How to Use Your Financial Model After building your financial model, you can use it in several ways. Here is a list of use cases: Raising funding for the business by determining how much you need to raise and when. Generate financial forecasts and projections for managing the business. Project…

What to Include in Your Financial Model In building your financial model, make sure you include the following: 1. Revenue projections — your estimate of revenue from all sources. 2. Cost of Goods sold — your estimate of how much it will cost to build and deliver the product or…

How to Build a Bottoms-up Financial Model There are two approaches to building a financial model: top-down and bottoms-up. The bottoms-up approach uses specific data from your financials, such as historical revenue, specific expenses, working capital, etc. You apply assumptions to the historical numbers to build out the projections. To…

How to Build a Top-Down Financial Model There are two approaches to building a financial model: top-down and bottoms-up. In general, you should use a bottoms-up approach for preparing the financial projections, which will be more detailed. To build a top-down financial model, consider the following: Start with the size…

Benefits of a Financial Model Many startups build a financial model to show the investors and then leave it alone ’til it’s out of date and no longer useful. The benefit of an up-to-date financial model is that it can actually help you make management decisions. Here are several ways…

How to Build a Financial Model It’s best to build your own financial model so you understand it thoroughly. Here are the steps to build your financial model: Define the goal for the model.   Figure out how you will use it and what decisions you need to make. This will…

Why Build a Financial Model? In building a startup, the financial model is a key step in validating the viability of the business. Templates can educate on what to include and how to format, but it’s best to start from scratch. Every founder should build their own financial model at…

Founder Business Skills Required In starting a company, there are key skills required of the founder: Here is a list of basic skills: Team building — the founder must find a co-founder, build a board, and make the initial hires. Leadership — the founder must set the vision of the…

Metrics for B2B SaaS Here are the key metrics for B2B SaaS startups: Committed Annual Recurring Revenue (CARR) – this shows the overall health of the business as it includes new users as well as churn. To calculate, take the current ARR and add new bookings and upsells, and subtract…

Metrics Investors Use Investors also use metrics. Here’s a list of key metrics investors focus on: Annual Recurring Revenue (ARR) Growth – the overall growth rate of the revenue is a key factor. Month-over-month growth demonstrates product-market fit. Magic number – shows how sales and marketing spend drives revenue. To…

Your Top 3 Metrics  There are many metrics you can use for your startup. Focus on these top three metrics for your startup at each stage: For pre-seed, focus on qualitative activities such as customer interviews and community development. Track the number of calls made, the number of interviews completed,…

Efficiency and Predictability Metrics In addition to growth, there is efficiency to measure. This is important to consider as you grow your business. Here are some key metrics to use: Magic number – shows how many revenue dollars your sales and marketing dollars generate. To calculate, take current quarter revenues…

Metrics for a Downturn Economy In a downturn economy, metrics can help you make decisions about your business. Here are some key metrics to consider: Net burn rate – measures the actual cash lost in a single month.  To calculate, subtract the total revenue from the total amount of money…

Segment Your Data In running metrics, it’s important to segment your data as you grow. Segmentation helps identify the factors driving growth. Here is a list of ways to segment your data: 1. Location – the geographic location of the customer such as city, state, region, or country. 2. Industry…

Meaningless Metrics   Some metrics are actually meaningless and tell you little about the business. Metrics should demonstrate customer interest and satisfaction through commitment of time or dollars. Here’s a list of metrics to avoid: Number of downloads – by itself, it doesn’t show the level of interest or progress. A…

Marketplace Metrics  Here are the key metrics for marketplace startups: Match rate – the rate at which buyers and sellers engage with each other. To calculate, take the number of transactions in which there is a successful match and divide by the total number of attempted transactions. Time to match…

Customer Traction Metrics In raising funding, customer traction is a key focus point. Here are the metrics for measuring your traction: Customer acquisition – this includes all sources of leads such as website, email, social media, and referrals, as well conversion of leads to customers. You can look at these…

Challenges With North Star Metrics The North Star Metric seeks to capture the essence of a business in just one metric. It makes decision-making easier. Anything that doesn’t foster that metric is deprioritized. It does change over time as the company’s priorities change especially with growth. It’s not always a…

Finding Your North Star Metric The North Star Metric is the one metric that drives the growth of the core business. Founders use it to focus the company around a common goal. Some startups focus on signups, others focus on retention, and still, others focus on engagement. If you don’t…

