APIA 2018 Shenzhen

1. BUILDING A SIMPLE FINANCIAL MODEL 1
© Rick Rasmussen 2018

2. START UP FINANCIAL MODELS
Investors don’t put their money into ideas.
They put their money into businesses…
Your financial model is your ‘real’ business plan
Revenues
Profits
Cash needs
Hiring plans
Burn Rate, Runway
2

3. WHAT DO VCS WANT?
What you pitch
Unmet need
Solution
Market size
Product-Market Fit
Go-to Market
Team
Competition
Financial projections
Ask

4. WHAT DO VCS WANT?
What you pitch
Unmet need
Solution
Market size
Product-Market Fit
Go-to Market
Team
Competition
Financial projections
Ask
What they hear
Is there money to be made?
How much money can we make?
Are these the people who will
make me money?

5. INVESTORS EXPECT:
A 5-year Profit & Loss (P&L)
A simplified Income Statement
Broken out by Year in the presentation

6. 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
6

7. TELL A STORY
Startup financials are your
story expressed in numbers
Build out your story and then
translate
7

8. THREE FINANCIAL STATEMENTS
Balance Sheet: A "snapshot”
Assets vs. Liabilities
At a specific time
Income Statement: A “video”
Measures Financial Health
Income vs. Expenses
Over a period of time
Cash Flow Statement: Shows effects on Cash
based on Balance Sheet and Income Statement accounts

9. THREE FINANCIAL STATEMENTS
Balance Sheet: A "snapshot”
Assets vs. Liabiliities
At a specific time
Income Statement: A “video”
Measures Financial Health
Income vs. Expenses
Over a period of time
Cash Flow Statement: Shows effects on Cash
based on Balance Sheet and Income Statement accounts

10. THREE FINANCIAL STATEMENTS
Balance Sheet: A "snapshot”
Assets vs. Liabiliities
At a specific time
Income Statement: A “video”
Measures Financial Health
Income vs. Expenses
Over a period of time
Cash Flow Statement: Shows effects on Cash
based on Balance Sheet and Income Statement accounts
Non-rigorous version
often called a
Profit & Loss Statement
or P&L

11. P&L: BASIC STRUCTURE

12. P&L: BASIC STRUCTURE
Revenue
- Cost of Goods Sold (Variable costs)
= Gross Profit (Rev – COGS)
.

13. P&L: BASIC STRUCTURE
Revenue
- Cost of Goods Sold (Variable costs)
= Gross Profit (Rev – COGS)
Gross Profit
- Expenses (Fixed Costs)
R&D
Sales and Mktg
General and Administrative (G&A)
= Net Profit [Gross Profit - Expenses]
.

14. P&L: BASIC STRUCTURE
Revenue
- Cost of Goods Sold (Variable costs)
= Gross Profit (Rev – COGS)
Gross Profit
- Expenses (Fixed Costs)
R&D
Sales and Mktg
General and Administrative (G&A)
= Net Profit [Gross Profit - Expenses]
+/- Other Income (expense)
= Net Income

15. THREE THINGS TO FIGURE OUT…
Revenue
- Cost of Goods Sold (Variable costs)
= Gross Profit (Rev – COGS)
Gross Profit
- Expenses (Fixed Costs)
R&D
Sales and Mktg
General and Administrative (G&A)
= Net Profit [Gross Profit - Expenses]
+/- Other Income (expense)
= Net Income

16. 16
Cash flow positive

17. HOW DO YOU DO THIS?
17
in $M Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Revenue $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
Expenses 2.4 6.2 10.1 15.1 21.1
Net
Profit
($2.4) ($4.7) $0.05 $4.5 $11.6
?

18. WHAT DOES YOUR CURVE LOOK LIKE?
How deep?
How wide?
Timing?
Slope?
18

19. STEPS TO BUILD A PROFIT & LOSS STATEMENT
1. Build out Unit Economics
2. Build a timeline with assumptions
3. Use curves to build short-term model
(12, 18 or 24 months)
4. Predict Year 5 model
(within Zone of Reason)
5. Fill-in P&L and/or present graphs
Benchmark vs. Competition
Make sure everything passes
“common sense” test
.

