COSTS
Add Salary, Marketing and Sales and other Fixed
Expenses
Category Expense
Salaries $360K
Rent, etc $190K
Marketing $370K
Total $K $920K

33. EXAMPLE: SIMPLE ONE-PERIOD
P&L
Assume we’ve sold 100K units…
Gross Revenue: $1,600K (same as
$1,600,000)
COGS: - $700K
Gross Profit: $900K
Formatting Notes:
1. US uses period
as a decimal
point
2. Larger numbers
always
expressed as
$K ($1000) or
$M ($1000K)

34. UNITS SOLD  GROSS PROFIT
Units Sold (K) 100K
Average Selling Price
(ASP)
$16
Gross Revenue ($K) $1,60
0
Average Cost $7
COGS ($K) $700
Gross Profit ($K) $900
Step 1

35. GROSS PROFIT
% of revenue
shown for
comparison vs.
industry standard
Results %
Revenues $1,600 100.00%
COGS $700 43.75%
Gross Profit $900 56.75%

36. ADD EXPENSES
Convert into
expense category
Express as a
positive number
Results %
Revenues $1,600 100.00%
COGS $700 43.75%
Gross Profit $900 56.75%
Salaries $360 22.5%
Rent $190 11.87%
Marketing &
Sales
$370 23.13%
Total Expenses $920 57.5%

37. ONE PERIOD P&L
Our Clicker
Business…!!!
Here is everything
lined up for one
period
Results %
Revenues $1,600 100.00%
COGS $700 43.75%
Gross Profit $900 56.75%
Salaries $360 22.5%
Rent $190 11.87%
Marketing &
Sales
$370 23.13%
Total Expenses $920 57.5%
Net Profit ($20) -0.75%

38. ONE PERIOD P&L
Our Clicker
Business…!!!
Here is everything
lined up for one
period
Are these good
results?
Results %
Revenues $1,600 100.00%
COGS $700 43.75%
Gross Profit $900 56.75%
Salaries $360 22.5%
Rent $190 11.87%
Marketing &
Sales
$370 23.13%
Total Expenses $920 57.5%
Net Profit ($20) -0.75%

39. OTHER TYPES OF BUSINESSES
Software: No physical cost of Goods
May consider Customer Acquisition Cost as
Variable
Two Sided Markets Have two separate Revenue and Cost
streams,
One for each side
Businesses with
Multiple Revenue
Steams (e.g.
services + ads + …)
Model for each business as separate line
items
P&Ls are flexible
Copy best practices from others in your industry
Look at Public Companies in similar businesses for ideas

40. BUILDING THE FINAL
MODEL

41. NEW COMPANY
Introducing NewCo
Custom-made Pens
Nothing but the best for AIA..!
41

42. STEP 1: BUSINESS
ASSUMPTIONS
Revenue Model: A product, one-time sale
Market Type: Re-segmented Market
Marketing Strategy: B2B
Sales Channel: Direct Sales over Web
Costs: First production: $10
First 2 years $2.50
Declining costs over time

43. STEP 1: OPERATIONS AND TIME
ASSUMPTIONS
Production: Subcontract Manufacturing
no factory required
Time-to-Market:
Takes 3 months to develop first prototypes
Three months to sample customers
Three months to first production

44. STEP 2: UNIT ECONOMICS
Our unit is one box of pens
Unit Price: $6.00
Unit Cost: $2.50
Unit Profit: $3.50
Unit Margin: 58.3%

45. NEWCO UNIT PROFIT OVER 2
YEARS
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Units Sold
(K)
0 1 5 20 50 80 120 160
ASP $0 $0 $3 $6 $6 $6 $6 $6
Total $K $0 $0 $15 $120 $300 $480 $720 $960
Unit Cost - $10 $10 $5.00 $2.50 $2.50 $2.50 $2.50
COGS $K 0 $10 $50 $100 $125 $200 $300 $400
Gross Profit 0 ($10) ($35) $20 $175 $280 $420 $560
In this case:
- Average Selling price starts at zero (product samples) and grows to steady state
- Units ship in Q2, pre-production until Q5
- Unit costs high for first batch, steady state for Q5 and beyond

