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©Copyright2009Spartina Beta 1

SIBMSpartinaInternetBusinessModel:

ManageCash,IncreaseRevenue,GrowProfit

CongratulationsonchoosingtorunanInternetbusiness.Itisquiteunlikeanyother,withreal‐timefeedback,andtheuniquefeatureofbeingabletoscaleandgrowwithlimitedcostsinhumanresourcesandfacilities.ThisfinancialmodeladdressestheuniqueaspectsofyourInternetbusiness.Revenue&CostsAkeydifferentiatorforInternetbusinessesisthatrevenuesarebasedontraffic.Yourfinancialmodelmusttakeintoaccountandforecasttrafficaccurately.Therevenueforecastingisafunctionofhowthetrafficconvertstovariousmonetizationactivities,suchasauserclickingonaGoogleAdsenseadplacementorbuyingasubscription.WebelieveallInternetbusinessesshouldlookattheirtotalrevenuedividedbytheirtotalvisitorstoderiveaRevenueperVisitor(RPV).YourmissionistogrowtrafficandoptimizeconversiontoincreaseRPV.ThecoststructureofanInternetbusinessisalsounique.Youhavemanyadvantages:thecompanycanbevirtualtostart.Youmay“onlyneedaMacbook,”astheadsays,tostartit.Developmentcostsarelowwithadvancedsoftwaredevelopmentenvironments(RubyonRails)andopensourcetoolsreadyforofftheshelfintegration.Youshouldbeemployeeefficient,sincethetechnologythatyoubuildtorunwebsitecanbeleveragedforusebyanyhumanresources.FinancialModelAtSpartina,ourgoalistorunabusinessatthelowestcostwithoutjeopardizingthebusinessopportunity.WehavecreatedacustomizablemodelanduseditsuccessfullyacrossmanydifferentInternetcompanies.Themodelisdesignedtohelpyoufocusandthinkabouttherightleversthatbringyoutocashflowbreakeven,and,thenhelpyouscaletolargeprofits.Inthisdocument,wewillgothroughthevariousworksheetsthatyouwillengagewith.TherearealsoinstructionswithintheSpartinaInternetBusinessModel(SIBM)spreadsheetaswell.Thepurposeofspreadsheetismodeling/forecastingyourbusinessandcreatingabudget,whichyoucanthentransferintoyouraccountingsystemifdesired.Themodelisbasedona12‐monthperiod,andnotnecessarilytiedtoyourfiscalyear.Youcantransfertheappropriatedatatoafiscalyearwhenyousetupyouraccountingsystem.Inthemodel,youwillfindcellshighlightedinYellow:thesearetheoneswhereyouwillbeenteringinformation.Theothercellsarederivedfromyourentereddata.InstructionsareprovidedinGreen‐highlightedcells.Inthisdocumentweboldorunderlinewordsthatrefertocellsinthespreadsheet.WhenyouarereadytousetheBusinessModel,werecommendthisorder:Step1:ForecastyourtrafficonTrafficWaterfallsheet(Row4,allacross)Step2:GotoRevenueandfilloutthenumbers.Step3:Thinkabouthowmanypeopletomeettheheadcount;FillintheHeads,forecastheadcount.Step5:GototheBudgetSheetStep6:CompleteCashWaterfall–“alwaysknowwhenyouwillrunoutofcash.”Step7:Gotoline10ofRollupandaddgrowthrates.


HeadcountThemodelstartswithheadcount,theHRresourcesthatyouneedtodeliveryourbusiness.Theprincipleistobeasleanasyoucan.(Seeourarticleonstaffing)Leanstaff=moreefficientcommunication=higherproductivity.Yournumberonejobistohiregreatpeopleandwaitifyouareeverunsure.Ofcourse,everycompanywantsthat.ButforanInternetcompany,onegreatprogrammerisbetterthanthreegoodones.One“rockstar”developergivestheprogrammercompletecontrol,andtheycanworkwithsuperefficiency.SeveralofourpartnercompanieshavebeencreatedwithaCTOthatcodes,producingamazingresultsintimetomarketandproductevolution.

