Best saas funnel for Financial Services

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hey everyone eric here in this video i'm going to help you solve a finance case study for a sas startup we'll build a financial model calculate the key metrics and make recommendations at the end by the end of this video you'll have a great financial modeling background to go into interviews or work with startups okay let's get started so here is the setup for our realistic finance case study for this sas startup so our instructions are that we need to create a financial model for the following business then lay out the best metrics to track performance for this type of a company and then talk about risks opportunities and how we should move forward so whether you're going into an interview or you're just doing consulting or running your own company i'm basing this video on my real experience working with lots of different startups so it should be informative for sort of whatever angle you're coming at it from so step one create a two-year forecast and i'm saying that our startup is a bottoms up b2b sas business so that would be a company like slack which is the sort of messenger collaboration app if you haven't used it and what i mean by bottoms up is that traditionally b2b sort of like enterprise software companies would sell top down so they'd try to go to someone in the company like an executive and get to them and say hey buy our software for everyone in your company they make the sale with the executive and then everyone in the company basically gets the software at the same time it's rolled out and they're kind of forced to use it all at the same time but now you're seeing a lot more businesses like maybe businesses like dropbox businesses like slack who actually get they get adopted by individual employees first they'll start using it to chat with their co-workers or other people that they know or they'll start using it to store their files and it starts with a few people and then it actually um gains adoption from this initial starting cohort of of employees and but from the bottom up and then a lot of times it'll get adopted throughout the enterprise so mathematically it's you know you still end up with enterprise software but the sales tactics and sort of the growth strategy is is a lot different and you can use more sort of b2c consumer growth strategies to sell software which is pretty cool so we're going to make assumptions to build out a realistic financial model and we are given the following information as a starting point and then from there we just need to freestyle it and build something that is coherent so the monthly price for our product and we're saying it's some you know chat messenger app let's say is 12.99 a month we currently have 3 100 active users these users are churning off the platform meaning they're canceling at 2.1 percent per month the typical company because it is an enterprise tool we're trying to sell it into companies although each company has its own individual users so the typical company size is 5.6 users but the company size is going to be increasing over time so we need to build a two-year forecast so we're going to be starting with 5.6 employees per average company but that number is going to need to increase okay there's going to be a 15-month uh gross margin cac payback at the company level and so we're going to break this down in one moment the first analysis we're going to do is look at cac and lifetime value um and this will you'll understand this really well right after we do it and but we need this cac number to slowly decrease over time so the average company size is increasing cac is decreasing and we have a 15 monthly new user growth rate in year one and in year two it drops to 12 percent okay so first thing that you want to do with any startup period does not matter the type of business is break down the customer lifetime value so in order to do that you need to figure out first um what is our relationship look like with one customer for one transaction and then what you're going to look at is well what about over the entire lifetime of that customer how many transactions are they going to have so first let's break this down so we know that the price is 12.99 okay and then users first we're looking at the ltv for one individual user and then we're going to look at it at the company level so 5.6 users so first one user and we know the churn is 2.1 so there's a trick if you know your monthly churn rate and it's consistent meaning it is sort of unchanging over time certain businesses their churn is higher in the beginning of a lifetime with a customer and then it's lower at the end but let's just say it's consistent over time to get the average lifetime of that user you just take one and you divide it by the churn rate so if it's two point one percent churn per month one divided by two point one percent is roughly 48 months so the typical customer if they're turning at two percent a month is going to be using the product for about 48 months so from that you can get the lifetime revenue so it's just these 47.6 months times the monthly price so the average user is going to pay us 618 dollars in revenue now we have the gross the gross margin or i'm just going to call it the gm percent gross margin percent and they haven't given us a gross margin percent here so we need to make an assumption usually with software businesses their gross margins are like around 80 or you know can be a little bit less can be a little bit more so let's say 83 that's a very sort of standard um profit margin you'll see for a software business next you're going to have your life time value so this is the lifetime revenue times gross profit so it's 513 dollars so after paying the direct cost of providing the software so things like support and hosting the typical customer we will make 513 on over their 48 month lifetime so this is very