Washington Technology Industry Association Startup Cohort. July 18, 2019. Chris Dishman, Denali Financial and Dave Parker, WTIA Startup Program Chair

1. Copyright
DKParker, LLC
2018
Revenue Models and Forecasting
Dave Parker
@DaveParkerSEA
www.dkparker.com/blog
Dave@dkparker.com
Chris Dishman
chrisd@denalifc.com
www.denalifc.com

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2018
Agenda
¤ Outcomes for the day:
¤ Template w/ Key Inputs
¤ Use Cases
¤ Key Metrics
¤ Common mistakes
¤ Rolling up your sleeves!

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DKParker, LLC
2018
About
About Dave
¤ Context – Dave
¤ Use Cases
¤ Marketing Funnel
¤ 16 Startup Revenue models
- with metrics
¤ Inc 500 Data
About Chris
¤ Models – Chris
¤ Telling a financial story
¤ Mapping your model to
your deck (and keeping
them in sync)
¤ Financial models
¤ Forecast vs. actual
¤ Common Mistakes

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2018
Business Model Breakdown
Creating Value -
Product or
Service
Delivering
Value -
Marketing &
Sales
Capturing
Value -
Reasonable
to Exceptional
Profit

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DKParker, LLC
2018
Use Cases
Why do a financial model
¤ Scoping the business – should you do this?
¤ Fundraising requirements
¤ Pre-Product Market Fit/Post-Product Market Fit

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Key Metrics
¤ Assumptions
¤ Staffing
¤ Timing
¤ Product Pricing
¤ Timing
¤ Pricing
¤ Sales
¤ Scaling past founder
¤ Time to close
¤ Marketing

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Marketing Funnel Breakdown
¤ Time to Close
¤ Marketing Activities
¤ Channels
¤ Monthly Spend
¤ Attribution
¤ Marketing Qualified Leads (MQLs) – Conversion
¤ Sales Qualified Leads (SQLs) – Conversion
¤ Customers

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2018
OrganicSearch
PaidSearch
WordofMouth
SalesCalls
PR
Miracles!
TimetoClose
Month1
Month2
Month3
Month4
$
Spen
d
#
Conv
#
Conv
#
MRR
Time

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2018
Revenue Models– Pick One or Two
• Fee for Service
1. Commerce
2. Subscription
3. Transaction Fee/Rental
4. Productize a Service
5. Combinations
6. Marketplace
7. Lead Generation
8. Gaming
9. Advertising/Search
10. New Media
11. Coins & Tokens
12. Multi-sided Marketplaces
13. Big Data
14. Panels
15. Licensing

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Top Templates
¤ Subscription
¤ Recurring revenue, churn, ARR/MRR, LTV:CAC
¤ Transaction Fee/Rental (can be used for Commerce)
¤ Avg transaction amount, % fee, # transactions/mo, LTV:CAC
¤ Productize a Service – people required to deliver some portion
of the service
¤ Split % between product services, avg revenue, GM by segment
¤ Marketplace
¤ Two funnels, avg trans, % fee, 2X LTV:CAC

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2018
2. Subscription
¤ Example: Salesforce , Box, Spotify
¤ Use: B2C & B2B
¤ Key Metrics
¤ Average Revenue Per User (ARPU)
¤ Conversion ratio – e.g. trial to purchase
¤ Churn
¤ Challenges: MVP won’t be enough to be Kick Ass Product
¤ Notes: Highest multiple, forecastable revenue

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3. Transaction Fees/Rental
¤ Example: 99Designs, KickStarter, Elance, Chugg
¤ Use: B2C & B2B
¤ Key Metrics
¤ Average transaction revenue
¤ Fee % per transaction
¤ Number of transactions
¤ Challenges: Margins are small (15%), need efficiency
¤ Notes: Don’t start too low

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2018
4. Productize a Service
¤ Your offerings is generally complex and requires services
to deploy
¤ Gross margin on Services >35%
¤ Product development comes with services
¤ Use: B2C & B2B
¤ Examples: Moz, service company convert to tools.
¤ Challenges – difficult to make the transition away from
services

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2018
6. Marketplaces
¤ Example: eBay, Alibaba
¤ Use: B2C & B2B
¤ Key Metrics
¤ Average Transaction Amount
¤ Number of Monthly Transactions
¤ Commission %
¤ Challenges: two sided market places require you start
with one side, value to seller & Product market fit (x2)
¤ Notes: critical mass or marketplace required

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2018
Inc 500 Data
Quiz
¤ How much revenue do you need to do to land on the
Inc 500 Top 10?

