08 October 2009

Financial Modeling for Startups-- How Much Will It Really Cost?

I came across this blog entry from Christine Herron of First Round Capital detailing the costs of starting web wunderkind Mint.com (acquired by Intuit for a handsome $170M).

Christine does a great job of breaking out Mint's costs by "Garage Phase," "Seed Round" and "Series A," showing the cost structure of building the company at each step. 

We build about 10-15 startup financial models per year, and this post is right on the money (pun intended). The key element is in the thinking that goes into the model-- building out solid model logic and assumptions-- since everyone knows reality will be far different than the pro-forma.As Christine puts it:

"Know how the business model works. People do X behavior and it turns into $Y income, add up those $Ys and it's a $Z business. If you can walk people through these assumptions convincingly, you'll get that seed round. "

and she continues:

"What model do you build next in order to raise the Series A? Testing and learning from your seed model, show user growth, retention, COGS, revenue per sale/user, and profit. The accumulated loss is how much you need to raise, and a well-though funding strategy combined with an understanding of (hopefully good) business economics is what will speed the Series A process along."

An interesting side note from a post on WSJ blog Venture Capital Dispatch is that Mint raised about $32 million from investors but only used about $12 million of that capital.

Naturally, it makes me wonder if founder Aaron Patzer now wishes he had raised a series of smaller rounds and retained more of his equity. But of course, this type of Monday-morning quarterbacking is easy to do with post-acquisition hindsight, and in this market most startups are wise to raise as much as they can, when they can.

Either way, it's an impressive success story and a good archetype to follow.

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