helpful and our monthly gross margin is going to be 12.99 times 83 so it's gonna be about 11 a month okay so now we have the customer lifetime value so again this is really what you're after here customer lifetime value and i think we can put that here because we want to calculate it now at the enterprise level so we're selling our customers are really businesses because we're a b2b business to business uh company so we know that users at the company level are much more they're 5.6 in our starting month so our monthly price sort of for the average company is 73 depending on how many users they have but that's kind of our monthly revenue obviously churn is going to be the same lifetime is going to be the same but your lifetime revenue now is that monthly revenue times 48 months so about 3 500 per enterprise that adopts our software again gross margin is the same and your lifetime value now at the company level is about two thousand nine hundred dollars so um even though we're only making seventy three dollars a month here of of revenue and only sixty dollars a month of of gross profit will end up making about two thousand nine hundred dollars of profit on this company over roughly a four year period so how do we figure out the cac now so cac stands for customer um acquisition cost so if you don't know what this this concept is definitely go and look around my channel i have uh some videos around customer acquisition cost but this is the marketing cost that you spend to get one new customer to buy for the first time so we know that once we get someone to pay those you know that 13.99 for that first month on average they're going to end up spending 618 dollars so we're saying if we think about the same idea at the enterprise level once we get one enterprise onboarded so we get a small cohort of customers inside of a company using our product the average company is going to be paying us 73 dollars and we can expect to make 2 900 in profit from them so the customer acquisition cost is 15 times the monthly gross margin okay so monthly gross margin times 15. so we're saying that the customer acquisition cost is 900 so it seems kind of crazy if you can't see what your customer lifetime value is so you'd say okay i paid 900 in marketing and i get one new customer and that customer only pays me 73 dollars a month and i only make 60 of profit so i just paid 900 so in your first month you are in the red if you think about the payback period 845 dollars but you know that you'll end up making 2 900 so if you break these this math down and this is called unit economics you can confidently pay 900 for a new customer um all day in fact you could pay a lot more than that as long as it's less than 2 900 you will make a profit on that customer so this is the first thing we need to break down and now we can sort sort of start building out our financial model okay so you can do it here it's probably fine okay so we're going to say m1 and so we're going to go to your model and so m1 just stands for month one month two month three and um i'm just dragging the cell and it'll just autofill okay so 24 months two years right and so when when we say financial model usually we're talking about profit and loss or income statement same thing so that's what we're trying to build so what is the starting point of the model well we know we have 3 100 active users and we know that that user base is growing 15 a month and it's also churning 2.1 percent a month so with that information we can start to build out our customer numbers so let's give this a try okay so users okay and i'll just make this a little bigger and let's see here you just kind of change some of these formats okay cool users okay so we're going to have our starting users and zoom in a little more so i kind of want to walk you through this logic so that's 3 100. so we know okay we have 3 100 users and before i sort of totally dive into this section i just want to say really quick if you're finding this content valuable please subscribe to my channel right now and like this video and also if you want me to teach you everything i know about finance for startups in a small group with personalized support for me join the wait list in the description below for a chance to join the next cohort of my training program finance for startups okay so let's dive back in so our starting users are 3 100. then we're going to have a churn rate and then churned users so we know our turn rate is 2.1 percent and you'll notice i'm putting certain certain numbers in dark blue in any sort of financial modeling context you want to put your assumptions in dark blue and so you usually just go in here to more colors and just find a really dark blue and your formula is in black so that if someone else is going through your model or if it's just you you know that you can change things that are in blue but black those cells are referencing other cells so i'm putting my assumptions in in blue here so then you have your growth rate then you have your new users and then you have your total net users so this type of table applies to so many different businesses so let's just kind of work through the logic here okay so starting is going to be these plus you're churned plus you're new so here's how it works so at the end of last month we had 3 100 users from there we had and i'm going to use a round formula um i put a negative sign in front of it we had 2.1 percent of those users comma and i'm rounding it to zero so it's a whole number 2.1 percent of those 3100 people canceled and that ends up being 65 people so we lost 65 customers but from that ending number of 3100 we gained 15 percent more customers so that was a growth number so 465. so it nets out to actually 3 500 customers and so i interpreted the 15 monthly new user growth as uh based on the end of the prior month users and so you could calculate it off the end maybe you say okay that that growth rate is