Startups Archives - Foresight Valuation Group

Foresight Startup Q&A Blog Series: Modeling Unit Economics

Posted on April 8, 2025 1:40 pmModified on April 8, 2025 9:20 pmby Foresight Valuation Group

The Foresight team regularly spends time answering our startup clients’ most pressing questions regarding Financial Modeling, IP Strategy, Valuation, and more. We’ve decided to share some of these important insights in our Startup Q&A Blog Series. This article deals with modeling Unit Economics for your early stage business.

Question:

How Do I Model My Unit Economics?

One of Foresight’s startup clients approached us asking for advice on how to model the Unit Economics for 2 different business models that the company was considering. The client was launching an Airbnb-type venture and weighing the pros and cons of a Subscription model and Commission model. Although the 2 business models are very different, the Unit Economics modeling is fairly similar, with the largest difference being the Monthly Recurring Revenue (“MRR”) component.

Answer:

Identify the Unit

The first step to modeling Unit Economics for a majority of (if not all) businesses is to identify the Unit. The Unit is the revenue generating component of your financial model. For a Consumer Software/Subscription business (i.e. Spotify, Microsoft Office 365, etc.), the Unit is likely a single subscriber. Conversely, for Enterprise Software-as-a-Service (SaaS) businesses (i.e. Salesforce, Workday, etc.), the Unit may be an entire organization with many users. In any case, the best starting point for thinking about your Unit may be identifying your “average customer.”

In the case of our client’s Airbnb-type business, the answer is somewhat counter intuitive. The Unit in both cases, Subscription and Commission, is not the end-consumer (the people using the platform to rent). Instead, the Unit is the “Host” – the owners of the assets that are listing their property on the platform. This is because the Hosts are ultimately driving revenue for the business, either through monthly subscription fees or by sharing a portion of their rental proceeds.

Determine Your Customer Acquisition Cost (CAC)

Once you’ve identified your Unit, the next step is to determine how much it will cost your business to “acquire” them. By definition, for your Unit Economics modeling it is important that you isolate the cost to acquire and onboard a single Unit. There are commonalities among almost all businesses that will be included in your CAC, such as sales expenses, marketing expenses and salaries, but it is also important to consider less-obvious costs that may be more unique to your business, such as data hosting expenses, legal fees, etc.

Again, since the Unit was consistent for our client across both business models, the components of the CAC were also consistent. However, differing business models have significant implications for the CAC that are important to consider. In this case, the Marketing Expenses required to acquire a Host under the Commission model are likely much less than the expenses under the Subscription model. At the most basic level, this is because the costs to acquire a paying user is typically far greater than the costs to acquire a free user.

Calculate Monthly Recurring Revenue (MRR)

The MRR for your Unit Economics model is another critical input that looks at the amount of revenue that your business collects from each Unit on a recurring basis. The simplest determination of MRR is for a subscription business with a single subscription tier. If the business only offers 1 subscription level, to 1 type of customer, then the MRR is equal to the monthly subscription fee. The MRR calculation becomes more detailed as you begin to add additional subscription tiers, different types of customers, add-on features, etc. In these cases, you should again undertake the exercise of determining the characteristics of your average customer, and calculate the recurring revenue generated based on these features.

For our client, MRR is the component of the Unit Economics model that differs the most between the 2 business model options. For the Subscription model, the determination of MRR is again fairly simple – it is equal to the monthly subscription fee that the average Host will pay to list their assets on the platform. For the Commission model, however, the calculation becomes much more involved. Because the revenue generated from the Unit under the Commission model is not uniform or guaranteed, many assumptions need to be made about the transactions. These assumptions include Average Transaction Size, Average Number of Transactions per Month, Average Number of Listings per Month, etc. From this example, it is clear how quickly the MRR calculation can complicate.

Know Your Industry Benchmarks (Churn Rate)

Particularly in the early stages of your business and Unit Economics modeling exercise, it is important to be acutely aware of your industry benchmarks. For inputs such as CAC and MRR, although each business will have unique values, it should raise a “red flag” if your inputs are orders of magnitude away from what similar companies are reporting. If solid justifications exist for your deviation from industry norms, proceed with your modeling but be prepared to answer questions about the abnormalities.

While CAC and MRR are determined using internal inputs and assumptions in conjunction with industry benchmarks, Churn Rate (“Churn”) will come exclusively from benchmarks for all new companies. Churn is defined as the percentage of customers that you lose each month. In the early stages of your business, you simply lack the operating history to know how “sticky” your service is, so instead you should turn to the market to tell you how frequently customers leave (unsubscribe, cancel, become inactive, etc.) similar platforms.