46. ADD EXPENSES BY DEPARTMENT
Salaries and Fixed costs
Research & Development (R&D) Research, Engineering and
Development
Sales & Marketing Promoting and selling
product
General & Administrative “Overhead” of corporate
management,
finance, legal, rent, etc.
Some companies will have Operations - Making and distributing

47. NON-SALARY EXPENSES
R&D
Subcontractors and outsourced engineering
Non-depreciated tools, servers
Marketing and Sales
Trade shows
Marketing campaigns
Operations
Subcontractors
Facilities
G&A
Legal, IP, accounting expenses

48. ENGINEERING / R&D:
Dept Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Headcount R&D 2 3 4 5 6 6 7 7
Salaries 50 75 100 125 150 175 200 250
Expenses
Tools 10 10 10 10 20 20 20 20
Contractors 50 50 50 50 100 100 100 100
Travel 10 20 20 20 20 20 40 40
Expenses R&D $120 $155 $180 $205 $290 $315 $360 $410

49. MARKETING & SALES:
Dept Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Headcount Mktg 2 3 4 5 6 7 8 9
Salaries 50 75 100 125 150 175 200 225
Expenses
Campaigns 50 50 100 250 250 400 400
Contractors 50 50 50 50 100 100 100 100
Travel 10 20 20 20 20 20 30 30
Expenses Mktg $110 $195 $220 $295 $520 $545 $730 $755

50. OPERATIONS:
Dept Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Headcount Ops 2 3 4 5 6 7 8 10
Salaries 50 75 100 125 150 175 200 250
Expenses
Subcontractors
10 10 10 10 15 15 20 20
Contractors 50 50 50 70 80
Facilities 10 20 20 20 20 20 40 40
Expenses Ops $70 $105 $130 $205 $235 $260 $330 $390
NOT ALL BUSINESSES WILL HAVE AN
OPERATIONS TEAM

51. GENERAL & ADMINISTRATIVE:
Dept Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Headcount G&A 1 2 3 4 5 6 6
Salaries 0 25 50 75 100 125 150 150
Expenses
Legal 50 10 10 20 50 50 50 50
IP Filings 50 50 50 50 50 50
Travel 10 20 20 20 20 20 30 30
Expenses G&A $60 $55 $130 $165 $220 $245 $280 $280
EXECUTIVE, LEGAL, FINANCE, HR, ETC.

52. P&L FOR FIRST 8 QUARTERS
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Units Sold
(K)
0 1 5 20 50 80 120 160
ASP $0 $0 $3 $6 $6 $6 $6 $6
Total $K $0 $0 $15 $120 $300 $480 $720 $960
Unit Cost $10 $10 $5.00 $2.50 $2.50 $2.50 $2.50
COGS $K 0 $10 $50 $100 $125 $200 $300 $400
Gross Profit 0 ($10) ($35) $20 $175 $280 $420 $560
R&D $120 $155 $180 $205 $290 $315 $360 $410
S&M $110 $195 $220 $295 $520 $545 $730 $755
Ops $70 $105 $130 $205 $235 $260 $330 $390
G&A $60 $55 $130 $165 $220 $245 $280 $280
Expenses $360 $510 $660 $870 $1,265 $1,365 $1,700 $1,835
Net Profit ($360) ($520) ($695) ($850) ($1,090) ($1,085) ($1,280) ($1,275)

53. START TO BUILD 5 YEAR P&L
Why Five Years?
 Shows Business Potential
 Steady State growth rates, profitability
 Ability to compare with industry averages
 Fits within VC 10 year investment horizon
An educated guess
First Two Years Complete: Business under
development
Think about Year 5
53

54. THINK ABOUT YEAR 5
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 %
Units Sold
(K)
26 410 8200
ASP $5.95 $6 $6
Total $K $135 $2460 $49,200 100%
Unit Cost 6.15 $2.50 $2.00
COGS $K 160 1025 16400 33%
Gross
Profit
($25) 1435 32800 67%
R&D 660 1375 3540 7%
S&M 820 2550 8360 17%
Ops 510 1215 3430 7%
G&A 410 1025 5800 12%
Expenses $2,400 $6,165 $21,130 43%
Net Profit ($2,425) ($4,730) $11,670 24%