based on the end of the month um minus the churn just be very clear about how exactly you calculate your number so that it's very clear in your model okay so from here so you can see that's 3 500 we can just copy this across so we know that it's 15 growth in year one and then in year two so that's month 13 goes to 12 growth okay so by the end of this you have 36 000 users okay so that's helpful so we have our total net users but remember total net users is not total companies now let's break down total companies because what we're trying to do is calculate revenue and of course your gross margin but then how do you calculate the marketing expenses that's the biggest expense of this company what you need to do is you need to figure out how many new companies you're adding per month and you need to multiply that by the cac because you will have spent 900 to get one new company so in order to calculate the number we need to convert the user number into the number of companies that we added and then from there multiply that by the cac so we're going to do that right now so let's say users users per company then we can say active companies and then what we really want is net added companies okay so users per company we know is 5.6 5.6 and but we know this number is going to be increasing over time so let's say 5.6 and then let's say it increases by 0.1 each month and so by the end of 24 months this would get us to 7.8 so that's gradually increasing and that's you know the kind of thing you'd want to see from a business like this next what's your total companies so we're going to take the total users and divide it by 5.6 rounded to a whole number meaning zero digits and it's 554 companies so here let's say the net added companies so if we added companies we probably spent money on marketing so net added companies was 71. so this is where we can get our marketing costs from okay so here we're going to say marketing expenses and this is going to be basically and i'm going to put the cac here down below customer acquisition cost okay so we're going to do is for the first months we're going to take this number our customer acquisition cost and i'm going to tap f4 which puts a dollar sign in front of the row and the column so that wherever i copy this it continues to reference the same cell so if i didn't lock it it would reference the cell to the right if i copied it to the right okay so the customer acquisition cost is here and but we know based on the assumptions that we have above the customer acquisition cost decreases over time okay so here let's say the customer acquisition cost is decreasing by five dollars each month and it really depends on the company sometimes you'll see the customer acquisition costs going up over time as a company scales and has sort of more of their customers coming from paid channels sometimes you see customer acquisition costs going down over time you almost never see it flat and so uh usually you have to think about the dynamics of of sort of where they are in the growth trajectory and in building their sort of network of users okay so the marketing is going to be total new customer total new companies times customer acquisition cost so let's say you know we don't know how many companies there were before so we'll put an assumption in here but in this scenario we know that it's 71 times 906 is going to get you to 64 000 and if we just multiply this forward you can see that your marketing ends up being about 300 000 per month by month 24. so because we don't have this number let's just assume a very reasonable number based on you know the the month that comes after it so let's say 60 000 just because we don't know what the total act of companies was the month before but part of this model is just building out a level of reasonableness okay so now we've modeled in the 15-month cac payback decreasing over time employee average sort average number of employees per company increasing over time churn users everything everything so we've got all we need to do now to build out the revenue the cost of goods sold and the gross margin so let's do it okay so here and we can just do this right here we can say okay so your revenue cost of goods sold and then your gross margin and then i always like to say gm percent because you want to keep an eye on the percent just to make sure your formulas are looking good so let's um and i'm going to be just formatting in the way that you would in a typical financial model so revenue is going to be total users times 12.99 per month tapped f4 which locked the column dollar time in front of the letter and a dollar sign in front of the number so now i can just copy this all around so monthly revenue is 40 269 your gross margin is this times 83 tap f4 you can you don't have to tap f4 you can also just go in manually and you know basically put the dollar sign you know here and here to edit the cell i'm tapping f2 so just just take note okay so here i'm just going to solve basically for the cost of goods sold so i'm going to take revenue i'm going to subtract gross margin and so i know it's 6 800. and just as a triple check i'm going to take gross margin divided by revenue and you can see that your gross margin percent is indeed 83 percent copy this across okay so now we've built um everything down to the gross margin we know that by the end of month 24 our revenue is about half a million dollars a month our gross profit is almost 400 000 a month so we're scaling the business up nicely it's up about 10x from month one so now we need to work on the operating expenses okay so what are we going to have here and we're going to need to do some make some assumptions here so we have a few things already worked out down below we have the customer acquisition costs we have the marketing expenses in fact i think we can just pull the marketing expenses up into the operating expenses but we're going to have some other things and