Using these 4 steps as a starting point, you should be well on your way to constructing a solid Unit Economics model. This will become the foundation of your Financial Model as a whole, and help you determine your specific funding requirements among many other key details about your business. For a more in-depth explanation and example of Unit Economics modeling, check out Foresight President, Efrat Kasznik’s talk titled “Telling Your Story with Numbers,” and register to attend one of our upcoming talks!

Startup Q&A Blog Series: Valuing Early-Stage Startups

Posted on April 4, 2025 7:37 pmModified on April 8, 2025 9:07 pmby Foresight Valuation Group

The Foresight team regularly spends time answering our startup clients’ most pressing questions regarding Financial Modeling, IP Strategy, Valuation, and more. We’ve decided to share some of these important insights in our Startup Q&A Blog Series. This blog deals with valuing an early-stage startup when dealing with seed investors.

Question:

How Do I Value My Seed Stage Startup?

A Foresight client was preparing for a seed funding round, and asked us the best way to value their business. Because early-stage companies lack operating history, and in a majority of cases lack any form of revenue, assigning value to the startup cannot be done with “traditional” methods such as a discounted cash flow analysis or a revenue “multiple” approach. The client is launching a smart wearable health tracking device, and looking to substantiate a $12M pre-money valuation.

Answer:

Know the Current Market Comps

Because early-stage startups cannot be valued on cash flows, investors often turn to the market to determine the “going rate” for businesses in any given sector. This is where the entrepreneur should start as well. Undervaluing your business in negotiations with investors means you will likely give up greater ownership percentage than is necessary – something that should be avoided at any stage of the business, not just the seed stage. Conversely, overvaluing your business could kill the deal before it even starts. When both the investor and entrepreneur are educated on current market conditions, the starting point of valuation negotiations can at least begin in the same ballpark. The ColleyGO publication is a great resource for starting your market research. Below is a sample chart from this report:

Not only can we gather the median pre-money valuation for seed companies of which was $16,725,000 in 2024 according to this chart, but we can also observe trends in seed stage valuation over time. Various public sources are available for valuation research by country, market, etc. As a starting point, Foresight’s client knows that they within the median range with the targeted $12M valuation.

Know What Matters to Early-Stage Investors

Although it is a great starting point, most investors will be a bit more sophisticated in their valuation process than simply taking the market median. In particular, there are certain characteristics of a business that investors will consider when assigning value to an early-stage company. In 2011, Dave McClure, founder of the accelerator 500 Startups, shared insights on his methodology for valuing such companies. McClure said that each of these 5 components of a business were worth $1M in value:

Market
Product
Team
Customers
Revenue

The value assigned to each point can change over time, and would probably be more than $1M today given the sharp increase in pre-money valuations since 2011. Each investor has her or his own heuristics.

When developing your pitch deck for the seed round, it is important to keep these factors in mind, and highlight those that are strengths of your own business. If you have existing, brand name customers, make sure to call them out. If you operate in a particularly large or “hot” market, emphasize this and quantify it in any way possible. Our client happens to have a particularly strong founding team with experience working with and launching products in similar industries. This will be a great point to emphasize when negotiating for their target valuation.

Efrat’s “Bonus Point”

One component that is noticeably absent from McClure’s list, and that is particularly pertinent to Foresight, is Intellectual Property. IP gives companies an inherent advantage over the competition, and as such, such advantages should be considered in the valuation of the business. Traditional valuation methodologies often overlook the true value of IP to a business – something that Foresight tries to combat. For this reason, entrepreneurs should be acutely aware of the business’s IP value from the early stages and understand how it impacts the value of the business as a whole.

When considering your company’s IP and the value it adds to your business, make sure to consider all forms of IP, not just patents. A granted patent is undoubtedly something to hang your hat on when negotiating valuation, but remember to also highlight things like a strong brand, customer relationships, trade secrets, customer data, etc. Even the potential to develop these strong IP assets is something to be considered for your pitch (for example, the potential of amassing customer data even though you may only have a small number of subscribers at this stage). With 2 design patents and 4 provisional patents, our client certainly has some increased leverage in the valuation discussion.

Bonus Note for Hardware Startups

Hardware startups are still very viable businesses, although they come with a number of inherent challenges that software or service startups do not face. Because of this (and because hardware is not the most trendy space), some early-stage investors may shy away from hardware deals.