Operational Metrics An efficient operation is one key to a startup’s success. Here are operational metrics you can use to check your startup: Basic efficiency – measures the overall efficiency of the business.   To calculate, take operating expenses divided by the revenues.   The smaller the number, the more efficient the…

Product Metrics The product is the core focus of the early-stage company. Here are two key metrics for understanding the performance of your product: The Heart Metric measures the quality of the user experience with the product. Here are the components of it: 1. Happiness – measures user satisfaction and…

Scale-Stage Metrics After the growth phase comes the scale phase in which you ramp up the business. Here are the key metrics to consider at the scale stage: 1. Break-even per customer – this shows how many days until the new customer turns profitable. This is a key factor if…

Growth-Stage Metrics Once you have product-market fit and start seeing growth, consider these metrics for your business: 1. Activation rate – the percentage of users achieving some step in activating your product. This helps you determine where users are dropping off. 2. Active users – the total number of users…

Startup Customer Success Metrics Once you have customers, the next step is to measure their success with your product. Here are some key metrics to use: Net Promoter Score – also referred to as NPS, this metric measures how loyal the customers are to the company. The metric asks the…

Seed-Stage Metrics Seed-stage startups have a few users trying out a beta product. The startup is working on the go-to-market strategy and focusing on customer acquisition. Key metrics to use are monthly unique users, monthly new leads, customer acquisition rate, and churn rate. This measures basic customer acquisition. To measure…

Start With Your Key Metric There are many metrics you can use to guide your startup. In the growth stage, start with your key metric that captures what drives growth. You can either focus on the total number of users or look at the total number of actions the user…

Unit Economics In the early days of a startup, the revenue is small. Instead of focusing on the absolute size of the revenue, focus on the unit economics of the business. Unit economics shows your business model on a per-unit basis. Measure the cost of acquiring each customer and the…

Pre-seed Metrics At the pre-seed stage, startups should focus their attention on engagement and referrals. Track how many visitors you can draw to your website. See how many of those visitors sign up for a trial.   The conversion rate is more important than the absolute number. See how many referrals…

Metrics by Stage of Startup Startups move through stages from pre-seed to seed to growth to scale. The metrics you apply should adjust to the stage of the company. Here’s a list of metrics by stage: Pre-seed – when you have an idea, use qualitative metrics and focus on basic…

Metrics by Stage of Life Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing. Startups go through three stages of life: product, growth, and operations. In the first stage, the startup focuses on the product. The objective is to…

Metrics by Startup Objective A startup’s objective changes as it moves from early to later stages. Here’s a list of metrics by stage objective: In the earliest stages of the startup, look for conversions.   Basic validation is important to prove the market wants the product. This exercise will teach you…

3X in 3 Terms I analyzed the results of several angel networks and found that 65% of the investments after three years were still in business but were no longer on the venture track.  In most cases, they were growing businesses but were not going to be bought out for…

Startup Success Rates The early-stage failure rate of startups is quite high. Out of 100 startups, only 40% go to the next level at Series A. Only 22% of startups reach Series B. Only 15% of startups reach Series C. Only 8% of startups reach Series D. As for the…

Payback Plans Not every funded startup continues on the venture path to a high payoff from the sale of the business.  For those startups, investors using an early-exit term sheet can find a path out of the deal. There are several options for the startup to pay back the investors….

Redemption Strategies In an early-exit term sheet, the investors have the right to redeem their stake in the company before an acquisition. There are several redemption exercise strategies. The first strategy is to recover the principal investment.   This makes the investor whole and now lets them play with “house money”….

Key to Facilitation Is Operational Involvement In managing an early-exit term sheet, it’s important to facilitate the ongoing information rights due to the investors. Most term sheets provide rights to the company’s financial statements, including the income statement and balance sheet as well as the cap table. This duty is…

Redemption Facilitation Process In an early-exit term sheet, it’s important to have a redemption facilitation process. This includes the steps for setting up the bank accounts, capturing the investor’s interest, providing payouts, and investor updates. The process also tracks escrow of repayment funds and later, revenue share payments to complete…

What Is a Cap Table? In raising funding, investors will ask for a cap table. Cap Table stands for Capitalization Table and is a document that tracks the capital structure of the company. In essence, it shows who owns how much of the company’s equity. So, a company that has…

Challenges in Building the Startup Community There are challenges in building a startup community. It doesn’t happen by accident and it takes a focused effort over a period of time. Here are some challenges to watch for and overcome: Choosing another community’s strategy instead of your own. It’s common for…