i'm going to keep this simple but i'm going to say salaries okay salaries then i'm going to say benefits taxes you know et cetera so the etc would be like the um you know like matching their retirement plan and things like this like there's a lot of things that can go into that bucket then i think marketing is fine what would be the other big buckets for for like an early startup consultants usually you have a lot of consultants and everything else um i'm just saying is miscellaneous so total opex opex is the short way to say operating expenses okay okay cool so total opex is where you're gonna be adding everything up okay nice so sixty thousand but it's missing all the information so let's move in so what do we do here for for um personnel let's start with our personnel so let's just make an assumption let's just say um companies per ee ee is employee so i'll say employee um and i'll put it as ee companies for employee we're saying how many customers do we have for every employee that that we have so let's say it's 150 companies and just to reference we have 554 companies so we're saying 150 companies per employee and so we're going to say total employees now this is like the absolute shortest way you could build this you could also build out like a payroll plan by team you could say okay we have one executive one engineer you know one marketer one designer um you know one lawyer and so you could build it up by team but i'm just doing this super super quick uh sort of version because we've got so much to go through so i'm saying round and what you'll do here is you'll take the total active companies and you'll just divide that by the number of employees and then you'll have to round that to zero digits so we're saying we have four employees okay cool so but i also you would assume with you know the software enterprise software that you can use as a company yourself that you can actually scale up the efficiency of your employees over time so let's say each month we get a little more efficient so we add on five per month so each employee can sort of handle a slightly bigger load each month as we build more automation and you know use more software in our own business to manage customer service and customer support so next we have the average annual salary let's say and then we have benefits um taxes et cetera so we're going to keep this super simple we're going to say the average average salary this one makes out our company is 85 000 and benefits would be 25 on top of the 85 000. and so 25 at least in the us is pretty common annual salary let's just say in the market that we're in that's a decent average across all the positions okay so the way that we do this is we say total employees 4 times 85 divided by 12 because we're doing a monthly model so it needs to be the annual number divided by 12. so that is 28 000 next we take that 28 and we multiply it by 25 percent so that would be an extra 7 000 of sort of employee related expenses in addition to the salaries next let's make two last assumptions here we're going to say consultants as percent of payroll let's say 25 um so we're saying like you know for every 28 000 in regular salaries we have you know another 7 000 of consultants usually there's a lot of consultants that work in startups because you need a lot of specialists but to do things that are not full-time jobs so you maybe have you know marketing people that run your ad accounts but you only need to talk with them for a couple hours a week and so it makes more sense to pay them a retainer every month and to hire someone full time it's actually cheaper and they'll be better at it okay so and then you have miscellaneous [Music] and yes expense let's just say it's like 10 000 a month so again you can make these numbers um whatever makes sense for for for your business um or for your case study but i'm just kind of showing how the structure would go and now let's look okay where is month 13 okay let's say we scale this up to like 20 000 a month now okay so here we just link that in and let's just kind of copy this over okay so you can see now that as our business is growing the operating expenses are also growing so i'm just going to apply this comma format and what you'll usually see in financial models is that when you have a section of data like this the top number will have a counting number sort of like dollar signs in front of it and the bottom number will and in the middle you just put commas so like this here this should be commas and it just looks cleaner and it's sort of just a generally accepted sort of type of format and so that's another one to just keep your eye on okay so now that we've done that we're basically done with the financial model so let's just clean this up a little bit we can say assumptions put this down below and let's calculate our operating income so that is your gross margin minus your total opex so your operating income is here and that's also called your earnings before interest and taxes so we call that ebit it's the exact same um metric ebit or operating income there's synonyms so ebit percent is this divided by revenue so at this moment it's negative 196 profit margin and these types of numbers are why um sort of start-up businesses are very poorly understood in sort of traditional business schools because this just tells you that you have a bad company but if you were to look and say okay i'm going to make 2 900 on a new customer and i spend 900 in marketing to get them you'd say it's a great company so really with startups you you can't necessarily be focused on the traditional metrics we have our own vocabulary for startups to understand what's the health of this business can we scale it to break even and then profitability after and so that's what we're about to break down in the metrics section so let me just look at two more things here so if we're losing all this money we need to know how much money we have