Inoursamplecompany,weindicate3people.Adjustthisbasedonyoursituation.WeincludeanoptionalBonusreservepercent.Ifyouareplanningonpayingabonusattheendofyear,youshouldaccrueforit,soyousetasidemoney.It’snotgoingtoaffectyourcashbutyouknowthatitisatruecost.Weincludethisinthemodelandinthebudget.Inaddition,pleaseaccruetheamountinyouraccountingsystem.ThereisalsoalineforTaxesandBenefits.Youcouldmodifythisandincludeanindividuallineforeachofthe

taxes(city,state,federal).Inourmodel,weuseanestimateforallthetaxes.Therangefortaxesis11%‐18.5%dependingonthelocation,andwhetheryouhavealocalorcitytaxaswell.Benefitscanbeashighas15–33%onceyouprovidehealthinsuranceanda401kplan.Notethatinthelongrun,therealpriceofanemployee,includingbenefits,administrativeoverhead,etc.isalmostdoublewhatyouarepayingoutincash.However,asastartup,oftenthesecostsarenon‐cash,sinceyoumaybeofferingstockincentives,andnotofferingbenefits,etc.(SeeSpartina.comcompensationarticles).Inyouraccountingsoftware,besuretoaccruewhatactuallygetsdebitedandwhattheforecastnumberis,sothatyoucanaccruetaxesandbonusescorrectly.AllthefiguresintheheadcountworksheetautomaticallyrolluptotheBudgetworksheet,whichisthenextplaceyouneedtoentersomedata.


BudgetWorksheet:

Staff:ThefiguresforthislineareautomaticallytransferredfromtheHeadsworksheet.Consultants:Inadditiontoemployees,consultantsareawaytogetbestqualityworkdone,beefficientandnothaveemployeeoverheadforsomethingyoudon’tneedonafull‐timebasis.Typicallyyouwillneedconsultantsforfinance,legal,additionaltechnology,content,andwebdesign.Eachofthesecategoriesfluctuatesintheamountthatyouneedandwhenyouneedthem.

Ourspreadsheetconsidersconsultantsasvirtualstaff,whichiswhytheyareupatthetopofthespreadsheet.However,inaccountingterms,eachoftheconsultantsmightbedistributedacrosscategories,suchasproductdevelopment(forwebdesign)etc.Weleaveittoyoutosetuptheaccountingsystemtoworkbestforyou.Financialconsultantsincludeyourbookkeeperandaccountant.Expecttospend$250‐$1,500/monthonthiscategory,dependingonwhatishappeningatanygiventime.Forexample,taxreturnswillcostabout$1k‐$5kdependingonthecomplexity,andagoodbookkeeperforafewhoursaweekwillcostabout$50/hr.Weamortizetheseexpensesovertheyear.Ifyoujustputthecostinthemonth,i.e.,taxreturnsinApril,thenyoudon’tgetatruesenseforagivenexpense.Ifyouaretryingtomanagethecash(i.e.,puttingyouractualsintothisspreadsheet)thenyoumightgroupthemaroundwhentheyoccur.Butinthebeginningit’shelpfultogettheoverviewofwhatitwillcosttodoyourbusiness.Weencourageyoutouseyouraccountingsoftwarefortheactuals.LegalConsultants:Itisreallyimportanttodothingsright;fixingthingscostsmoreinthelongrunhere.Oursecondfavoritequoteseeninanautopartsstore,is“Theinconvenienceofpoorqualitylingerslongerthanthethrillofabargain.”Getlegalhelpfrompeoplewhoknowstart‐upsandwilldothingswithanot‐to‐exceedquote.However,youcanstillexpecttospendafairamountofmoney,especiallyifyouaredoingafundingevent,issuingstockoptions,orenteringintosignificantagreementswiththirdparties.Whenyouworkwithalawyer,getatemplateagreementsoyoudon’tneedthelawyereverytime.Forexample,consultantagreementscanbedrawnuponcebythelawyer,andthenusedrepeatedly.Theoneexceptionisstockoptions.Youreallywantthemtoissueallthepaperwork,becauseifyoudoitwrong,youwillpaymultiplepeopletotrytofixit.Tokeepfundingtransactioncostsdown,seeSpartina.comlinktoYCombinatorformsandourarticleonConvertibleNotes.Technology:Thislineitemisforadditionalprogrammerservicesthatareeasilyoutsourced.Ifyouaredoingeverythingwithasingleemployeeyoucandeletethisline.ContentandEditorial:ThisisalsoauniquepartofInternetbusiness.Contentdrivestraffic.Everywebsiteshouldhaveameaningfulamountofcontentandit’sdevelopmentshouldbeon‐going.Additionally,aneditorialeyeisessentialforreadabilityandmeetingcompanystandardsandphilosophy.Bothofthese,thecontentwriting(orsourcing)andtheeditingcanbecontractedout.


