Modeling Your Startup’s Future: Template for SaaS Startups
A lot of entrepreneurs/founders don’t start out as a ‘finance guy/gal’. Nevertheless as founders, the company’s financial future is in our hands. To do the job right we need to build and maintain an operating model that explains how the company will grow (and spend). Until we have the budget and capacity to make that finance hire who is a finance expert, this responsibility is on our shoulders. But at any stage it remains imperative that you as the CEO understand and remain deeply connected to the company’s financial profile.
My first operating model took a long time to create, it was functional but not particularly well informed. It didn’t go far enough to tell the story of why growth would happen in a particular way. Over the years the model improved as I gained experience and help from investors and my finance team. This year, when we set out to create our 5th iteration of the financial model, we decided to do so in a way that would enable other founders of early stage companies to create a robust model with considerably less effort. With this post I share a template operating model and some of the experiences that inform its logic. The model is most applicable to VC-backed SaaS companies. Adapt it as needed.
Why you need an operating model
As first-time founder and CEO my relationship with an operating model has gone through many iterations. Early advice I got after spending time building out my first model was, “All you need is an idea to raise money. You’re wasting time on the model because it’s going to be wrong anyway.” Part of that statement is true, but it was terrible advice.
My first operating model was indeed wrong, but it’s a critical first step to really owning the financial future of the company. I found building a financial model from scratch helped me understand the mechanics of growth that were particular to my business. For example, we had to go through a year-long audit process with an industry regulator that cost us time and money before we could start selling to our target audience. Showing these costs in the model helped my early investors see that I had a point of view and was planning for this stuff. But there were some fundamentals that were missing, such as the relationship between investing in sales and marketing and revenue growth.
You might be using Quickbooks or Xero or other accounting software. The model is not intended to replace these. Both the accounting software and the operating model play an important role in managing your business. You’ll want to keep BOTH up-to-date as part of your monthly financial close process.
Questions, answers and considerations
A model will help you answer questions, model different financing scenarios and generally understand your business more clearly.
How much money should I raise? The amount of capital raised matters. Raise too much too soon and dilute yourself unnecessarily. Raise too little and you run the risk of running out of money. So you must take time to consider how long it will take your team to reach the milestones you want to reach before going out for the next funding round. Let’s say you’re considering a seed round and want you want to get to $2m run rate before you raise your Series A. You must figure out how much you’re going to spend before you reach that milestone and raise enough to get you there with some cushion. It nearly always will take longer and be more expensive than you’re able to anticipate.
Should I be conservative or aggressive? You’re going to need to show up to different conversations with different points of view and a flexible model will help you understand what levers you can pull to grow faster or slow down your burn rate. Investors will likely trim your revenue projections by 20%–40% when considering an investment. As a result, when selling the idea many founders like to be more aggressive when showing how the company could grow. But once you’re working with a board and using your model to set company goals and quotas for your sales team, you’ve got to think carefully about what you’re committing to. The model alone won’t determine how many activities each sales person can do in a day and how many sales are actually achievable each month. One of my favorite sales leaders Loren Padelford of Shopify has a great talk on this part of building sales models with Bowery Capital.
How fast will we be able to grow? If you’re raising a Seed round your primary mission is to quickly find product-market-fit for and then scale. If you’re raising a Series A you’ve already found product-market-fit and you’re focusing more on building the organization in preparation for the growth ahead. After product-market-fit is established, how fast you are able to grow depends a lot on how much capital you have available. A model like the one we’ve shared here will help you understand some of the key relationships between growth and costs.
Who do I need to hire and when? One of the most important parts of the operating model is the hiring plan. Personnel will likely be the largest part of your operating expense. Being thoughtful about the WHEN and WHY of hiring is critical for controlling your burn rate and planning your company’s growth. A good model will help you understand if your ideas about who to hire and when make sense and will help you explain your thinking to your prospective investors and/or your board.
Using the model
I decided to create an open source template so that other founders can benefit from the work that we’ve done. In this project, I have tried to thread the needle between robust and not too complicated or specific. It has been tested by several investors and MBA interns and has proven to work well. But it is up to you to adapt it for your own needs.
To get started, click here and make a copy of the model.
Fundamentals. There are a few ideas you’ll need to keep in mind.
- All expenses are negative numbers. So when you’re entering salaries, COGS, operating expenses, etc. make sure you’re using negative numbers.
- There is sample data contained in the sheet when you make a copy. This data is all fabricated. Just write over it. It’s not designed to be a guide in any way.
- We’ve tried to use fairly generic names for teams and expense categories. If you need to change them be sure to do so consistently throughout the operating plan.
- Inserting rows: If you have to start inserting rows into the hiring plan, operating expenses or any other sheet take care to ensure that the totals are updating. Inserting rows into the operating plan is more tricky and you’ll have to watch out for calculation errors on the dashboard and fundraising workbooks.
- If you break the model, make use of Google Sheets’ built-in functionality to restore an earlier version. If you’re unfamiliar with how to do that, read about it here.
Layout. The operating model is laid out as follows:
- Guide — Start here. This sheet provides a lot of information on the thinking behind each section and how to input your information.
- Control Panel — Most of the inputs for your plan are contained in the 6 sections of the control panel. Each section is explained in the guide.
- Dashboard — The dashboard provides some helpful visuals and key financial indicators.
- Fundraising Workbook — If you’re fundraising you’ll probably find this workbook helpful. It considers two scenarios: a break even scenario and a runway scenario. We suggest you build the model first then consider the Fundraising Workbook and make changes to the model as needed.
- Operating Plan — This sheet is the output of the model. It’s laid for you as Profit and Loss (aka Income Statement) and Cash Flow Statements.
- Actuals and Actuals vs. Plan — Once you’ve adopted the plan and want to start tracking your company’s progress to the plan these sheets come into play. When you’re building the operating plan you can ignore the Actuals and Actuals vs. Plan sheets.
- Revenue Build — There are two sheets to build the revenue model. One is for existing clients (in case you’re lucky enough to have those). The other is for revenue from future clients. Read the instructions in the Guide for how to use these sheets.
- Expense Build — The expense is broken into 4 sheets. Each of the 4 sheets are important and require inputs. The hiring plan is probably the most complex sheet of all as it’s tied into the revenue and cost of goods sold (COGs). Follow the instructions in the guide and you’ll be in great shape.
Have fun and happy modeling!
Hiring: I’ve benefited like mad from Jason Lemkin’s writing on SaaStr. Here are a few of my favorites:
- Hire more than one sales person at a time
- When to hire marketing and how not to just end up with blue pens
- First 100 hires at a SaaS company
I don’t use the built in google graphs for my charting needs. I use the web app created by Mike Preuss at Visible.vc. The model shared here makes graphing on Visible (or any other graphing platform that integrates with Google Sheets) easy enough and you can get a much better result.