in the bank and how much money we need to raise from investors in order to keep going so let's say money raised and then cash balance okay so cash balance let's say we start with 500k okay hold on here let's put this here so 500 500 000 okay 500k and let's say here we raise 1.25 million we're like okay you know things are going well let's raise around because um you know we need some more dough because you know if you look at our forecast this 500k is only gonna last us you know six months so if we look at our cash balance what we're going to do is we're going to take the 500 then we're going to add our loss to it so that's called your burn rate your monthly burn and then we're going to add the money raised so f plus 500 000 so then we we deduct the 80 000 that we lost and we add in the 1.25 here and then each month you can just continue to use this formula and in row 48 which is this row all we have to do is basically just copy in anything that we plan to do on the fundraising side and it'll just get added into our cash balance so you can see here that with the way that our model is right now we see our cash balance and i'm going to zoom out just a little bit our cash balance is going down so because we're burning money each month but you do see that our ebit percentage is actually um increasing each month so the business is sort of charging towards profitability at some point but the monthly burn is still 100 000 or so each month so we end up running out of money so at what point would be a good moment to raise more money well you'd want to do it you know with enough time so let's just say we we say okay month 16 we're going to raise another 1 million and if your business is by this time you know getting to 225 000 in in revenue then you know raising another million dollars would be would be quite simple because your annual run rate which is your monthly revenue times 12 is about 3 million at this moment so you could probably raise money at a sort of 30 to 50 million dollar valuation maybe higher and we're going to look at the ar mrr lifetime value cac some burn metrics in the next section below but this model here gets us to you know 24 months of a very well thought out financial model where we're where we're keeping track of our cash or raising enough money to keep growing our cac is going down over time our average customer size is going up over time and we could make a million more changes to the model if we wanted to we could increase the pricing over time we could do a bunch of other things and that's what we're going to talk about in the opportunity risk sort of discussion section of this case study okay so now let's talk about what are the best metrics to track this specific business um and so it's a software business it's a sas business bottoms up sas business so um i'm going to talk about a couple different things so with every single business ltv cac and the ltv to cac ratio so let's sort of jump in there first and so we're going to say what's your lifetime value of a company what's your cac and then what's your ltv to cac ratio and that's really what tells you sort of how you're doing so lifetime value as a company so in this scenario let's go back up to how we calculated this this 2 900 lifetime value is dependent upon the number of users staying at 5.6 but in our model we have the users increasing over time so we have a dynamically changing lifetime value however our churn rate is staying the same so how can we figure out what our lifetime value is it's not super difficult all we need to do is basically look at your um monthly price no no you need to look at your yeah your monthly price times number of users per company times your customer lifetime we know that's staying the same times your gross profit margin so we're doing the same thing but we're basically just swapping in this dynamic row here for this one and so you'll see this is the same it's the 2900 that we saw up above but as we copy this formula forward you'll see the number will change and this excel file is downloadable in the description below for you to play around with it i encourage you to download it and sort of experiment and mess around with it yourself okay so the you see that as we increase the average employees per customer our lifetime value actually climbs to 4 000. however our cac during the same time period is actually going down ing to our model so the most uh sort of interesting metric is your is your lifetime value to calc ratio this tells you you know for the money that you put into marketing what do you make back in profit and so you'll see this ratio going up over time so you see it starting at about three and getting up to about over five so um you know a really successful sort of consumer software business you'll see a cac of sort of a minimum of three and so sort of three and up is definitely where you want to be you want to be sort of um having a customer acquisition payback so your sort of cac payback period to be like around a year maybe or less so this ltv to cac ratio if it's three four five is really strong and it's looking really good especially for an early stage business earlier stage businesses have lower ltv to cac ratios as they're figuring out their product okay so what are some other interesting metrics that we should be calling out monthly so i'm going to say annual recurring revenue and monthly recurring revenue so let's look here at monthly recurring revenue is for software business where everyone is buying on a subscription all your revenue is recurring meaning all of your revenue has signed up to be billed the following month however there's certain software businesses where maybe there's an implementation cost when they implement the software that revenue is not recurring so you need to break out what is one time revenue and what is recurring revenue because your occurring revenue is far more valuable from a valuation standpoint because