For those entrepreneurs dealing with hardware, Foresight recommends a few things. First, be creative when developing your business model. One of the main drawbacks of traditional hardware businesses is that revenue is restricted to a single transaction. Modern business models, like we see in software, integrate things like subscriptions or upgrade plans to increase the recurring nature of the company’s revenue. Second, think about how software can work with your product. Even something as simple as a mobile application can open many more possibilities for your hardware business (customer data, premium content, community building, etc.). Finally, be mindful of your audience when pitching your business. Knowing that the word “hardware” might raise some red flags, be creative in how you present your idea to keep investors engaged. For our client, we suggested simply replacing any mention of the word “hardware” with words like “device,” or “delivery mechanism”.

Do The Right Thing: Burning Cash Without Burning Out

Posted on February 27, 2019 9:34 pmModified on February 27, 2019 10:51 pmby Efrat Kasznik

If you follow the headlines from Silicon Valley you might have encountered the stories reciting the chronic shortage in CFOs, particularly for late-stage VC backed startups who are looking to get ready for exit (IPO or acquisition). I find these stories particularly troublesome, as one of the key assignments of a CFO in a startup is manage cash flow, which is one of the most daunting tasks of any startup at any stage in its lifecycle. In the early stage there’s pressure to find product market fit, following that stage there’s pressure to scale, and in the later stage there’s pressure to sprint to the exit. All throughout that cycle, cash is generally a scarce resource that needs to be managed efficiently, as any new cash influx usually means the current shareholders lose some of their share in company to the new investors (a process known as “dilution”).

I was reminded of the cash flow management issue when a journalist recently contacted me for an interview for a story about cash flow management tips for startups. The questions that were posed to me highlighted some of the common misconceptions and myths surrounding the cash utilization in a startup (post-funding). What I set to do in this blog is try to dispel some of the myths around cash flow management and create a set of practical guidelines for early stage founders, most of whom are not people with any financial background, who find themselves in the enviable position of having to spend millions of investors’ dollars in the most prudent and efficient manner.

So what is a startup to do to manage its “burn rate”, a term referring to the monthly cash burned through expenses? More often than not, startups think they are doing the right thing while inadvertently burning cash the wrong way. Moreover, founders and investors can have different incentives when it comes to funding for growth; so when framing the question about what is the right pace or what is the optimal cash burn rate, it’s really a question of what is the business model, what is the exit strategy and how quickly you plan to grow the company. Higher growth usually means higher burn rate, which in turn could lead to more funding; investors may like the accelerated growth since it gets them to a point of liquidity (exit through a sale or an IPO) more quickly, but you as a founder may find yourself with a smaller piece of the pie due to excessive dilution.

With that in mind, below are the 5 things every early stage startup founder needs to know about burning cash without burning out:

There’s a fine line between burning too quickly and burning too slowly, and neither of them is desirable – a startup should generally raise enough cash for 12-18 months. The challenge then becomes managing the burn rate carefully, to ensure that the company grows to the next “inflection point” (a point when certain milestones are achieved, and the valuation increases enough for the company to go for its next round of funding). Burning too quickly means that you underestimate the cost of growth and will be back on the road raising funding much too soon (a time consuming activity that distracts the CEO and other senior management form running the company). Burning too slowly, on the other hand, is not appreciated by investors, despite the common belief, shared by many founders, that stretching their funding longer should always be the goal. If you are not spending enough then you are not growing the company fast enough to get to the next inflection point, which in turn would slow down the path to an exit point in time for your investors to have the right return on their investment.

An increasing burn rate is not necessarily a bad sign – this is another common misconception, which ignores the fact that the pace of cash burn is largely a function of your business model. Take, for example, the ubiquitous software-as a service (SaaS) business model, where an increasing cash burn is a strong indication of growth. A SaaS company generally invests heavily in marketing, which it then recouped over a long period of time with monthly subscription fees, so in that industry there is a cash “trough” that is expected to present itself when the company is in hypergrowth mode. If a SaaS company raises funding for growth but cash flow is going down, it is generally considered to not be spending its investment money wisely. In this example, managing burn rate is not to be confused with necessarily reducing it, because it may signal to investors that growth is slowing down. On the other hand, if your startup is in the hardware manufacturing business, your cash flow might indicate the efficiency of your supply chain, where managing payment terms with suppliers is key to executing your business model. In this type of environment, increasing negative cash flows might indicate inefficiencies in managing your supply chain that are getting worse, instead of getting better.