How to Launch a Startup Ecosystem For those who want to launch a startup ecosystem, follow these steps: – Start with a group interested in startups and meet regularly. – Encourage startups to share their projects and invite others to support through coaching and making introductions. – Set up a…

Signs of a Strong Tech Ecosystem In building out your startup ecosystem, look for these signs to know if you are on the right track: – Does the ecosystem have strong clusters of founders and developers that meet up regularly? – Does the local community foster the startup ecosystem? –…

Assessing Your Startup Ecosystem  In building your startup ecosystem, take time to assess its effectiveness. Here are some key points to look for: Do entrepreneurs connect and learn from each other? If not, set up events to increase the interactions and foster interactions. Do the entrepreneur groups share resources? If…

How to Get the Most From Your Startup Ecosystem  For those who want to engage with the startup ecosystem, here are some key points to consider: Know why you want to engage with the community and what you want to take away from your experience. The best way to meet…

Building Your Startup Ecosystem Resource List In building out your startup ecosystem, start by identifying the resources in your area. Search for the groups that foster and support startups. This includes the following: – Incubators and accelerators. – Coworking spaces catering to early-stage companies. – Local media organizations that feature…

Organizations of a Startup Ecosystem Take inventory of your startup ecosystem for what currently exists and what does not. Here’s a list of organizations to look for: – Universities that provide the founder talent. – Angel groups and other investor networks for funding the startups. – Venture capital funds providing…

How to Attract Startups to Your Startup Ecosystem  In building your startup ecosystem, recruit startups to move to your area. Here are some best practices to attract them: It takes technical and business talent to build and grow startups. Highlight the talent available in the area, both experienced and those…

Where to Focus Your Startup Ecosystem In building your startup ecosystem, focus on the strengths of the community. Interview the local economic development group to find out what startups already exist. Talk with investors to find out their interest in startups to fund. Review the local businesses in the community…

How to Build Out a Startup Ecosystem In building out your startup ecosystem, consider these points: Start with five successful serial entrepreneurs. Identify their sector and type of business. Interview them on how to multiply those businesses. Target their sector for growing new businesses. Figure out what additional resources are…

Steps to Building a Startup Ecosystem  In building the startup ecosystem, the entrepreneurs drive it. The role of the ecosystem builders is to create connections and networks. Here are some tools for building connections in your startup ecosystem: Robust set of meetings, happy hours and coffees, and activities that bring…

Components of a Startup Ecosystem A startup ecosystem is a network of startups, investors, and others who come together to foster startup formation and growth. It is fueled by talent, funding, and customers. In building your startup community, tap successful serial entrepreneurs to lead. Use their star power to capture…

What Is a Startup Ecosystem? A startup ecosystem is a network of startups, investors, and others who come together to foster startup formation and growth. The network fosters innovation through shared resources such as capital, talent, and mentorship. At the core of the network are startups led by founders who…

University Angel Network vs. Traditional Angel Network The university angel network has similarities and differences to a traditional angel network. They both consist of a group of investors interested in funding startups. They both want to make a return on their investment. They both want to socialize with others. They…

Finding the Champion In launching an angel network at a university, it takes a champion to see it to fruition. In addition to a business school sponsor and five check-writing angels, you’ll need someone who will be the champion for the group. The champion needs to be well connected with…

Retaining Members In running a university angel network, the attrition rate is often lower than for non-university angel networks. The university group has a great answer for “Why invest in startups?”. Many members join to support the university. The group’s primary purpose is to provide the student with an educational…

Offline vs. Online Meetings In running a university angel network, consider both offline and online meetings for the members.  Online meetings allow you to run education sessions, screening meetings, and pitch sessions along with diligence follow-up. Since the members need not travel to campus, these can be short half-hour calls…

Fund Documents In setting up a university angel network, you’ll need fund documents for the prospective members to review. You’ll need to establish a legal entity for the fund, typically an LLC. After that, you’ll need to write the company agreement documents.  This includes the formation of the fund, its…

Why Set Up a Fund? Consider setting up a fund early on for your university angel group. For every one alumni who joins the angel group, there will be three who will join the fund.  Angel investing takes time and many will not be able to participate in pitch meetings…

Student Participation Is Important Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing. In setting up a university angel group, the student experience is the primary objective. To ensure the success of the group, set up a program for…

Where Does Making a Return Fit In? Many angel investors want to support their university group, local entrepreneur ecosystem, and more. The primary goal is building up their local community or network. In addition to supporting the community, the investor needs to make a return on the investment.  Investors will…