it's very sticky because it's you know 40 000 of recurring revenue is going to be worth you know hundreds of thousands of lifetime revenue whereas 40 000 of one-time revenue is only worth 40 000. so you want to break out what's your recurring revenue and your annual recurring revenue is just this times 12 and what does this tell you this tells you that if you do this revenue every month for a year your revenue is going to be 483 000 for that year so it's something called a run rate it tells you sort of this is what we're pacing towards um in a given period of time our business is around what would be annualized at a 500 000 revenue per year number so you want to call out it's called your arr and your mrr so there's another metric that i want to call out which i saw recently which i just thought was pretty cool for sas businesses um and it's called a burn multiple so a burn multiple i'm going to calculate this and we can talk a little bit about what it means so this is your net burn then your net new arr and then one divided by the other is going to be your burn multiple multi multiple okay so actually let's just copy this forward because we're going to use these numbers in our burn multiple so the burn multiple is a is something that relates how much money we're losing to how much revenue we're gaining so your net burn is here operating income so i'm going to put a negative sign in front of this so we're burning 79 000 this month and so um in fact we won't have it for this month because we don't know what our net gain in revenue is so we'll start in month two okay so your net new error this is how much annual recurring revenue did you gain in this month so there's two ways you could calculate this you could take your monthly revenue and what's the increase your increase is 5000 and multiply it by 12 or you could just take your arr subtract it from the prior month and you'll get the same number it's the same exact idea so you burnt 80 000 of cash but you were able to bring on revenue that should be worth on an annualized basis about 62 000. so your burn multiple is your burn divided by the net new arr so here is our starting point 1.27 so there's a well-known um venture capitalist and sort of founder named david sachs he works at a company or he's one of the gps at a venture fund called craft ventures and they basically specialize in b2b sas they write a blog i saw this burn multiple on their blog of something they track with their portfolio companies and this was the table this is taken sort of exactly from the blog and what they say and let me just copy this across so we can actually sort of see so it starts at 1.3 and then it goes down to 0.21 so they say that less than 1 is amazing 1 to 1.5 is great 1.5 to 2 is good and then sort of up from there is either suspect or bad so fortunately our business starts in the great category and then it moves into the amazing category and this just means that you know if we put in 80 000 of burn of investors are putting in money and we're burning through that money how much are we growing the top line so it's kind of a way to look at the sort of like roa roi on investor capital in terms of sort of like increase in valuation for the company and it is a really good measure of product market fit if you need to spend an incredible amount of money and burn an incredible amount of money to get just a small amount of new revenue then this multiple is going to be really high and it's going to show you that maybe people don't like our product that much if we're having to work this hard to sell it um but you know if we put in you know a smaller amount of money and we can increase our revenue it means that people are loving our product they're not turning off too fast and the reason here we see our burn multiple going down over time so why would this be so our customer acquisition cost is going down a little bit but our burn multiple is going down like 80 and so the reason is because basically we're getting more efficient in our operating expenses so our team is growing but because the efficiency of our team is going up over time it's not growing as fast as the revenue so our margins are increasing because of that so same with consultants same with miscellaneous we're not growing our expenses we're growing them more slowly than our revenue so our margins are increasing and our burn sort of relative to the revenue is decreasing over time so our margins are are getting better over time so you see the burn multiple going down because we're getting more efficient so these are the sort of um different metrics that i would highlight for this business so given that we just built this whole model we've had all these discussions how can we think about you know what should this business do so i'm going to call it out as a couple i'll just create a couple buckets for you while i sort of brainstorm out loud opportunities risks and i'll give you my recommendation if i was coming in as a sort of like a cfo or or i was building this company myself sort of like what seems obvious to me to to do okay so opportunities okay um let's just okay so the one big opportunity is spend more on marketing so if our burn multiple efficiency is just like so insane that it puts us in a category of startups um that is like this very tiny um decile of startups probably we're underspending on marketing and we'd be growing way faster and given that our efficiency is so so high we could actually spend a lot more on cac and still have a very efficient business so so i'm going to just write this down so grow faster given that our efficiency is so high we can tolerate a much higher cac to accelerate growth so i see this a lot when i go to work with sort of early stage startups if their cac is really low if their ltv to cac ratio is like 10 or 20 usually just means it's usually a bad thing it usually means they're leaving a lot of growth on the table because they're not