(This is the second of three blog posts on financial models for startups.  Yesterday I wrote about best practices in spreadsheet design.)

I couldn’t find a good template financial model online, so I decided to create one.

We started with a sanitized version of a financial model I had developed for startups I have run.  I gave it to Rodi Blokh, who dramatically improved and formalized my model to be suitable for publication.  Rodi (Haas MBA '13) is a former corporate banker at Bank of America Merrill Lynch, and interned at Track.com this summer, and has extensive financial modeling experience. He did a great job refining this and making it user-friendly.

Download the template financial model in Excel here.

This is designed to be a simple end-to-end financial model for an early-stage startup.  The model outputs standard financial statements and key operating metrics based on a wide range of user inputs, and is highly customizable and entirely transparent.

Unfortunately, most financial models are built for established businesses, and therefore force assumptions (like terminal growth) and calculations (EBITDA multiples come to mind) that a startup has no need for.  The model seeks to serve as a robust option for entrepreneurs that wish to analyze the operating side of their business, but does not constrict against pivots and technological disruptions.

The Income Statement sheet allows you to model expenses and revenues as they occur.  Unlike the Cash Flow Statement, which records movement of actual cash, the Income Statement records and projects items like depreciation, which see no physical cash flowing each year, but are accounted for over multiple years.

The Balance Sheet takes a snapshot of your company at an instant in time; the assets on hand when it is produced do not necessarily correlate to dates before or after.  Here you will see listed assets, liabilities, and equity.

The Cash Flow Statement, for a startup, will often prove particularly important, as it will tell you whether or not you can do the essential tasks like pay employees and bills.

We included a Discounted Cash Flow Valuation tab for the sake of completeness, but it’s irrelevant for most startups.  Projecting cash flows for a startup is a guessing game.  Startups really see their valuation determined by a negotiation between them and investors, not a DCF.

The final tab, Funding Rounds, will assist you assessing options for raising capital.  A key point here is that future capital raises will dilute current shareholders, so this model will allow you to see what a final equity share percentage will be after your desired funding stages.   More on this in a later blog post.

Thank you to Adam Kalamchi (Columbia MBA ’13) for some initial input on this model. 
Image credit: Genbug.

Expert networks have been in the news a lot for the past few weeks, due to the SEC's attempt to look for insider trading amongst hedge funds, following on their Galleon investigation (Raj Rajaratnam of Galleon is in the photo shown).  The best source of information on this topic is as usual the Integrity Research blog.   I wholeheartedly agree with the thrust of their commentary: expert networks replace social capital with financial capital.  Investors have always  sought out primary research; expert networks just make it easier.  They also add a significant compliance layer, making it much easier for a fund's compliance officer and/or the SEC to see with whom a fund spoke, and on what topic.

What's striking to me is that the SEC is clearly investing serious firepower in looking for wrongdoing: subpoenaing many hedge funds and most of the major expert networks.  However, as I said to the Globe and Mail in their piece on the topic, U.S. financial probe digs into a murky industry, "So far there is exactly one person [Don Chu of Primary Global] who works for an expert network with any specific allegations against them."  Noteably, the complain against Don Chu looks like black & white insider trading. 

(UPDATE: Authorities have arrested one other employee of Primary Global, James Fleishman, and several other technology company employees for allegedly leaking information.  another technology company employee pleaded guilty and is cooperating with investigators. . The information allegedly leaked is in clear violation of the employee's employment agreements and agreements with the expert networks; it doesn't undermine the basic logic of the expert network model.)

To me this lack of more accusations against expert networks is striking.  If the SEC subpoenaed 15 New York restaurants, I'm sure they'd find more evidence of health code violations than they've found in all their recent investigation of hedge funds and expert networks.

As a more general comment, this reminds me of an old joke:

A drunk loses the keys to his house and is looking for them under a lamppost. A policeman comes over and asks what he's doing.

 

"I'm looking for my keys" he says. "I lost them over there".

 

The policeman looks puzzled. "Then why are you looking for them all the way over here?"

 

"Because the light is so much better".