55. ZONES OF REASON
Once a company reaches “steady
state”, you can compare expenses vs.
industry norms.
For tech companies, normally
summarized as:
 M&S Marketing & Sales
 R&D Research & Development
 G&A General & Administrative
Category Expense as
% of Revenue
Marketing &
Sales
15% to 55%
R&D 10% to 30%
G&A 8% to 15%

56. THINK ABOUT YEAR 5
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 %
Units Sold
(K)
26 410 8200
ASP $5.95 $6 $6
Total $K $135 2460 $49,200 100%
Unit Cost 6.15 $2.50 $2.00
COGS $K 160 1025 16400 33%
Gross
Profit
($25) 1435 32800 67%
R&D 660 1375 3540 7%
S&M 820 2550 8360 17%
Ops 510 1215 3430 7%
G&A 410 1025 5800 12%
Expenses $2,400 $6,165 $21,130 43%
Net Profit ($2,425) ($4,730) $11,670 24%
Zone of
Reason

57. FILL IN THE GAPS
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 %
Units Sold
(K)
26 410 2900 5250 8200
ASP $5.95 $6 $6 $6 $6
Total $K $135 2460 $17,400 $31,500 $49,200 100%
Unit Cost 6.15 $2.50 $2.50 $2.25 $2.00
COGS $K 160 1025 7250 11813 16400 33%
Gross
Profit
($25) 1435 10150 19688 32800 67%
R&D 660 1375 1740 2630 3540 7%
S&M 820 2550 4420 6240 8360 17%
Ops 510 1215 1760 2430 3430 7%
G&A 410 1025 2175 3850 5800 12%
Expenses $2,400 $6,165 $10,095 $15,150 $21,130 43%
Net Profit ($2,425) ($4,730) $55 $4,538 $11,670 24%

58. IT’S A P&L…!
In $K Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 %
Revenue $135 2460 $17,400 $31,500 $49,200 100%
COGS 160 1025 7250 11813 16400 33%
Gross
Profit
($25) 1435 10150 19688 32800 67%
R&D 660 1375 1740 2630 3540 7%
S&M 820 2550 4420 6240 8360 17%
Ops 510 1215 1760 2430 3430 7%
G&A 410 1025 2175 3850 5800 12%
Expenses $2,400 $6,165 $10,095 $15,150 $21,130 43%
Net Profit ($2,425) ($4,730) $55 $4,538 $11,670 24%
$50M Business
Losses for first two plus years
Break even year 3
Unit costs dropping
Steady State profitable
Expenses within “Zone of Reaso
Need to raise at least $7.2M

59. SIMPLIFIED FOR PRESENTATION
in $M Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Revenu
e
$0.1 2.5 $17.4 $31.5 $49.2
COGS 0.2 1.0 7.2 11.8 16.4
Gross
Profit
(.02) 1.4 10.1 19.7 32.8
Expens
es
2.4 6.2 10.1 15.1 21.1
Net
Profit
($2.4) ($4.7) $0.05 $4.5 $11.6

60. GRAPH IT..!
Income statements are the
language of most finance
professionals
Graphic representations differ.
Simplest: Break out Revenues
and Net Profits
Keep as periodic information,
not cumulative.
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue 0 135 2460 17400 31500 49200
Profits 0 -2425 -4730 55 4538 11670
-10000
0
10000
20000
30000
40000
50000
60000

61. FINANCIAL KPIS TEMPLATE
Unit Economics
Variable (Unit) Costs
Unit Profit
Fixed Costs
Burn Rates
Base & Net

62. Gross Burn Rate: Your fixed expenses in a
given month
Net Burn Rate: Your net operating loss in a
given month
equals Gross Burn Rate minus
Gross Profit

63. BURN RATES
It Depends
on where you
are in the
company
lifecycle…
Different burn rates at different times

64. HOW MUCH MONEY DO I NEED TO
RAISE?
It depends
- Enough to get you to the next milestone
- Enough to get you through 18 months
- Enough to get you to cash flow break even
- None. I’m going to “bootstrap”

65. HOW MUCH MONEY DO I NEED TO
RAISE?
It depends
- Enough to get you to the next
milestone
- Enough to get you through 18
months
- Enough to get you to cash flow
break even
You will need to set
fundraising strategy

66. YOU DID IT..!
Congratulations!
You’re becoming an
amazing financial
genius
Get ready to present
to the investors..!