pushing a little harder which might increase their cac but they would still be acquiring incremental customers at a profit and so they'll have a larger more profitable business if they push harder but they're just getting the lowest hanging fruit where they could maybe be going to the middle of the tree and still making money on customers and growing way way faster so the first thing i see is probably they're underspending and they're undergrowing so they could grow faster what other opportunities do you have on the revenue side you know expanding your sort of lifetime revenue per customer so like try to create maybe um usage-based features to increase revenue per user so maybe there's like storage maybe they can store documents in their chat app or or something like that or maybe you don't want to build it yourself and instead what you do is you integrate other people's storage software and you say you cross sell other products via affiliate partnerships um so instead of building them ourselves so you just go to you know box or dropbox or google and you say hey we'd like to sell your services to our customers pay us you know 40 of what you make and we'll just sort of like integrate your product in um and a lot of businesses create like these affiliate models roku does it a lot like they built this software and then they sell subscriptions to a lot of other softwares from within their operating system and then there they make an affiliate fee so affiliate partnerships are can be very lucrative once you build the sort of network of users so check this out if we slow the growth down because we spend so much on marketing if we were to slow the growth down to say five percent we're basically break even so five percent we basically break even four percent you know then we're we're making a profit three percent so with these businesses where you have to put in so much money up front then you spend 15 months just trying to break even on that customer then finally after 15 months you make a profit if you just slow your marketing down you become profitable immediately and so that's a massive massive lever that this company has so if we if we i'm going to write this down if we slow growth down to five percent we become instantly profitable so that's a powerful lever in emergencies so let's say that the economy softens and there's like some really bad economic recession and we can't fundraise no one will put money into our business well what we could do is slow down user acquisition basically turn our marketing off or turn it way down and just turn a profit and just ride it out because we're enterprise software we'll have that recurring revenue we'll be able to make a lot of profit and we can wait out the storm until we can start fundraising again a lot of businesses do not have this option they need to fundraise through all economic environments because they're basically hemorrhaging so much money so a big opportunity is the fact that we can slow down growth and make money at any moment if we want to okay um also an opportunity what changes can we make to our product to reduce churn so how can we increase customer retention if we increase customer retention so reduce the churn if we got this to 1.5 percent well now your customer lifetime value goes way up as well so you know how can we increase the number of users per customer how can we increase the price how can we decrease the churn so it's usually that usually has to do with product what changes can we make to our product maybe we can add features and then another opportunity is probably start an enterprise sales team to sell top down into larger companies and push our average customers per company up more quickly so this is the traditional way of selling software which is you try to approach the executive teams at startups or at other companies and sell your product in top down so maybe we should be going at it bottoms up and top down and so that's the sort of natural evolution of software business okay what about risks um well the biggest risk i think is churn so if we think about churn even at a one 2.1 percent we're saying okay 2.1 percent times 12 so that's a 25 annual churn rate so every three to four years we're losing a hundred percent of our customer base so churn we have um to rebuild our customer base completely from scratch every three to four years at a 25 annual churn and by the way 25 annual churn is extremely low a lot of um b2c businesses have a five to ten percent or more so they're rebuilding their entire customer base every single year so you know we could run out of tam that's the you know total addressable market um to sell into i mean for how many years can you rebuild your entire customer base every three to four years and um still grow your revenue at the same time so that's you know it's called the leaky bucket so churn is always a risk with software businesses okay so by the way 2.1 is really low so churn rates churn can go much higher than 2.1 5 would mean we lose 60 of our customers in a year okay so if that happened we would have to do a tremendous amount of customer acquisition every single month so so the cac can always spike if we are heavily dependent on paid on paid advertising so that's a huge risk you know if we're losing our customers and having to reacquire them all the time and competition on facebook increases which by the way competition on facebook increases every single year generally i see the cost of advertising on facebook increase 30 to 40 percent every single year so it's a very difficult situation startups are up against um so given all these these sort of opportunities these risks what would i recommend okay so here's what i would do if i was a founder this is my business or i was like the cfo or if i was just doing this case study so first thing you need to do before you fundraise is you need to lay out a vision so i would say a vision is getting to over a