The US financial regulatory apparatus looks terrible now because of the Madoff scandal (which was not a hedge fund) and the 2008 financial meltdown (caused by the large banks/mortgage companies, bad regulation, quasi-government agencies like Fannie/Freddie, and consumers who took on too much debt).  So now they're focusing their investigative energies on hedge funds and expert networks, whom everyone agrees bear no responsibility for the 2008 crisis.   Why?  Mainly because those are two groups who do not have the regulatory sway and lobbying budget of the large investment banks.  This seems like a misuse of our taxpayer dollars, to put it mildly.  

I've given a number of presentations to senior executive groups on expert networks; below are two slide decks:

How to Earn More Consulting Revenue from Gerson Lehrman and Other Expert Networks

How Executives Can Work with Private Equity and Venture Capital Portfolio Companies..and Buy a Company with Private Equity Backing

I have spoken periodically to private equity funds on this topic also:

It's the People: Improving Portfolio Company Valuations by Working with Operating Executives (discusses expert networks and other ways to tap outside operating executives)

Lastly, I've blogged frequently about expert networks.  For my notes on some panels on expert networks (some of which I participated in), see:

Investorside 

World Hedge Fund Summit
New York Society of Security Analysts Panel
Investorside conference
Harvard Business School Club of NY Investment Research Panel

Also, for background, see
MIT Enterprise Forum of NY: Collaborative Investing Startups
Software & Information Industry Association Panel on Content and Community

(Image by Getty Images via @daylife)

Four days ago, a team of Wall Street veterans launched Track.com, a new marketplace for independent research providers.  I met with the management team today. 

Track.com offers independent research providers a platform to distribute their intellectual property.  Buyers pay subscriptions for access to the pool of content. Similar to Value Investors Club, the general public can get access to the content at no charge after a delay.

It looks like an institutional version of SeekingAlpha.  It also has components of the market for research that AQ Research tried to launch some time ago.  

I think their greatest obstacle is noise.  There is a deluge of opinions available on the markets in every possible medium, and for every possible view on the market you will find someone passionately defending that view. 

The most clever parts of their model are:

- the appeal to elitism, which has a proven appeal on Wall Street

- the recruiting of Wall Street alumni in transition, who want to keep their brand visible in the market.  Given my background working with executives in transition, I particularly liked this aspect of the model.

- the tiered display of research over time, in order to price discriminate. 

I look forward to following their progress.

He also runs  an active, open Facebook group called "Wall Street Networking".  You'll find over links there "to help you with jobs/internships, economics, Bloomberg tutorials, excel spreadsheets, fund manager interviews, interview questions, learning about the industry (investment banking or trading? You decide), developing contacts, & learning how to make money in the markets." 

Yaser is a great model of a young person who has leveraged online networks to create a significant personal brand and professional network, which has already created unique professional opportunities for him.  I wish I were as forward-thinking as he is, back when I was in college!

Corporate Development track.  My notes follow.  To preserve confidentiality, I have labeled as "X:" the comments from all the participants.  We had about 30 people in the group, almost all of whom were heads of M&A at their respective companies.

Our moderator was Wendy Stahl, Vice President, Corporate Development, CreditCards.com.

----------------------
QUESTION: do you pay intermediaries?

X: we identify bankers who we think are competent. We tell them what we're looking for. We tell them we won't pay them; the sell side will pay  them.

X: Bank of America built a relationship with us by offering to introduce us to some corporate partners.

X: We don't rely on external sources for deals. We tell them, only contact us if it's a bulls-eye. We emphasize to bankers that we don't retain them, to avoid mis-set expectations.

X: We'd be willing to pay a finder's fee if we think we'd never have gotten the deal.

X: We take the leads, on a non-exclusive basis. Pay 1% or less.

X: question-how many people are using finder's fees? And what do you pay?

(about 20% of the group raised their hands).

X: a finder gets less than lehman formula because it's less work. Maybe a half-point, no retainer.

X: depends on what stage investment is at. 80% of what we see, someone has already been retained to create a process.

----------------------
QUESTION: what changes are you seeing in auctions? We're seeing fewer auctions. Does that make it more important to get to know bankers?

X: It's hard to tell if there's really an auction.  The banker will always tell there's an auction.

X: bankers are shopping deals where they don't have a client. They're working hard and getting nothing done. Whole environment has changed dramatically. They've all stepped down to smaller deals.

