Startup Finance // Modeling Operations
Modeling a five year expected run-way for your pitch deck
5 min read
You will inevitably want to think about how much money you need to raise and what milestones you can hit along the way with your funding. Also as you start to talk to investors, they want to know how big of an "opportunity" they can invest in. You need to rationalize how you'll spend and manage your business as well.
For that, you'll need to model based on some assumptions. I've included a mock model for a theoretical dashboard business. You can copy and view it via the Google Link included at the bottom of this article.
By the end of this short explanation, you should have an understanding of a model you can copy and edit for yourself to try to forecast the performance of your business for pitch deck creation, operational scenario planning, or assessing the validity of a business given other external assumptions.
We use a set of templates to model the line of business we are focusing on. You can adjust any of the items in blue and the following are all editable:
Number of initial customers - this is your starting paid beta customers - your trusted design partners
Growth Rate - expressed as a percentage (400%) implies heavy upfront growth likely viral
Churn Rate - this is the rate of loss of your customers in this case 3%
Product Price - this is the monthly cost of the software you are building in this case $12,500 / month
We call this a Pro Forma calculation since it is a forecast. It's probably wise to do a few of these like a best-case scenario where you capture 100% of the known market and another where you capture 5-10% of the known market. Then a few in-between scenarios.
This is where we document our assumptions of what we are selling, it's growth rate, and effectively our top-line revenue. We end up with an LTV (Lifetime Value Calculation). I won't go into that here, but it's valuable as well if you can demonstrate this model is realistic. Until you have some realistic proof that this model is accurate it's probably not meaningful to worry about LTV.
Here we have modeled that in Year 1 we will have 8 paying customers with a theoretical growth rate of 400% decaying towards 200% over the 5-year period.
This is where we start to draw some conclusions about our product's performance like the Total Revenue we can earn as a business by selling this product or service.
We can then start to deduct out costs of operations (liabilities) of operating our business to determine the profit or shortfall of operations.
Given the assumptions of simple operations, we can extrapolate how well our business will perform. There are some additional assumptions you can document here like One-time setup costs, costs per subscriber, and marketing spend per new additional subscriber. You can also model some of the compensation costs like bonuses and other expenses. In the linked spreadsheet you'll see that headcount is linked to a Headcount Over Time tab to explore your hiring and human capital growth.
This particular business would not appear to need investment if these assumptions turned out to be true. Especially in the case that year 1 would start with 8 customers. I would call this a best-case scenario.
As you edit the assumptions you'll be able to visualize the theoretically modeled performance of your business. This is especially useful when you have a shortfall. This shortfall if you have one is how much money you need to raise as you execute this plan. If you can't raise that money, you either need to adjust your expenses (via the model) or earn more customers. There are levers to pull for sure, but that'll be the management's decision to make as they operate within the parameters of reality.
Human Capital Forecasting
You can't know for sure as time goes on who you will need to hire and how much they will cost. In this model, we have some extremely optimistic salary expectations (from the business's point of view). In the case where founders are willing to do the work of a CEO, CTO, CFO, or other individual contributors in Year 1 we modeled it by using a fraction of a person. This is in fact a full-time individual, however, they are willing to work for a fraction of the cash due to their outsized equity position in the business. These are almost assuredly founders. Your model may require some additional thinking around the types of employees you will need to hire but the above should cover a large portion of the needs for a SaaS model business involving heavy engineering and software development with customer support.
This article was a quick explainer of how to create a financial model to be used in your pitch materials, planning for fundraising, and general operational forecasting. You can of course spend many more hours guessing how the future of your business will operate, but this slightly better than back-of-the-napkin model may help you come up with more realistic explanations you can revise as you operate.
If you read this far here is a link to download or copy the model. Please leave me a comment below if you found this useful and give me some love in the reactions on the right!