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S3 Operating Model Template

S3 Operating Model Template

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As you might imagine, when the S3 Team is meeting with entrepreneurs and founding teams, funding needs are a common topic. When raising money, entrepreneurs should always be prepared to answer the question “How much money do you need, and how far will that get you?” Very often, the answer is “We need $X million dollars in funding to accomplish these goals: X, Y & Z.” As investors, that is the answer we want to hear. Unfortunately, quite often when we begin to dig into the “why” behind that answer, it becomes less clear and a lot of time is spent between investors and the management team getting to the right answer. Too often, the number is much higher or lower than the original “$X million” answer.

 

We understand that as entrepreneurs, you have a lot going on – building your product, hiring an “A” team, signing up new customers, raising money, etc. Many times, building a financial model to forecast operating expenses and cash needs gets pushed further down the list, especially if you do not have a financial background. This creates a problem when investors begin to look into the detail behind the numbers and expenses during diligence. Not having a solid operating model in place delays diligence time as investors attempt to get a handle on the cash needs. This can be crucial time for a cash-strapped company. The S3 Ventures operating model templates are free resources that we hope will help entrepreneurs accomplish two goals:

 

1. Better understand their business and the expenses involved to get cash flow positive
2. Streamline the diligence process during fundraising, saving valuable time

 

S3 hopes entrepreneurs will be able to utilize this tool to get an accurate, granular view of their business expenses, revenue model, and overall cash needs of the business. We attempted to make the templates simple, with the templates applicable to the 5 most common business models that we typically see: Enterprise SaaS, Enterprise License Software, Medical Device, Consumer SaaS, and Consumer Marketplace companies. Each model generates Balance Sheet and Cash Flow statements with very few inputs. The models do not include capital expenses (or the depreciation associated with them) or inventory management. Below are some notes to help you with the models.

 

S3 Ventures “Operating Model Template” notes:

  • There are five operating model templates from which to choose from, depending on your company’s business model: Enterprise SaaS, Enterprise License Software, Medical Device, Consumer SaaS, and Consumer Marketplace companies.
  • All inputs (business drivers) are in blue and shaded – everything else will auto-populate.
  • Start with the staffing tab and then work through the departments.  As most of the cost of software and medical device businesses is people, the timing and level of hires will be the largest cost drivers in the business.
  • In each department, we attempted to capture the typical cost buckets for most startups.  If you have other cost categories or line items, you can add rows or drop them into the blank rows.
  • The revenue and cost of goods in the Income Statement comes from the green “Revenue” tab.
  • While we attempted to provide a template for some basic business models, the revenue drivers in your business will likely be different than the simplistic view we have used in this model.  Please add tabs as you see fit and link them either to the existing revenue tab or directly into the ‘Income Statement’ tab. It is important to understand the real business drivers of revenue for your company and incorporate those into this model.
  • Equity investments are an input in the Cash Flow statement.
  • At S3, we look at a handful of metrics that are remarkably consistent across the companies in which we invest. If you are out of these ranges, you may want to revisit your estimates.
    • For enterprise SaaS and enterprise license software companies:
      • Total operational expense divided by headcount usually lands at around $15k/head/month +/- $2k.  This variability comes from the type of workforce you have (local vs. offshore, very experienced vs. entry level, etc.).
      • Salaries and Wages are 60%-75% of total operational expense.
      • Gross margins are 90%+.
    • For medical device companies:
      • There are more variances in operational expenses than for software companies, especially depending on necessity of trials, FDA path, manufacturing process, R&D requirements, etc.
      • If the business is a “razor and razor blade model,” consumable gross margins are 80%+, while the durable device gross margins are usually somewhat lower.
      • Gross margins on medical devices without a consumable component vary from 50%-90%+.
    • For consumer SaaS and consumer marketplace companies:
  • Operating expense per headcount, salaries and wages as a % of operating expenses, and gross margins are similar to enterprise software, but more variable, depending on the go-to-market strategy and team required to deliver the product.  
  • Spending $1 (or less) on customer acquisition (CAC) to yield $3 of customer lifetime value (LTV) is a ratio many companies target because it is indicative of the ability to profitably acquire customers.
  • For consumer SaaS companies, monthly customer churn should be below 10% and is frequently in the low single digits. Churn is more variable for marketplace companies. Churn is an important metric to focus on because it is frequently less expensive to retain an existing customer than to acquire a new one.

 

The S3 Team hopes these templates help you with your business, but we know they are not perfect.  If you have suggestions on improving the models or other feedback, please email us at feedback@s3vc.com. Unfortunately, due to the volume of emails we get, we may not be able to respond to support questions. The S3 Team wishes you well in growing your business! Please submit your business plan and financial model through our website to contact us about funding.

 

S3 Enterprise License Operating Model

 

 

S3 Enterprise SaaS Operating Model

 

 

S3 Consumer SaaS Operating Model

 

 

S3 Marketplace Operating Model

 

 

S3 Medical Device Operating Model

 

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