What Is the Mission of the Group? In starting an angel group at a university, the key mission of the group is not to make money. Supporting the university by providing students with a quality academic experience and job placement is the primary goal. Alumni who join the angel group…

Providing Mentorship to Startups Angel groups are often asked to provide mentorship to startups. Here are some best practices for engaging your angel investors into mentorships with startups: Start by matching the investor with the startup based on the business model, sector, and stage of business. Identify a specific challenge…

Who Else Should You Involve? In launching a university angel network there are legal considerations specific to the university to keep in mind.  A university is a non-profit and therefore cannot participate in startup investing. The first step in launching a group is to contact the university legal counsel about…

The Two Keys to Success A university angel network is a group of investors formed around the affinity to a university. The primary goal of it is to provide student experience and job placement. Making money from the investments is secondary. There are two keys to successfully launching an angel…

Why Start a University Angel Network? A university angel network is a group of investors formed around the affinity to a university. It typically consists of alumni and supporters of the university. So why start an angel network at a university? It’s a great way for alumni to connect back…

Why You Should Move Your Angel Group Online As the world moves online, so you should move your angel network online as well. This includes your screening process, presentation meetings, diligence process, and education sessions.  The screening process can be made more efficient by capturing 1-3 minute pitch videos from…

Meeting Considerations In setting up your angel network you’ll need to set up the meetings. Here are some key points to consider: 1. How many deal flow cycles are you planning? 2. Are you online, in person, or both and at the same time? 3. How will you set up…

Working With Other Angel Groups In setting up an angel network, it’s important to build relationships with other angel groups. Here are some key points to consider: 1. Other angel groups can provide additional deal flow to your group. 2. They can provide follow-on investment for your funded deals. 3….

Sponsorship Issues Sponsors bring needed financial support to the angel network. Here are some key points for managing sponsors: 1. Keep the number of sponsors low so it’s easier to manage. 2. Allow a limited number of sponsor representatives to join the meetings so they don’t overwhelm the members. 3….

Consider Service Providers In setting up an angel network, it’s important to have support from services providers such as lawyers, accountants, and financial advisors. Startups will need legal, accounting, and financial support. Review your community for current service providers who are already helping the startups. Assess the skills of the…

Educating the Members In running an angel group, it’s important to educate the new members on how to invest in startups. Most new members will not have experience with startup funding. It’s important to set up an education program for the members. The members will receive education through the process…

Communicating With Members In running an angel group, it’s important to communicate your membership criteria and organizational structure to prospective members. The website and associated documents should make clear not only the membership criteria, but also the process to become a member, and how the group is structured. It also…

Setting Membership Criteria In setting up an angel network, you need to determine the membership criteria. Here are some points to consider:  The Securities and Exchange Commission or SEC sets the investor criteria to allow for investments into startups. Members must meet the SEC criteria for accredited investors. Make clear…

Funding the Angel Network Program In setting up an angel network, you need to fund the program.  Here are some funding sources to consider:  Most angel networks charge a membership fee to cover the expenses for running the program.  For those groups using the fund structure, a management fee or…

Choosing the Investment Structure In setting up an angel network, you need to choose an investment structure. Here are some structures to consider:  Individual investments — the members can each decide if they want to invest and how much to invest in each deal. This allows for maximum flexibility for…

Choosing the Regulatory Environment As angel networks expand across the globe, those groups outside the U.S. should also consider their local regulatory environment before launching an angel network. Here are some points to consider: 1. Is there a legal environment that allows for investment structures for venture funding? 2. Are…

Choosing the Legal Structure There are several legal structures to use when setting up your angel network. Most angel networks form a Limited Liability Company or LLC. This gives the angel network a legal entity with which it can conduct business. The members often pay an annual fee to fund…

Choosing the Organizational Structure There are two ways to organize your angel network: member-led or manager-led. Member-led groups let the members source deals, lead the investments, and recruit the members. They hire staff members to handle the administrative tasks. Manager-led groups hire experienced professionals to perform key functions such as…

Challenges in Angel Investing Angel investing can be fun and financially rewarding to the investor as well as helpful to the startup. It can also be challenging. Here are some challenges to consider: Angel investing requires hands-on work with the startups not only in funding but also in supporting them…

The Benefits of an Angel Network An angel investor will find many benefits in joining an angel network. The angel network can build resources to share with the angel such as due diligence. This is time-intensive work, so it helps to share the load. Angel networks provide more and better…

