How to build an investor grade financial model for your SaaS startup
Originally published: 20/10/2016 16:17
Last version published: 21/06/2017 09:17
Publication number: ELQ-89983-7
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How to build an investor grade financial model for your SaaS startup

Making a financial model for your startup can seem intimidating  — but it can actually be fun


Trying your luck with Google

But building a financial model from scratch, regardless of the stage you’re at, can be hard and time consuming. Where do you start? What should you include? Do you have enough details or is it too detailed (yes that’s a thing!)…there are so many things to consider.

The first thing you may do is Google it?
—?here’s what happens: you see a bunch of links with templates that you have to buy or courses you have to take?—?its actually not that hard.

In my role at SurePath Capital Partners, I’ve seen a fair share of financial models, especially for startup SaaS companies —?although there are many similarities, each model is unique.

Outlined below are some of the key components every good model should have. I’ll discuss each in detail including best practises and things to consider when building a financial model for your SaaS startup. This is not meant to serve as a foolproof method to build an investor grade model, but should serve as a guideline and considerations for best practices. (Note a good financial model will have an Income Statement, Balance Sheet and Cash Flow?—?in this post, I’m going to be covering the Income Statement in depth)

1.The Sales Plan: how does your business plan to generate revenue?
2.The Hiring Plan:who’s going to be on the team to do it and when should you hire them?
3.The Expenses: what will it cost to keep the servers/hosting up and running, attract new customers, keep the lights on, etc.?
4.Metrics:what is the average revenue per user (ARPU), how much are you paying to acquire them (CAC) and many other SaaSy metrics that show an investor how awesome your business actually is.
5.Overall tips and best practises: creating a financial model isn’t a science, there isn’t one right answer?—?there is however some things that work and others that don’t.

Pro-tip: templates are a good starting point (although I believe you should never pay for a financial model template), your business is unique and so should your financial model?—?don’t just blindly use a template.

Think about the implications for your business and whether something applies or not. That said there are plenty of free templates and resources you can use to get started with, but remember to tailor it for your business. (Editors note: eg: )

  • Step n°1 |

    The Sales Plan -> General Comments

    This is the most fundamental part of any financial model. A good sales plan has clearly identified drivers — the key factors that increase sales. This can be hard, but it is arguably the most important part.

    thumb_up Here are a few examples:

    - Number of visitors to your website in a month. From there a % of them may sign up for a free trial, after their trial ends, a % of them may become “Bronze” level customers, while another % of them become “Silver” level, and so on (based on your existing product/tier mix).
    - Number of sales reps. Typically, they’ll have a certain quota of deals/customers/sign-ups they are required to close in a month. Perhaps they have a number of demos they have to book every month. From there there maybe a % of those demos that are actually completed and eventually a % of completed demos start a trial, and eventually become paying customers.

    lightbulb_outlineThink: What is the ONE thing that my business needs to drive revenue?

    Pro tip: do not just hardcode a revenue number and show it growing an arbitrary percent month-over-month (MoM). This is not well thought out. An investor wants to know the components of that number, so they can see how your business grows and becomes massive.

    How to build an investor grade financial model for your SaaS startup image
  • Step n°2 |

    The Sales Plan -> The Funnel

    Think about each stage of your sales funnel from a lead to a paying customer. Dissect it and assign values to how each stage converts to the next.

    thumb_up1. What’s at the top of the funnel? What drives it?
    2. What happens at each stage of the funnel? Each step in the funnel needs to have its own set of assumptions.

    lightbulb_outline Use as much history/experience you have up to a maximum of the last 12 months.

    How to build an investor grade financial model for your SaaS startup image
  • Step n°3 |

    The Sales Plan -> Customers

    Once you’ve thought through how your sales funnel brings in new customers each month, the next step is to think about your customer count over time.

    thumb_up Each month, you should show the following build up of your customers:

    Beginning Paying Customers (the same as the customers you ended the previous month with)
    + Add: New customers acquired through your sales funnel
    - Subtract: Customers lost through churn (inevitably some of your customers will leave, or unsubscribe, you need to account for this through a monthly churn assumption)
    = Ending Paying Customers (this will be the number of customers that pay you this month)

    Some Considerations: 
    1. If your business has multiple product tiers, you should do this for each product tier.
    2. If you charge different prices for annual billing compared to monthly billing, you should separate your customers this way as well.

    How to build an investor grade financial model for your SaaS startup image
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