X:: you used to have to fill out a non-binding Letter of Intent to look at a transaction.  That's no longer true.

----------------------
QUESTION: Where is a good database of bankers?

Teten: Capital IQ, LinkedIn, ACG Network.  Also, make sure you're in the buyer's directories: S&P Money Market Directory, Bigdough, Galante's, PrivateEquityInfo.com, PEDatabase.com.

X: I've been really aggressive about linking to every banker I speak with on LinkedIn, since they're linked to other people in the space. That's been very helpful in building out a database for myself of the bankers I need to know.

----------------------
QUESTION: Discuss the internal side.  How do you manage the process?

X: It's mostly a collaborative relationship. Operating guys are in the field.

----------------------
QUESTION: Who's taking the lead on a deal?

X: the operating guy has to live with this deal for the rest of his career. He has to be motivated.

X: We position corporate development as the "internal investment banker". We position ourselves as a business advisor. I tell them, "My job is to help you grow your business." Part of my job is to assess their competence as a deal-doer. I also have to mentor people in the process of doing a deal.

----------------------
QUESTION: a scenario I've seen: operating guys are gung-ho; you have to buy this company. On the deal side, you're skeptical.

X: We ask the local person to be the business champion. He has to say, here's how I'm going to run it, on the target numbers, etc.

----------------------
QUESTION: What does corporate development sign up for?

X: We have a balance. We have to get the best deal for the company, and we have to get a deal done.

X: What if there's no intermediary on the other side?   I find myself saying to the other side, 'I'm not your banker, but if I were, here's what I suggest you think about."

X: Part of my role is to be a contrarian. Promote debate. Is there real buy-in?  Why do they really want to sell?

X: tension between being gatekeeper and being a nice guy.

X: We want to make sure we have good relationship with operating companies. I may not like a deal, but I'm not going to say that. COO of holding company has to sign off on the deal pre-Letter of Intent.

X: We tell operating people we're going to discuss validity of the deal when you're not in the room. That's part of our job.

----------------------
QUESTION: Who has ownership of the valuation model? And do you share that model with the operating businesses?

X: We are responsible for modeling, but rely on the operating team's assumptions.  We don't share the spreadsheet.

X: I see a risk that the operating people will game the model. Have you seen that?

X: We prepare a standard report and send it to business champion. We'll walk them right thru the valuation.

X: I don't go past the COO.

----------------------
QUESTION: Part of your role is to take the firm to places you haven't been.

X: Our corporate development team also owns innovation, so we're constantly looking at the make/buy decision.

X: Good book: "Alchemy of Growth". Discusses make/buy decision.

X: Our corporation is designed around those horizons of growth.

About 10% of room indicated they're responsible for innovation as well as corporate development.

----------------------

QUESTION: Are you responsible for portfolio review also?

X: We have strategic planning, corporate development, and then enterprise partnerships. That's all in one group. They're closely related.

Members-only Web sites with names like CapIntro.com, HedgeACT.com and HedgeConnection.com promote their online offerings as an alternative to real-world meet and greets. They argue that capital introduction - the practice, traditionally performed by prime brokers and third-party marketers, of bringing together hedge funds and qualified investors so they can perform initial due diligence and discuss mutual goals - is faster and cheaper on the Internet.

Panel Biographies

Roger Ehrenberg, Moderator, Managing Partner of IA Capital Partners, LLC

Roger Ehrenberg is Managing Partner of IA Capital Partners, LLC, his personal venture investing vehicle. IA has made 27 investments since 2004, principally in the areas of digital media and financial technology. IA`s portfolio companies include TheLadders.com, Mimeo.com, Clickable, Covestor, BlogTalkRadio, Buddy Media, Silicon Alley Insider and Stocktwits. Roger was also an original investor in Wallstrip (sold to CBS Interactive) and MyTrade (sold to Investools), sits on five Boards of Directors and advises the gaming company Genesis Interactive and the location-based messaging platform Socialight.

