Fresh Powder

Let’s take a lift to the top.

Whether you ski or snowboard, you’re not getting far without the right equipment. Financial modeling is an important technique that helps you simulate different scenarios for your business. Imagine we’ve made it to the top of the snow-covered mountain. There are endless ways to make it down. Similarly, there are endless ways your business can evolve.

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This caffeinated contribution was written by Jeff Erickson. Based in the silicon slopes of Utah, Jeff is an angel investor, experienced advisor, avid skier, and leads partnership development at Forcastr. Forecastr is a financial modeling platform that helps founders forecast revenue, predict runway, and use dynamic insights to get funded.

Having worked with hundreds of early-stage startups, I often hear founders talk about how everyone knows financial projections will be wrong, so why is financial modeling important?

A financial model is a tool to help forecast the financial performance of their company over time. Financial models are generally based on a combination of the company’s historical performance and assumptions about the future. Financial models can be used by entrepreneurs to help make better decisions when raising financial capital and to assess the potential returns of a given venture. Returning to our mountainous metaphor, think of financial models as your map of the snowy terrain. It provides an overview of the area, routes to explore, and dangers to avoid. Similar to a trail map, financial models use numbers to set the scene, then help entrepreneurs determine the speed and direction of their business. Along the way, they also help identify potential risks and optimize how different types of resources are used.

As a startup founder, it’s important to understand why investors ask for financial models. A financial model is essentially your roadmap for the future and it gives investors an understanding of how you plan to generate revenue and scale up over time. Having a solid financial model demonstrates that you have done research into the market, understand potential risks and opportunities, and have thought through the key drivers for success in your business. Ultimately, your financial model helps investors see how you think about your business and whether you understand the levers that matter. It also gives them confidence when they see that you know how to strategically allocate the money they may invest and that you know how to project and manage cash flow.

Most investors speak in the language of finance. Terms like run rate, CAC, LTV, runway and burn rate are common vernacular. Going through the process of building your financial model helps you learn, decipher and understand this language of finance. A shared understanding will help you more effectively work with investors. A common mistake for many founders is thinking that it’s you and your financial model versus the world. Instead of falling in love with your assumptions, consider how you can work with potential investors, by using the financial model to analyze various scenarios. When founders can cruise down the mountain with investors, while explaining different scenarios in real-time, strategic partners will get excited about taking the lift back up for another run.

Ready to create a financial model that’s useful? Most models have historically been built in spreadsheets, but new software tools, such as Forecastr, make it easier for companies to create financial models. Entrepreneurs need to be aware of the changing terrain in order to make the best decisions for their evolving business. Let’s avoid the trees and carve out a few key steps that will land you in a position to know the numbers.

Define

Before you can create a financial model, it is important to define the company’s business model, revenue streams, and financial objectives. This understanding will help determine how you structure your assumptions in order for the projections to accurately reflect what could realistically happen with your startup.

Gather

Once you define company goals, gather historical data relevant to creating accurate projections for your startup’s future performance. This includes information such as past sales, costs associated with running operations, generating revenue, customer acquisition, and any other financial data that may help tell the story of your business.

Build

Using both qualitative (e.g., industry trends) and quantitative (e.g., past results) data points, begin building out realistic assumptions that will drive your financial model. Begin with customer acquisition and define how you’ll attract customers (e.g., paid ads, partner referrals, reseller channels, sales outreach, etc.). Next, build out assumptions around revenue streams. Consider all the ways you can make money by adding value to your customers (e.g., advertising revenue, product sales, services, etc.). Now you’re ready to build out assumptions in regards to hiring and building your team, and then focus on projecting the changes in your operating expenses based on the company’s performance. Finally, consider any required expenses to scale your business and how you plan to finance the overall venture.

Validate

With all your initial assumptions in a financial model, it’s important to track the accuracy of your assumptions each month and update the numbers based on actual data. As metrics are consistently tracked over time, your financial model becomes more accurate and reliable. You will notice trends in customer acquisition, identify the most profitable revenue streams, and monitor your expense projections. Additionally, you will be able to run different scenarios using your financial model to help you confidently make better decisions in running your business.

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I hope you’ve enjoyed this month’s theme, dedicated to early moves that help anyone avoid that new business idea from floating toward someday! As you compile the various resources you’ve created into an investor pack, you’ll be astonished at how well you understand your new venture. As you stay committed, the self awareness brews confidence from true understanding and others will be even more excited to join you.