Should You Start an Angel Network? Before launching an angel network, assess your community as follows: 1. Do you have accredited investors interested in startup investing? 2. Do you have any investors who will take the lead on diligence and investing for each deal? 3. Do you have a champion…

In running an angel group, it’s important to provide regular reports for the investors about the investments as well as the state of the group.  For individual investments, negotiate regular updates from the startups to include the following: – Sales reports tracking leads, pipeline, and closed sales on a monthly…

A key part of angel investing is negotiating terms with the startup. It’s important to take time to negotiate good terms for the investors in your group. Key areas to focus your negotiations include the following: Valuation – this is the most important term as it determines equity ownership and…

In running an angel network, it’s important to drive the funded startups toward an exit. Investors funded the companies with an expectation of a return typically in the 5 to 7-year timeframe. While some startups will fail and shut down completely, most startups continue as ongoing businesses. It’s important to…

After investing in a startup, it’s important for the angel investor to determine their role with the startup. There are several roles to consider: The investor can take an advisory board seat and provide coaching to the startup on an informal basis. The investor can take a board seat and…

There’s risk in startup investing as most investments don’t pay a return to the investor. In running an angel network, one must take steps to mitigate liability. It’s a best practice to have all members sign liability waivers stating they understand the risk of startup investing and take responsibility for…

 In running an angel network, it’s important to set up a due diligence process. Diligence can take a substantial amount of time, so there needs to be a prescribed process for the members to follow. The process needs to be led by those with experience in diligence and startup investing….

In running an angel network, it’s important to set up several sources of startups seeking funding called deal flow. The best source is angel group members. Continually check with your members to see what deals they’ve seen or heard about. Other sources include the following: Incubators and accelerators often have…

The deal screening process is a key program for an angel group. The process needs to capture all available deals in one place for review. For each deal, sufficient information must be provided by the startup including their revenue, sector, product stage, and fundraise sought. The screening process can be…

In running an angel network, consider using online events for the program. Here are some key tools for creating successful online events: A website. This keeps track of scheduled events with information about each one including the name of the event, description, who should attend, and associated documents. Event registration….

Warrants give the holder a number of shares to be exercised over a specified period to buy the company’s stock.  Warrants play a key part in venture debt. Companies offer warrants in exchange for a lower interest rate on the debt. Investors offering venture debt use warrants to gain access…

Litigation funding provides investments to businesses seeking to litigate a lawsuit.  Lawsuits come from businesses suing other businesses, tenants suing landlords, startups defending their intellectual property claims, and more. The one pressing the lawsuit needs funds to carry it through the courts.  Investors receive a return when the business wins…

Revenue-based funding makes a startup investment and pays back the investor at the rate of top-line revenue. This aligns the investor and founder to the same goal – to create a business and grow sales.  The higher the sales, the faster the payback to the investors and the higher the…

Salary-based funding makes a startup investment and pays back the investor at the rate of compensation the founders take. This aligns the investor and founder on the same goal, to create a business that can sustain itself and pay the team. The investors receive an agreed-upon percentage of any salary…

As your company grows and the equity becomes worth more, there comes a time to switch over to debt funding. There are several forms of debt to consider. Each one is used for a different application.  The primary options are as follows: 1. Traditional bank loan – requires a personal…

Growth startups can raise not only funding for equity but also funding for debt called venture debt. Venture debt doesn’t dilute the founders and provides capital to continue the growth. Here are some key terms and conditions to know when looking for venture debt: There are term loans and revolving…

Venture debt is not for every startup or for all fundraises. It is best used in conjunction with an equity raise. The equity funding provides ongoing working capital that doesn’t need to be paid back. It works well between equity raises from institutional investors. The business must be up and…

Venture debt can reduce dilution and give your startup more runway. Here are a few pointers to see if venture debt is a good fit for your fundraise: It’s often used with equity funding for purchasing equipment, making acquisitions, or making up for funding not acquired through the equity raise….

Venture debt is on the rise in the startup world as more startups find it a useful part of their fundraise strategy. It’s a form of debt financing for venture-backed companies that lack the assets for traditional debt funding.   Venture debt has been around for as long as venture capital…

There’s an old saying in the angel world: If you want money, ask for advice. If you want advice, ask for money. In raising funding, most founders spend their time selling the idea to the investor. An alternative approach is to collaborate with the investor. The selling approach uses the…

Founders need to bring startup mental models to bear on their business. Here’s a list of key mental models to know: 1. Least worst option — use this model when all options are not ideal. 2. Jobs to be done — use this model to discover how your product fits…