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Taylor Davidson on Building an Early-Stage SaaS Financial Model

Taylor Davidson, financial modeling expert and founder of Foresight, discusses the core building blocks of an early-stage SaaS financial model and why flexibility and customization are vital elements of model creation as a business grows.

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The Role Forward
Taylor Davidson on Building an Early-Stage SaaS Financial Model

Episode Summary

Starting a company requires an idea and people to help bring it to reality. But a company requires more than a vision, even though it’s fundamental to its success — it needs a well-thought-out business model.

For early-stage SaaS startups, creating and implementing a financial model is challenging for a variety of reasons. Which is why Taylor Davidson founded Foresight, a company that offers an extensive library of financial model templates for entrepreneurs.

In this episode of The Role Forward, our host Joe Michalowski chats with Taylor about the core building blocks of an early-stage SaaS financial model. They also discuss the challenges of implementing an operational model, which part of the model is critical for which stage of the business, and why flexibility and customization are vital elements of model creation as the business grows.

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Featured Guest

Taylor Davidson

Founder, Foresight

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Taylor Davidson is the founder of Foresight, a strategic advisory service and financial model template provider for entrepreneurs and investors. Taylor has over two decades of experience, which spans lecturing at Carnegie Mellon University and the Founder Institute to his former directorship of kbs+ Ventures to co-curating Creative Entrepreneurship, a book for startup founders about venture capital and entrepreneurship. Taylor is an angel investor in nearly 100 companies.

Key Themes from the Episode
  • Building an effective model requires a deep understanding of your business. But it also boils down to structure and repeatable processes so you can leverage your model without a huge learning curve.
  • When you determine your company’s goals, the financial model will follow. Simply asking “What is our business, and what is our goal?” determines how complex your model needs to be.
  • Building a model takes different skill sets. And as you get more advanced, you can use financial model templates as a way to spark a different approach to your own model or as an educational tool about the business.

Episode Highlights from Taylor Davidson

2:21 — The Target Audience for SaaS Financial Model Templates 

“The majority of the entrepreneurs that I work with are people who have started a company. [I’m] working with founders or companies that haven’t made their first finance hire or have a more junior hire. Typically the CFO role — even a part-time CFO — or one of the executives or head of ops or some other roles fulfill that core function, and they don’t have a finance team and capabilities built out yet.”

6:41 — How You’ll Use a Particular Model Depends on Business Stage

“A model encompasses a wide variety of things. So the way I like to think about it is that there are necessary components that are valuable for different stages. For the seed stage company, one that is in early stages, creating an expense budget is always important. You should always have a budget to build, manage your expenses, and be able to lay out a strategy in terms of how you’re gonna spend your money. 

One, you have to manage cash, and two, it’s who you’re gonna hire and bring on board. It’s an indication of your strategy as well. You’re thinking about how you’re going to manage the business. And so that’s an important thing for every stage.

Now, forecasting revenues depends on the stage. I see just as much of a fault in a company not forecasting revenues as one not having a model [that] doesn’t fit this stage of your business. It’s easy to build something complex that doesn’t reflect where your company’s at.’”

13:17 — The Core Building Blocks of an Early-Stage SaaS Financial Model

“I try to build a model for SaaS that maps back to the levers that are important in understanding the growth of the business. And so, the growth of the SaaS business comes from acquiring new customers and retaining them. 

I focus on acquisition, conversion, retention, churn, and revenues and billings — five distinct entities. And they capture acquisition — how you grow the channels used for growth and conversions — and how you use those channels to convert to customers or retention. […] Then you have revenues, you have billings — the billings and cash associated with that. 

For SaaS visibility, you have to pay attention to the difference between revenues and the contract cycles embedded in the retention curves, which may differ from the billing cycle. […] So those are the five core building blocks that I focus on in building a model.

Now the degree of complexity may vary depending on what you’re doing. And there’s a variety of approaches to it.”

Full Transcript

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