Extra Credit

I have always loved listening to stories. 

At home, my parents used to tell me stories whenever I’d go to sleep. In school, I enjoy listening to friend’s and telling my own stories as well. Lately, my growing interest in entrepreneurship has me listening to people discuss their entrepreneurial journeys. These stories of solving problems and building a business have captured my attention, but I had to go beyond the status quo to find them.

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This caffeinated contribution was written by Ani Soni. Anirudh is a student who is becoming indispensable as he explores entrepreneurship within a startup community.

As a student in high school, there are a few classes, programs, and clubs that hint at what entrepreneurship is all about, but they lack heart, let alone the realities that come from actually building a startup or small business. I enjoy hanging out with my friends, but they don’t share the same interest I have in building my own company. My family is supportive too, but I really haven’t had a way to consistently share stories about building a business.

To fill this storytelling gap, I started looking for ways to meet other entrepreneurs. While it took a little research, I found many ways to meet people who own their own business. I’m eager to continue exploring “entrepreneurial ecosystems”, but I feel lucky to have chosen to first attend a weekly program called 1 Million Cups. Attending 1MC has allowed me to listen and learn from the stories of entrepreneurs, but showing up wasn’t easy.

I was so nervous at first! As a high schooler, I wasn’t sure if or how to show up. I assumed everyone was more qualified and successful. I didn’t think I would be able to understand, let alone contribute to the conversations. In my own mind, I didn’t belong and it was like I didn’t deserve to be there. It would have been easier to say, “maybe someday”, but I’m glad I decided to take the training wheels off.

When I arrived that first Wednesday morning, everybody was welcoming, kind, and incredibly interesting! I was thirsty to return after experiencing the generous energy this room of fellow students, entrepreneurs, intrapreneurs, and community builders exuded. Attending 1 Million Cups week after week, I now realize that people of all ages enjoy sharing stories just like me. Entrepreneurs sure like helping one another as well!

It’s only been a few months, but I already feel connected to this community of entrepreneurs. In fact, I’ve offered to join the volunteer 1MC organizing team, because I’ve seen how stories create a bond, and perhaps that’s what it’s all about. No matter where you’re at within your own journey, I’ve learned we are not alone. Everybody helps everyone grow. Now I’m on a mission to learn from more entrepreneurs, to build into my own ideas, to ask for help, and to accelerate others however I can within the entrepreneurial ecosystem.

Breakout Valuation

Breakout valuations are achieved when a business is valued based on how it makes people feel and its future potential, not just what it’s done in the past.

The nine components of a breakout valuation are confidence, vision, curiosity, people, communications, cash management, financial forecasting, capital strategy, and business design. Whether or not you sell your company, business owners who optimize in these areas, position themselves to capture a breakout valuation.

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This caffeinated contribution is a special adaptation from Breakout Valuation, which is the #1 New Release in Venture Capital and was written by my good friend, Patrick E. Donohue. Patrick is an entrepreneur, mentor, advisor, investor, valuation expert, and community builder who offers unique insights into the dynamics of money and business.

While you’re running a company, breakout valuations make everything easier. It attracts talented employees and quality customers. This expands your market position, makes financial capital less expensive, and invites vendors to extend better terms based on your surging trajectory.

Knowing what your ownership of the business is worth helps you make important financial decisions and becomes increasingly important as a business matures. If a business grows to the point where it becomes valuable to acquire, academic and finance professionals attempt to make valuation objective, but the complexity of each transaction makes valuation subjective in the end. Along with all the objective data, valuation is highly influenced by the environment, relationship, and personal views of the participants in a transaction. Knowing how investors and lenders use objective valuation tactics is crucial, but understanding the potential value of the business, articulating it to potential partners, and having them buy into the vision will arm you with an advantage to get what you want—a breakout valuation.

Breakout valuations are not aspirational. They emerge from what you are doing right now. It’s all about being clear with your mission and vision. It’s knowing your numbers and how everything comes together through a shared mindset, communication, and workflow. The pursuit toward a breakout valuation compounds, requiring attention today, and every day moving forward. This aggregates understanding and builds confidence. When the day comes to part with some or all of your business, the confidence from a breakout valuation will maximize the payout or deliver assurance in walking away from the deal.

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What are we doing today to support our goals for tomorrow?