Prior to founding IA, Roger spent 18 years on Wall Street in Mergers & Acquisitions, Derivatives and Trading. Most recently, Roger was President and CEO of DB Advisors, the $6 billion multi-strategy hedge fund trading platform of Deutsche Bank. As head of derivatives businesses at both Citibank and Deutsche Bank, Roger`s teams twice won awards, securing Global Finance magazine`s `Interest Rate Deal of the Year` in 1998 and Institutional Investor magazine`s `Equity Derivative Deal of the Year` in 2000.

Roger has penned the popular business and technology blog Information Arbitrage since July 2006, and has had over 1 million readers since inception. He has also been interviewed broadly on topics ranging from hedge fund regulation and algorithmic trading to deep-web search and building vertical communities by The Financial Times, The Wall Street Journal, the BBC, NPR, Reuters, CNBC and many others.

Roger received his Bachelors in Business Administration from the University of Michigan/Ann Arbor, and his Masters of Business Administration from Columbia Business School. Roger is Trustee of the Little Red School House/Elisabeth Irwin High School and a Board Member of the Integrative Pediatrics Council. He lives in New York City with his wife Carin and two boys.

Divya Narendra, Founder and CEO, SumZero

Before founding SumZero, Divya was an Associate at Sowood Capital Management, a $3.5B multi-strategy hedge fund located in Boston, MA. At Sowood, Divya analyzed investment opportunities across the capital structure, spanning credit and equity. Prior to this, he was an analyst in the Mergers & Acquisitions Group at Credit Suisse Securities in NYC. In 2004, during his senior year at Harvard College, Divya co-founded ConnectU.com, an online social network dedicated to the university community, and predecessor of Facebook.

SumZero is the largest online community of professional investors worldwide, currently consisting of more than 1,200 analysts/PMs from nearly every well-known buyside fund. The site is free to use, but membership is by invitation-only. Each member lists 3 or more tickers for companies he/she has extensively researched. As such, an analyst can search for a company he is interested in and find the buyside analyst at another leading firm who has already spent months researching that name and initiate a dialogue. As a by-product, an analyst grows his network. SumZero also contains a fully searchable database of concise investment write-ups focussed on valuation. Though not required, only those members who contribute an idea can access the database. Please emaildivya@sumzero.com for more information and an invitation to join.

Stacy-Marie Ishmael, Writer, Financial Times Alphaville/Long Room

Stacy-Marie Ishmael is a New York-based writer and blogger for FT Alphaville, the Financial Times' award-winning blog. Her responsibilities also include FT Alphaville`s Long Room, which is a "digital restaurant" where finance professionals are encouraged to share research and comment on the work of others. Stacy-Marie is actively involved in the development of the FT Alphaville platform and brand.

FT Alphaville is a Webby-award winning blog focused on global financial markets, with a team spanning London, Tokyo and New York. The Long Room, which was launched in October 2008, is a members-only extension of the main site, focusing on comment and analysis. Both FT Alphaville and the Long Room are free to readers (an FT subscription is not required to access content) and are supported primarily by display advertising opportunities on the site and in FT Alphaville`s email briefings. In the case of the Long Room, revenue is generated from the sponsorship of "digital tables".

Phil Pearlman, Director, StockTwits

Phil Pearlman was a co-founder of Lumina Fund Management, a long/short equity hedge fund which focuses on behavioral and sentiment analysis to exploit under and overreactions in options markets. He is an expert in the area of market participant behavior and emotion and consults with professional investors employing strategies adapted from empirically validated psychological treatments to improve trading performance. Phil has developed a proprietary prescriptive model of investor experience which integrates empirically validated clinical models and behavioral finance. He is a contributor to Real Money, a paid service owned by TheStreet.com. He currently trades a private account in New York.

Phil is an investor in and director at StockTwits. He also makes angel investments in other social media based start ups and focuses on the relational and community aspects of online social networks. Phil earned a doctorate in clinical psychology from Argosy University in Washington DC.

Rikki Tahta, Co-Founder Covestor

Rikki Tahta has held a number of senior roles in Finance and Information Services. Previous start-ups include ARK Information (acquired by Thomson Financial), WebTrack (acquired by Jupiter Communications - later public on NASDAQ), Steelhead Systems (acquired by Merrill Lynch) and Bookpages (acquired by Amazon.com). Other positions include Chase Capital Partners (private equity) and Thomson Financial (Securities Data Corporation). Rikki lives in New York and loves fishing. Username: RikkiTahta

Covestor is a portfolio sharing service for proven self-investors and for those wishing to track them. Tens of thousands of self directed investors share their real trades and you can follow them live for free. Covestor is funded by New York based Union Square Ventures, Boston based Spark Capital and London based Amadeus Capital Partners. We also have a strategic investment from Independent News and Media Group.