20. UNIT ECONOMICS

21. UNIT ECONOMICS
Fundamental building block of
any financial model
What does it take to
build and sell one?
­One product delivered
­One software license
­One job completed
­One client serviced

22. UNIT ECONOMICS
Unit Revenue
Unit Costs
Fixed Costs
(overhead)

25. PRIMARY BUSINESS MODELS
Product
Tangible Solution
Design once, sell many
Service
Custom Solution
Intangible Value
Trade
Connect Buyers and Sellers
Product
Service Trade

26. SECONDARY BUSINESS MODELS
Combining primary business modes in groups
Product Service Trade
Marketplace x x
Brokerage x x
Subscription x x
Ecosystem x x x
Product
Service Trade

27. REVENUE MODELS DRIVE UNIT ECONOMICS
Type Business Revenue Model Example
Primary
Product Sales One time sale Presentation Clicker
Service Sales Hourly Rate Consultant
Trade Resale Retail Sales
Derivative
Subscription Monthly Revenue Software as a Service
Marketplace Transaction Fees Ebay, Etsy
Brokerage Commission Fees Real Estate
Ecosystem Combination Apple

28. REVENUE MODELS DRIVE UNIT ECONOMICS
Type Business Revenue Model Example
Primary
Product Sales One time sale Presentation Clicker
Service Sales Hourly Rate Consultant
Trade Resell Retail Sales
Derivative
Subscription Monthly Revenue Software as a Service
Marketplace Transaction Fees Ebay, Etsy
Brokerage Commission Fees Real Estate
Ecosystem Combination Apple

29. Example: Product Sales
Behold the lowly clicker

30. Getting into the
Clicker business
What type of
business?
Existing?
Re-segmented?
New?

31. Retail price: $35

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

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

34. 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

35. UNIT COST
Subsystem Cost
Housing $1.50
Electronics + Laser $2.50
Battery $0.25
Packaging, manual $1.00
Wireless Module $1.75
Total Unit Cost $7.00
Draw a Circle around the Unit.
What does it directly cost to produce?

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

37. UNIT PROFIT
Profit made per unit sold:
Average Selling Price (ASP): $16.00
Average Unit Cost: - $7.00
Unit Profit: $9.00

38. UNIT PROFIT MARGIN %
Percent profit margin
= (Revenue – cost) / Revenue
= Profit / Revenue
= $9 / $16 = 56.25% 43.75%
56.25%
Revenue
Unit Costs
Unit Profits

39. UNIT PROFIT MARGIN %
Percent profit margin
= (Revenue – cost) / Revenue
= Profit / Revenue
= $9 / $16 = 56.25%
Is this good?
43.75%
56.25%
Revenue
Unit Costs
Unit Profits

40. REVENUE MODELS DRIVE UNIT ECONOMICS
Type Business Revenue Model Cost Model
Primary
Product Sales One time sale COGS
Service Sales Hourly Rate Hourly Cost
Trade Resell COGS
Derivative
Subscription Monthly Revenue CAC
Marketplace Transaction Fees open
Brokerage Commission Fees open
Ecosystem Combination open

41. Law Firm
Working for hourly
billings
Billing Rate
- Hourly Pay
Hourly Profit
SERVICE EXAMPLE

42. REVENUE MODELS DRIVE UNIT ECONOMICS
Type Business Revenue Model Example
Primary
Product Sales One time sale Presentation Clicker
Service Sales Hourly Rate Consultant
Trade Resell Retail Sales
Derivative
Subscription Monthly Revenue Software as a Service
Marketplace Transaction Fees Ebay, Etsy
Brokerage Commission Fees Real Estate
Ecosystem Combination Apple

43. Sales
- Returns
Net Sales
TRADE EXAMPLE

44. FIXED VS. VARIABLE COSTS

45. TOTAL COSTS
Variable Costs
Fixed Costs
Variable costs vary with
the amount produced.
Fixed costs remain the
same, no matter how
much output a company
produces.

46. TOTAL COSTS
Variable Costs
Fixed Costs
Variable costs vary
with the amount
produced.
Fixed costs remain
the same, no matter
how much output a
company produces.
COGS
Expenses

47. FIXED COSTS
Business costs that are constant independent of units
produced
Generally includes:
­ Salaries
­ Rent, Insurance and Utilities
­ Marketing
All stay the same whether you sell one or 1M units

48. FIXED COSTS?
If you have employees, you have Salary costs
If you have a physical building, you pay
Rent, Insurance, Utilities
If you promote, Marketing and Sales are a primary
expense
* Exception to both would be large factories where Capital cost considerations
need to be added

49. SALARIES
How many people needed to run
your business?
­Management
­Engineers
­Marketing, Sales, etc.
Factory workers are considered
Direct Labor, part of COGS

50. RENT
Price varies by use
Commercial or store fronts
Warehouse space
Offices:
Consider 20 sq meter per employee

51. MARKETING
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

52. IS MARKETING VARIABLE OR FIXED?
… It depends
Yes:
If we can attribute marketing costs on a per-unit basis
Example is a coupon redeemed for a given unit
This is a Unit or Variable Cost.
No:
If we are running a general campaign and cannot attribute to specific
unit sales
These are Fixed Costs or Expenses

53. A UNIT COST EXAMPLE: COUPONS
We run a coupon campaign for $2 off
That specific coupon attributable to a clicker
sale
Coupon cost à sold a clicker
This is a Variable or Unit Cost

54. A FIXED COST EXAMPLE
General Advertising
We run radio ads, We attend trade shows
Increases sales but can’t attribute our expenses
to any specific unit sales.
This is a Fixed Cost or Expense
?