Ask For Help

I was raised to “go figure it out”.

This DIY mindset was reinforced through years of education and employment in traditional, corporate environments. If there was a problem that I didn’t have the answer to, I would naturally slide into problem solving mode to independently determine different ways to ensure progress. By and large, this mindset has served me well. It has taught me to be resilient in the face of challenges, even when it’s not the popular path forward. It’s left me with an open, achievement-oriented approach with less limitations, because I am a DIY business woman.

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This caffeinated contribution was written by Laurie Brown. I had the pleasure of collaborating with this operational savant through her work inside the Kauffman Foundation and with 1 Million Cups. Laurie is now helping fellow founders optimize their own business operations, so let me know if you’d like a warm introduction.

Lately, I’ve been re-thinking this approach. Perhaps my DIY mindset should include more asking for help?

Within a recent career transition, I’ve been exploring this new attitude through an experiment. On numerous occasions, I’ve encountered unknowns. In these moments of uncertainty, I’ve resisted my life-long instinct to figure out every answer on my own. Instead, I have started asking myself, who in my network might be able to help me learn?  As this experiment has unfolded, I have three key takeaways.

  1. Asking for help drives results. I can learn from others who have pioneered effective solutions, which saves me time (and pain) along the way.
  2. The collaboration from these exchanges go beyond the problem at hand. Many times it strengthens relationships, the fun of helping each other forms friendships, and mutual professional growth is a welcomed side effect.
  3. By leading the way to ask for help, I serve as a role model to my peers and open the door from them to ask me for help in return.

My DIY ways will continue to serve me well, but I’ve learned that an added dose of curiosity and willingness to listen can add fresh layers of potential. I’ll continue to carry forward my resilient, solution-driven approach, but plan to incorporate more inclusive problem solving and an “AFH attitude” within my engaged network. This will keep problems from staying problems, while also creating a new catalyst for prosperity.

Venture Studios

Venture studios work with different startups to activate a portfolio of ideas into reality.

They invest financial capital, then use a long-term lens to enhance the chance for traction by pouring resources into each startup they invest in. A compounding collection of services are provided within these funds and full access helps everyone building together, often in sprints.

The compressed nature of the building process makes venture studios somewhat comparable to accelerators, yet with an extended, almost open-ended timeline. This emerging model can also be used as a form of due diligence for venture capital funds. While there’s still a lack of standardization and wonky economics have some investors questioning the long-term mechanics of such an approach to investing in startups, it’s no surprise that the innovation economy continues to drive fresh approaches to raising financial capital through the art of supporting entrepreneurs.

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This caffeinated contribution was written by Miles Dotson. I met Miles through mentor madness with Techstars. We bonded over our shared interested in this emerging approach to supporting entrepreneurship. Miles co-founded Devland, which is an investment company that focuses on new innovative ventures with brilliant technologists and wildly underestimated entrepreneurs. Devland provides an alternative mix of investment pathways for committed entrepreneurs with program guidance and direct funding through Series A.

The builders venture studios can attract, do not always have familiarity with venture capital and the language of finance. Whether you call them venture studios or startup studios, the word “studio” gives them the sense that there is a seat for them, regardless if they have a passion for a new idea or if they have formed initial traction. Terms, timelines, and investment theses vary between venture studios, as they should, knowing each company and fund provide different strategic values. After years of experimentation, our team is currently using the venture studio approach to conduct due diligence over an average of 14 months, working alongside builders, getting in the trenches with them, and advocating for their growth. This provides a much better gauge of the entrepreneur as a corporate builder, leader, and team builder — further validating our cause to invest and market them to firms upstream from us.

To bring this short intro to venture studios together, we can think about this as a validation-led approach to venture capital. The intention is to discover outsized returns from potentials who do not generally have network into the world of capital, relationships, and resources needed to build a market leading business. We are operators, product leaders, and venture capital thinkers who understand the role startup creation plays in the market. Our goal is to illuminate repeatable paths that often result in early acquisitions, stable long-term growth, or public market entry while improving the average cost required to create that outcome.

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This has been a fun little series, brewed around a few interesting actors within entrepreneurial ecosystems. There are many more key actors, factors, and instigators throughout any startup community, but we hope you’ve enjoyed this sip of awareness around Accelerators + Incubators + Coworking + Venture Studios. As always, subscribe to Roasted Reflections and stay tuned for what’s being poured next week!