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2018
Inc 500 Data
Quiz
¤ How much revenue do you need to do to land on the
Inc 500 Top 10?
¤ Data from Top 10 Companies over eight year span
¤ Avg $50.64M
¤ High Average $147.78
¤ Low Average $20.44M
¤ All from a minimum first year revenue of $1M

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2018
Inc 500 Data
https://www.inc
.com/inc5000/lis
t/2017
2017 2016 2015 2014 2013 2012 2011 2010 Average
1 $54.20 $116.20 $118.20 $195.60 $117.90 $59.50 $195.60 $325.00 $147.78
2 $37.40 $55.00 $34.40 $82.60 $49.60 $26.90 $38.00 $15.60 $42.44
3 $48.80 $33.50 $33.60 $85.10 $25.50 $21.80 $20.90 $37.50 $38.34
4 $26.80 $30.70 $83.70 $35.30 $1.9b $14.70 $17.10 $14.40 $31.81
5 $49.10 $33.40 $44.60 $77.70 $87.00 $55.00 $16.40 $17.90 $47.64
6 $19.70 $17.70 $32.90 $138.00 $45.70 $55.60 $14.20 $249.80 $71.70
7 $23.20 $15.70 $37.20 $27.30 $25.50 $12.40 $15.10 $26.20 $22.83
8 $59.60 $15.60 $30.50 $159.90 $23.90 $21.80 $15.20 $131.40 $57.24
9 $41.70 $42.40 $32.10 $26.30 $33.10 $31.70 $14.90 $19.10 $30.16
10 $17.20 $25.90 $31.10 $32.90 $18.60 $14.20 $12.40 $11.20 $20.44
$50.64 $37.77 $38.61 $47.83 $86.07 $42.68 $31.36 $35.98 $84.81
*Normalized for $1.9B outlier

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2018
Telling a Financial Story
¤ Finance is the “language of business”
¤ The story comes down to numbers, and the model
validates the story – only numbers go in cells
¤ Investors want to see your model, and stress test it
¤ Models serve multiple purposes:
¤ Fundraising - Pitch deck storytelling
¤ Budgeting and forecasting
¤ Cash flow forecasting – “Runway”

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The Model Supports the Deck
¤ The pitch deck provides a 5-year summary of the model
¤ You have to know how to manage the model in Q&A
¤ The summary includes, at a high level:
¤ Revenue, cost of revenue, and gross margin ($,%)
¤ Operating expenses
¤ Profitability and cash flow breakeven
¤ Headcount
¤ Key drivers (e.g. customers)

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Financial Models – Best Practices
¤ The success drivers (metrics, KPI’s) are simple and easy to
understand. Avoid complicated formulas. On one tab.
¤ The revenue categories map to one or more of the 15
revenue models
¤ The 5-year revenue ramp is realistic.
¤ Cost of revenue is complete, so gross margin is correct:
¤ Hosting, fulfillment, shipping
¤ Labor (customer service)
¤ Production costs

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2018
Financial Models – Best Practices
¤ Operating expenses are complete:
¤ Expenses grouped by department (fixed versus variable)
¤ Headcount - Roles, compensation and benefits
¤ Contractors - HR, Acctg., Engineering
¤ Travel expenses
¤ Marketing- Reflects go-to-market strategy
¤ G&A – Facilities, insurance, other operating expenses
¤ Investments are reasonably estimated:
¤ Intellectual property, equipment

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2018
Financial Models – Best Practices
¤ GAAP/Accrual-based accounting
¤ Revenue Recognition
¤ A great model answers the burning questions:
¤ When does the company become profitable?
¤ When does cash flow breakeven occur?
¤ How much investor capital is needed?
¤ Will more than one round of funding be needed?

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Forecast Versus Actual
¤ Four dimensions of financial reporting:
¤ Actuals – QuickBooks (Accrual)
¤ Operating Plan – Budget (“Roadmap” for the year, quarter)
¤ Forecasting
¤ Variance Analysis:
¤ Actual to Plan
¤ Actual to Forecast

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Common Mistakes
¤ Complex and confusing assumptions
¤ Confusing model design
¤ Metrics and success factors are not defined
¤ Overly aggressive revenue ramp
¤ Improper revenue model
¤ Underestimating expenses and cash needs
¤ Key milestones are not clearly defined

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2018
Templates
¤ Choose one
¤ Orient
¤ Start with Assumptions
¤ Move to Compensation – people
¤ Revenue next
¤ Forecast

26. Copyright
DKParker, LLC
2018
Revenue Models and Forecasting
Dave Parker
@DaveParkerSEA
www.dkparker.com/blog
Dave@dkparker.com
Chris Dishman
chrisd@denalifc.com
www.denalifc.com