55. VARIABLE VS. FIXED COSTS
Variable Costs
Direct Materials
Direct Labor
CAC
Fixed Costs
Corporate Expenses
Rent
Salaries
Insurance
Training
Research
It Depends
Marketing Campaigns
Shipping, Delivery
Sales Commissions
Utilities
Scrap
Recalls

56. 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

57. ALLOCATING FIXED COSTS
For tech companies, normally summarized as:
­M&S Marketing & Sales
­R&D Research & Development
­G&A General & Administrative

58. 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%

59. 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)

60. UNITS SOLD à GROSS PROFIT
Units Sold (K) 100K
Average Selling Price (ASP) $16
Gross Revenue ($K) $1,600
Average Cost $7
COGS ($K) $700
Gross Profit ($K) $900
Step 1

61. 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%

62. ADD EXPENSES
By category
Expressed as a
positive number
Results %
Revenues $1,600 100.00%
COGS $700 43.75%
Gross Profit $900 56.75%
Marketing & Sales $480 30.00%
R&D $320 20.00%
G&A $120 7.50%
Total Expenses $920 57.5%

63. 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%
Marketing & Sales $480 30.00%
R&D $320 20.00%
G&A $120 7.50%
Total Expenses $920 57.5%
Net Profit ($20) -0.75%

64. 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%
Marketing & Sales $480 30.00%
R&D $320 20.00%
G&A $120 7.50%
Total Expenses $920 57.5%
Net Profit ($20) -0.75%

65. BUILDING THE FINAL MODEL

66. STEPS TO BUILD AN PROFIT & LOSS STATEMENT
1. Build out Unit Economics
2. Build a timeline with assumptions
3. Use curves to build short-term model
(12, 18 or 24 months)
4. Predict Year 5 model
(within Zone of Reason)
5. Fill-in P&L and/or present graphs
Benchmark vs. Competition
Make sure everything passes
“common sense” test
.

67. REVENUE CURVES VARY BY MARKET TYPE
Existing Market Re-Segmented
Market
New Market
1
2
3
4
5
6
7
1 2
3
4
5
6
7
1 2 3
4
5
6
7

68. PRIMARY BUSINESS MODELS
Product
Tangible Solution
Design once, sell many
Service
Custom Solution
Intangible Value
Trade
Connect Buyers and Sellers
Product
Service Trade

69. REVENUE CURVES VARY BY BUSINESS MODEL TYPE
“Scalable”
Product
Service
with Overhead
Trade
1
2
3
4
5
6
7
1 2 3
4
5
6
7
1
2
3
4
5
6
7

70. REVENUE CURVES VARY AS A FUNCTION OF THE
BUSINESS
Sales Volume = Height
Time to Market = Length
Sales Growth = Slope

71. YOUR COSTS WILL VARY WITH TECHNOLOGY AND
ECONOMIES OF SCALE
Decreasing Costs Uncertain Costs Increasing Costs
Technology
Transportation
LaborRaw Materials
Regulations

72. YOUR COMPANY TIMELINE
Q3Q1 Q2 Q7Q6 Q8
Series B
Company
Starts
First
Production
Full
Production
Series A
Second
Production
Cost
Reduction
First
Orders
Seed Funding
Q4 Q5
Employees: 6 10 14 18 22 25 29 33
50K/month
Shipments

73. NEW COMPANY
Introducing NewCo
World’s best
Fidget spinners…!!!
74

74. STEP 1: BUSINESS ASSUMPTIONS
Revenue Model: A product, one-time sale
Market Type: Re-segmented Market
Marketing Strategy: B2C
Sales Channel: Direct Sales over Web
Costs: First production: $10
First 2 years $2.50
Declining costs over time

75. 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

76. STEP 2: UNIT ECONOMICS
Our unit is one spinner
Unit Price: $6.00
Unit Cost: $2.50
Unit Profit: $3.50
Unit Margin: 58.3%

77. 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

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

79. 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

80. 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

81. 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

82. 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

83. 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.

84. 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)

85. 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
86

86. 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%

87. 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

88. 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%

89. 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 Reason”
Need to raise at least $7.2M

90. SIMPLIFIED FOR PRESENTATION
in $M Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Revenue $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
Expenses 2.4 6.2 10.1 15.1 21.1
Net
Profit
($2.4) ($4.7) $0.05 $4.5 $11.6

91. 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

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