hundred thousand let's say a hundred thousand paying users so um if it's an average of sort of six users per company so that's like 17 000 companies so 17k companies which would get us to so at 1299 1299 times 100 000 times 12 so your arr okay that's like a 15 million dollar annual run rate um 15 million arr in three years so remember our model has us getting to if we zoom out a little bit in terms of users let's look at this here at the end of year 2 36 000. and so we're saying in year 3 we want to kind of 3x that which is a nice growth trajectory so we're saying you know in three years we want to get to you know 100 000 users and that would get us to a 15 million arr and if we got to a 15 million arr in three years probably we could be valued you know in a reasonable market at 15 times revenue which would give us a 225 million valuation so if your valuation is 225 well you can go out and you don't need to sell that much equity to raise a big check you can sell you know if you sold 10 you could raise 25 million dollars but you know let's say you sell three or four percent you can raise 10 million dollars and that gives you an incredible amount of money to do customer acquisition so once you start getting to the bigger valuations you actually don't have much solution most of the dilution is in your early stage and your series a that's where you'll have like 40 dilution and serious b and onwards then there's there's not that much solution sometimes you're only selling you know sometimes even just one percent of your company so that's kind of what we want to get to and from there we can use our market value and our market cap to really scale so also my recommendation would be use the increased efficiency in the opex to re-invest in marketing so you see your your burn your burn multiples going way down because you're sort of you know have this really efficient opex i would just spend more on your cac and grow faster okay so so just to call that out i would say allow cac to rise and burn multiple to go as high as let's say one scaling much more quickly than this model so if you know the best most efficient companies have one or less well then maybe we can put the ceiling up to one and accelerate that growth because at the end of the day um the more customers we can acquire in the beginning the larger our cash flows are going to be 5 or 10 years out so we just want to basically scale as fast as we can and reinvest all the money that we can because once we start getting big we can raise a lot of money without a lot of delusion so what other ideas do i have so i always think about generating leads and then customer acquisition so in terms of generating leads let's say we launch a one month free trial to increase customer customer acquisition leads so you'll see this with a lot of software products will say okay try it for a week for free or a month for free and then during that time you become dependent on the product and you're like wow this is really great and then you're happy to pay at the end so that could maybe increase conversion for us what about launch a referral program with multi-month discounts for both parties okay so let's say you know you're working in a company and you want to invite your co-worker who's sitting next to you and you say hey i'll send you this invite link you'll get three months for free i'll get three months for free then your co-worker is going to say wow this is super cool and then he's going to invite his coworker and so referral programs with very generous discounts a lot of times can really accelerate your organic revenue growth as well what else can we do to sell more so again hire the enterprise sales team to sell top down so let's say now you know we're generating a lot of leads we're more and more organic revenue we're scaling much more aggressively with our cac you know we're raising a lot more money let's say at this point we want to identify the largest non-english speaking market to begin selling into and begin and and let's say localize the product for it so obviously english speaking the english-speaking market is very big globally but there are you know massive areas of the world that you know like latin america where there are so many tech companies and and there are huge markets but you'll need to basically you know rebuild the product and maybe you know sort of rebuild the sales team so that you can keep expanding your your product globally and then of course continue to tap venture markets to fund cac as long as conditions allow and again you can always just slow it down and turn a profit whenever you want and from the 15 million let's say 15 million arr target try to double the business annually for three consecutive years to hit 120 million arr and ipo so if you're out of 15 million times three you're at 45 times three you're at 135. so so let's say times 2 you're at 30 times 2 you're at 60 times 2 you're at 120. so if you can just double from that point every year for three years 120 million ar company would be able to have a huge ipo for sure more than a billion dollars maybe multi-billion depending on market conditions so that would be my recommendation you know focus on generating more leads finding more sales channels finding more markets to scale into okay so i hope this gives you some perspective on how to work through a real life finance case study by the way if you want me to teach you everything i know about finance for startups in a small group with personalized support again join the wait list in the description below for a chance to join the next cohort of my training program finance for startups as always in the description below you can download this excel file completely for free and if you found this content valuable please like and subscribe only 10 of the people that watch my videos are actually subscribed to my channel it would help me a lot thanks for watching and i'll see you in the next video