My notes

Roger:

I just spoke with a major ebroker. They're not worried about trading volume, which is fine. They're worried about durability, because they feel that their community is not loyal.

You remember stock message boards in the first dot-com wave. Problems of anonymity. Whole Foods CEO going online and bad-mouthing other peoples' companies.

I spent 18 years on Wall Street at Citi/Deutsche. Left in 04 after running a hedge fund business for Deutsche

Stacy-Marie Ishmael.

Officially, she's a credits market reporter for FT. Unofficially she's a web geek there.

Alphaville was viewed as the 'badly behaved little brother' of FT: their first blog. It was a response to perceived need for real-time interaction/dialogue.

Performed two functions: a) trendy (in 2006, everyone had to have a blog), and b) increased engagement.

Alphaville has 9 person team, based mainly in London. We do combination of reporting and commenting. We're encouraged to have an opinion on financial stories.

When we launched, traditional FT readers were slow to respond. We got 2 comments/week. FT's historic market were C-suite.

Brits much slower to take up social media. We had a lot of readers but minimal interaction.

Shortly after, we launched MarketsLive: a real-time chat every day at 11am ET between two senior market reporters. When this launched , we were the first. It made people realize that there were real people behind the concept of Alphaville. We got to a point of 420 comments per MarketsLive event, and quality of comments went up.

In late 80s, there was a well-known restaurant known as the Long Room, which attracted all the significant traders in the City. That's the origin of the name.

Today we feel that our main job is to moderate and edit, not write, because there's so much quality content.

Divya, Sumzero

Our vision was to create a Wikipedia for investing, but focused on professional investors.

We wanted to be as universal as possible.

Most writing to date is on single-name credits

We launched a year ago.

1700 analysts are members

Even if you haven't submitted a note, you can still see who has extensively researched a given company.

You can send a message to other analysts and start a dialogue.

This is the first way that analysts can communicate with one another about trades.

We have an earnings template which is searchable so you can run a screen based on buy-side consensus. We believe that's much more valuable than sell-side consensus.

(Teten note: this reminds me of Novus, as well as some of the other competitors I blogged about earlier.)

Phil Pearlman, Stocktwits

A community built atop Twitter

We're getting a lot of people, including amateur investors, professional investors

There's a high correlation between people we see subjectively as being experienced, and the number of followers they have

We have 2 semantic tags: 1) Put $ in front of a ticker, or:

2) general market comment: $$ at beginning or end of tweet.

Certain stocks are very popular on certain days.

Finance websites usually have huge dropoff on weekends. So in response, we've set up programming on weekends, where professionals do Q&A.

We also have a discussion, Macrotwits, Sunday night. Our speaker will advance a global macro thesis and debate it.

Rikki Tahta, Covestor

Our goal is to democratize fund management. We don't care about what you do ; we care about what you invest in.

(Teten note: I like his model, but I would never be a customer. It's like Marketocracy; there's so much noise in the data that I'm very uncomfortable delegating my investing decisions to someone else's etrade account. Investing is not a democracy; it's a game rigged in favor of the professionals.)

Most of the tools for investing are available free on the web.

BofA has even launched a free market trading platform.

In 2000, a big change in UK investment research : Marshall Wace led a movement towards 'Alpha Networks': a focus on actionable ideas instead of just opinions. They then quantified who gave the best advice and allocated trading flows instead. This concept never took off in the US.

This was a complete disassociation between brand name of the institution. We said investment talent does not logically have to be inside a financial institution.

Our principals:

- Treat anyone as a fund manager. But, they have to be investing real money, which we verify. We also require full transparency, so you can't selectively share your trades. We create a Morningstar tear sheet for individuals.

- Find best and invest alongside. Covestor replicates in your own account what other people are doing. Madoff is something of an inspiration: We think you should keep your money in your own account, and just take advice from others. This is like a distributed UMA. Our investors can treat their own account like a fund of funds.