Spend on the right things at the right phase in your company’s lifecycle – the burn rate should not only be evaluated based on its absolute size or direction, but also on its composition. To that effect, spending should be aligned with the business model and also with the phase in the startup’s lifecycle. If you run a SaaS company that raised Series A funding, which is a round of funding that is largely raised when the company is ready for scaling, and your post-funding spending is mostly on R&D and not on sales & marketing, then even though your burn rate is increasing (which, as previously mentioned, is to be expected of a growing SaaS company), you are burning cash in the wrong place. The unintended consequence of that is you will run out of cash before you can hit your next inflection point. Conversely, if you run a medical device startup and you are in the pre-clinical phase of your product development, any cash that you raise should be invested in R&D, and not in unnecessary administrative overhead, as an example. This rule may sound straightforward, but it’s easy for companies, when showered with millions of dollars and lacking the right financial acumen, to lose sight of the important things and throw money in the wrong places.

Breaking-even is not always the right goal for your startup – a common mistake that I see in startup financial models is the obsessive focus on “breaking-even”. The break-even point is loosely defined as the year when cash inflows exceed cash outflows. Startup founders are usually very eager to show investors that they are planning to reach break-even in year 2 or year 3, or sometime in the horizon of the 5-7 years leading to the exit event. The problem with this approach is that breaking-even is not a one-size-fits-all goal of every startup. On the contrary: in some business models, breaking even is not necessary, nor expected to occur pre-exit. Take Amazon as an example: a company showing unprecedented revenue growth that is rewarded nicely in the stock market, while barely breaking even (as measured by accounting net profits). Amazon’s valuation is driven by revenue growth, not by net profits. This is the business model and this is what investors expect it to keep doing. Going back to the world of startups: if you are in the business-to-consumer (B2C) software business, say: you develop a social networking mobile app. The classic B2C business model is offering the service for free, growing to a critical mass of users, and then monetizing through advertising or other ways; the larger the user base, the higher the valuation (see Facebook’s business model as the best example of this strategy). As a founder of the B2C company, you are expected to drive towards user growth; that is your #1 objective, and the best use of investor’s money as it drives your valuation and will ultimately improve the return in an exit event. Your investors are not expecting you to break even, it’s not a desirable outcome as by definition it means that you are focusing on the wrong objective.

Focus less on your cash burn and more on your unit economics – finally, even if you incorporate all the foregoing lessons when managing your startup’s cash flow, the burn rate alone may not reveal some red flags that could jeopardize the survival of your company. In addition to managing their monthly burn rate, startups should always also focus on their unit economics. More specifically: what founders should worry about is not the increasing burn rate, but rather the worsening unit economics. Your cash burn rate can increase due to investment in sales & marketing, for example, which may be fine for a growing SaaS company; however, if the economics of the customer operations (as measure by a set of SaaS metrics) are getting worse, as opposed to getting better, that should serve as a red flag. Let’s take as an example one of the key SaaS metrics: Customer Acquisition Cost (CAC) which is measured as the overall sales & marketing cost over the year divided by the number of new customers added that year. So if the CAC is $1,000, and you spend $1 million in marketing every month, it will get you 1,000 new customers every month. Now say that you raised funding to grow your customer base, but your customer acquisition cost now increased to $2,000, i.e.: the efficiency of your sales people is decreasing. You may now spend double in marketing, $2 million every month, but this spending will get you to the same 1,000 customers per month. This is an example of why it is so important to focus not only on the burn rate, but first and foremost on your unit economics.

The best practices laid out in this blog were learned through working and interacting with hundreds of startups from Silicon Valley and around the world. These are universal lessons that should help improve cash flow management and lead to better outcomes for founders and investors alike: burning at the right pace, focusing on the right expenses at the right time, and not losing sight of your business models and the factors driving valuation.

Carrots and Coins: The 2018 IP Valuation Year in Review:

Posted on January 30, 2019 5:24 pmModified on February 13, 2019 8:14 pmby Efrat Kasznik

A lot has been written on the impact of the new leadership at the USPTO on the value of patents. Since his appointment in early 2018, Director Andrei Iancu has managed to introduce new initiatives that increase transparency and uniformity in how the USPTO and the courts interpret patent claims and validity challenges, reforms that are largely considered to have a positive impact on the value of patents. Some market followers who keep track of the venerable “pendulum”, which signals the patent climate de-jour, were quick to note that the pendulum started swinging ever so slightly back in favor of patents (as evidenced by some renewed interest in the patent marketplace).

