Financial Modeling Part 4 – How Fundraising and Dilution Impacts YOUR Equity as a Founder
Transcript
The last time we talked about financial modeling, we came to the conclusion that spending more money in customer acquisition was going to help us grow the business faster. Go figure. In this case, for Dollar Cave Club, that more money was in marketing. If you remember, we increased our monthly spend from $10,000 a month in Facebook and $10,000 in Google to $40,000 each. It was awesome. We ended up with more cash and more revenue. Except by spending more money, we actually dug a hole and went negative.
negative and we're out of business in the first year because we ran out of cash.
And the question I left you with was we'd have to raise an extra 50% in the first round.
Would you as the entrepreneur rather keep it the way it was spending 10,000 a month on
each platform or raise 50% more in your first round and spend more money in customer acquisition?
And what I'm here to show you is that while a financial model is something that most people
think about for producing an income statement, a statement of cash flows, and a balance sheet,
you can model anything in your business, including valuation and fundraising.
And so I'm going to show you how we did it here and what the result is.
So let's take a look at the model.
If you remember correctly, this is the $500,000 in the bottom right-hand corner.
how much cash we had at the end of five years in our base case.
But I also modeled something else.
On the left-hand side in my assumptions tab,
I have lots of assumptions that I haven't showed you yet,
including how much we raised in the first round and the second round
and this multiple for enterprise value.
Specifically, I chose 5x.
You can put in any number you want.
But for a SaaS business, 5x seemed reasonable.
And so with that number and how much money we raised and what our revenue is on the monthly balance sheet, what I ended up doing was approximating the value of the company.
Here's the balance sheet.
The value of the company, the founder's portion of that value, and what dilution was created with each raise.
And you can see there's a lot of stuff here.
It's all in light gray, but it's all of the detail that allows me to ultimately calculate
how much money the founders have and what it's worth.
And so if I go way out here to the end, you'll see that the founder's value is roughly $14 million.
A much easier way to visualize that, though, I did with some graphs.
So I created a chart, and I have a couple of charts here.
This first chart is revenue and expenses.
Expenses are in red.
Revenue is in blue.
you'll notice that they don't cross. We don't get to cash flow positive until about month 53.
The second chart is cash in the bank. You can see we take our million bucks, we spend most of it,
we raise two and a half, we spend most of it, and right around month 53 our cash starts growing
because our revenue exceeded our expenses. But I created a third graph down here called
Founders Equity Value, and this shows how much your equity as a founder is worth,
and it caps out right at about $14 million.
So going back to the fundamental question,
which was if we were to look at the annual cash flow
and we were to say, wow, we know that the annual cash flow
looked much better when we spent $40,000 a month.
Wow, we went from half a million to 2.2.
However, we were in the hole here at the end of year one.
So that forced us to raise more money
let's raise 50% more another $500,000 which takes care of our problem with leg cash we have that
extra cash at the end but what did that do to our founder's equity value and I will reveal that
with the chart you'll see that in the new charts as they update that the revenue exceeds the expenses
is much earlier because we're getting more customers. Now it's in month 36, not in month 53.
You'll see that we have a lot more cash in the bank and the dilution kicked in, but you can see
the numbers are tiny, but you're worth almost $30 million instead of 14. The point of this exercise
is to show you that you can model anything about your business. It's not just the financial
statements. It can be how much money to raise. It can be what your portion of that equity is worth.
And if you use a financial model to do that well, you'll make better decisions,
not just about running your business, but better decisions for you as an entrepreneur.
Last time we left you with a question, would you rather keep the Dollar Cave Club business as is? Or raise 50% more capital to spend more on customer acquisition? We know that we will become profitable sooner, but is it worth 50% more dilution? Today, we are looking at how to model both your fundraise and your founder equity.
Originally published on the MATH Venture Partners blog.