- Benefits for investors. More choice, more control, more transparency. This is what big banks give people with $30m in assets. This is a better way to get active management

Roger

Does community matter?

Rikki

It matters less to us. Our focus is building an ability for an individual to invest with better resources than he would otherwise.

Divya

Credibility matters. We help people vet out their ideas.

Stacy

Community definitely matters.

Phil

We have people who make a lot of bold calls. 50% of the time they're right. We find out what they're really like when they admit (or don't admit) their mistakes).

Divya

If you hold a position, you have strong incentive to publicize why you hold that position. The guys who run their own funds are happy to discuss. The junior guys are nervous about ticking off their bosses. The people at very large hedges (e.g., och-ziff) and large investment banks are more hesitant to talk about their positions.

Phil

Ego

Rikki

People who are great performers but don't communicate, don't attract as many investors as those who can do both. The former is a much bigger driver than the latter. (Teten note: Jim Cramer is a far better performer than investor.)

Roger

Who gets into the community?

Stacy

We have very strict criteria for joining. We independently verify that a person is who he says he is. The person must be an active participant in the financial markets. This ticks off a lot of Alphaville readers who did not qualify for entry into the Long Room. There was a lot of angst over this among some readers. We don't allow people to discuss specific trades. Most of the discussion is about sectors/macro issues. So pumping and dumping don't happen.

Because people are anonymous, talent will out. People decided whether to trust the source or not based on commentary.

Rikki

The only hurdle is a $10,000 account. We run rankings on 78 different criteria. I learned this from Thomson: the more rankings the better.

Divya

Screening process is viewed positively. They have to work at a reputable fund, or submit a quality writeup showing they fit in.

Phil

We earlier built a vote up/vote down feature, but we found we didn't need it. The crowds made the picks for us. We subjectively made picks of who we thought was most value-added. The better people were building large followings.

Divya

if we hit our targets, we're very monetizable. Our content has tremendous value. We could charge our members for access. Set up section on website for outsiders to access our content for a fee. We could license our content to SeekingAlpha for a fee.

Phil

We view ourselves as a farm system. We're launching next week 2 premium products with two guys who are pros, and have built significant findings: Brian Shannon (technician) and Joe Donahue (hedge fund manager) . Next product will be options product.

In finance vertical, people will pay for information.

Stacy

I work for a news organization..that itself is a problem. We're one of the few parts of the FT which is completely free. You dont have to be a FT subscriber to get into Long Room. This is a constant source of friction between editorial team and ad team. We think being free is critical to our success in getting the community where it is. We're a loss leader. We do sell advertising.

Alphaville readers are much more sticky than FT.com readers. Our uniques and repeat visits are very high. We have people who are constantly updating RSS feeds.

Rikki

We haven't launched revenue model yet. We'll charge investors a management fee.

Gary Mueller
Which B2B communities are making money now, besides your own?

Roger

Gerson Lehrman Group. Revenues around $300m, valued at $1b by Silver Lake. 280,000 experts.

Stacy

Bloomberg. They own the major messaging system used on trading floors. They were a community before people talked about communities.

Rikki

LinkedIn

Phil

Look at ResearchEdge in New Haven.

Teten

How can users manipulate each of these sites; how are your users doing so now; and how are you defending?

Phil

We eliminated microcaps.

We also monitor the stream very closely and remove anything that smells funny.

Divya

We think reputation is the solution. Other users can rate content.

Stacy

We allow people to use pseudonyms. A certain analyst at a bank kept posting "CIT looks great today." We emailed him at his work address, and that put a stop to him doing that.

We're very strict on copyright and libel issues; as a news organization our awareness of those issues is high.

Wachtler:

What sites do you recommend for discussion of macro issues?

Roger

Use disqus to track individual comment streams, which creates a community around a comment thread.

Phil

9pm Sundays: Gregor Macdonald discussion. We squeeze a lot of meaning into 140 characters.

Stacy

Zerohedge came out of nowhere and has really taken off. We're sensitive to paranoid about whom we link to, since they can be thought of as sources. Look on our website for links to blogs we think are most worth reading.

Photo: Alan Cleaver