From an IP valuation perspective, one should take a broader view at the factors impacting the value of IP Assets, patents as well as other assets. While patents are legal rights that are profoundly impacted by case law and the USPTO examination policy, focusing on legislative and judicial developments in the US alone constitute a very narrow lens by which to evaluate IP portfolios and the value they bring to the companies that hold them.

Below are some of the main trends in that we have seen in 2018, based on the IP portfolios and transactions that came through the door in our IP valuation practice:

Over the last year, we have seen a clear increase in the weight of foreign assets in the IP portfolios presented to us; it used to be the case that the vast majority of assets were US assets, with a few counterparts that served more as a placeholder and less as a driver of economic value. Over the last couple of years, we have seen more and more patent portfolios used to support funding, strategic collaborations, international expansion or the sale of a company, where the major corpus of assets were foreign assets. More specifically, we have seen German, Korean, Chinese and Japanese assets anchoring an entire portfolio with very little and sometime no US counterparts at all. This is a telling sign of the increasing state of enforcement in foreign markets, as well as the increasing economic activity in foreign markets, which are usually the two reasons driving patenting decisions. I will stop short of also saying that this is a sign of the weakness of the US patent market, because I don’t believe that to be the case. Patenting decisions are made years in advance of the patent actually showing up. I also don’t believe that to be a ‘zero sum game’, i.e., if foreign IP assets drive more value, it doesn’t mean the US assets are worth less, but rather the entire pie is probably worth more.

Another trend that we are seeing emerge is the return of “carrot licensing”, which is a term used to reference licensing activity that is driven by technology transfer, as opposed to licensing driven by enforcement (also known as “stick” licensing). This form of licensing is more closely associated with emerging technologies, where the licensor is interested in creating markets for new products using an idea protected either by trade secrets or by patents. With enforcement models taking a back seat for a variety of legal and judicial reasons, particularly in the US, we are seeing more and more licensing activities involving new technologies and the IP rights protecting them. While enforcement is looking into infringement in mature markets, technology transfer is looking to carve new markets. This is a clear indication not only of the decline in the value of patents as “naked assets”, but it also indicated the increase of trade secrets as a form of IP protection that can be monetized together or apart from patents. We worked with a few European companies looking to expand worldwide using IP licensing as their main business model, seeing that IP licensing allows expansion into new regions without bearing the marketing, manufacturing and distribution cost associated with the complementary business assets needed to bring new technology to market.

There is a wave of innovation in the area of biotechnology, leverging on novel methods for molecular diagnostics and other technologies enabled by advances in genetic sequencing and gene editing, as well as the convergence of science with big data analytics and artificial intelligence (AI). Many of these technologies are initially developed by startup companies, that end up licensing to, or being acquired by, larger players. In such acquisitions or collaborations, we have seen IP rights – patents in particular – play a key role in determining the price and terms of the deal. IP assets in these areas are very valuable, and they gain their value from a technology transfer and new market perspective. As a matter of fact, IP assets in biotech and other life sciences companies are so valuable that they often survive the company even if the startup goes bankrupt for lack of funding, particularly if regulatory (FDA) approvals have been secured and other product milestones have been met.

Over the last couple of years, we have seen the emergence of new digital assets: databases, cryptocurrency, and other types of assets that made their way from the digital world into the business world. The valuation profession is slow to keep up with these assets, and as a result we have to be very creative in how we value them, as no guidelines, comparable transactions or other points of reference exist. One interesting case we have worked on this year involves the valuation of a digital token for a token-presale (a token is an asset used in a Blockchain environment to facilitate transactions on the network). From a valuation perspective, valuing tokens and cryptocurrency in general poses a challenge, as the very nature of the asset is not clearly defined: is it a security, a commodity or a currency? Should the asset, and therefore the valuation thereof, be regulated by the SEC? Many of these valuations are done for tax reporting purposes, however there is no clear policy by the IRS on some of these assets and the regulations are evolving, which makes the valuation exercise somewhat of a moving target.

In conclusion, our experience in 2018 indicated that patents are only one component of the modern company’s IP portfolio. There are other types of intangible assets, including new categories of assets we haven’t seen before, that are emerging in the new digital economy, posing new valuation challenges but adding more sources of value for companies. Additionally, new technological advances are creating fertile ground for technology transfer and open innovation, processes that depend on IP rights and which give IP Assets great value.