WebsiteDesign:Priortothedevelopment,besureyouhavedesigned,andtestedseveraldesignsforusability.Outsourcethedesignerratherthanhavingafull‐timeemployee.Marketing:Thislineitemrelatestomarketingconsultants(othermarketingcostsarefoundbelow.)ThekeytosuccessinanInternetbusinessisSearchEngineOptimization(SEO).Assoonasthesiteisnearingcompleting,itisessentialforaqualifiedSEOconsultanttolookatitandmakerecommendations.Thisisagreatservicetooutsource.Inaddition,noneedtohaveanin‐housePRteam.Therearemanyon‐lineservicesactingasnewswiresthatcandisseminateyourpressrelease.Youmayalsocontractoutthewritingofpressreleasesandads.Weencourageyoutomakedirectmediacontact;ablogisonegreatwaytodothis.

Marketing:PaidTraffic.BuyingtrafficfromGoogle,Yahoo,Facebook.YouwantmostofyourtraffictocomefromSEO,butyoumaywanttotestterms,orjumpstartthecompany.ThisPaidTrafficfigurecomesupfromtheRevenueWorksheet,describedinthenextpartinthisseries.Operations:Hosting:ThisisacostuniquetoInternetbusinesses.Managedhostingsolutionsarepreferableoverbuyingboxesandputtingthemsomewhere.Engineyard,Slicehost,andAmazonCloudofferings

areexamplesofmanagedhosting.Withco‐locatedhosting,ultimatelyyoupaymorebecauseyouneedmoreadministrativepeopleandyouhaveabiggerriskwhenthesystemgoesdown.ManagedHostingsolutionsarealsoamorescalablesystem.Whenyourtrafficrampsup,youdon’thavetobuyadditionalhardware,depreciateit,etc.Itsimplifiesthebusinessmodel.Yes,youdopaymoreintheshorttermbut…Phone:Ifyoucanjustusecellphones,doit.Ifyouneedaphonesystem,itcouldbeasmuchas$50/employee/month.It’snotcheap!VOIPservicesareworthlookingat.Inreality,youusethephonelessandless,andwithanInternetbusiness,evenyourcustomerservicecanbeonline.WerecommendRingCentralandOneBox.Rent:Ifyoudon’tneedanoffice,don’tgetone.It’sahassle.Youthinkitmightbecheapbutthenyouhavetodealwithgeneralliabilityinsurance,furniture,cleaning,utilities,security.Abettersolutionistomeetwithyourpeopleatacoffeeshoporyourlawyer’sconferenceroom.Wefoundthatrentingthefully‐servicedofficespacesaretooexpensive,andyoupayforservicesyouprobablydon’tneed,likesophisticatedandcostlyphones;kitchenamenities,etc.OfficeInternet:Youmaynotneedit,butifyoudoshopwithyourphoneproviderfirst,orcablecompany.SaaSServices:(ApplicationServiceProviders,orSoftwareasaService)…thingssuchasBill.com,GoToMeeting,EarthclassMail,PayCycle…everythingthatyouarepayingbythemonththatisaninternet‐basedbusinessservices.Ifyoulike,youcanaddrowsforeachproductyouareusing,ortrackthemallononerow.ForreviewsofSaasproducts,visitCoolBizApps.com.SoftwareLicensesareanysoftwarethatyoupurchasetorunyourbusinessorbuildyourproduct…MSOffice,WebAppBuildingtools.


SmallEquipment:Thisisyourbudgetfortheyear,otherthanitemsover$2,000,whichcomelaterunderCapitalExpenses.Thenextlinesareobvious:Supplies,OfficeFurniture,Conferences/Tradeshows,Dues/SubscriptionsInsurance(seearticle.)StartwithGeneralliability,under$500ayear.Asyougrowandtakeoutsideinvestments,youwillneedDirectors&Officersinsuranceat$5,000ayear.Entertainment:It’simportanttohavefun.Weencouragegivingthebudgettoyouremployeesandletthemdeterminethefunthingstodowiththesefunds.CapitalExpenses:Forexample,ifyoudecidetohostthesiteyourself,youwouldneedtoincludethecostoftheservers.Wegenerallyexpenseitemsunder$2,000,whichincludesmostdesktopcomputers.BottomLines:AtthebottomoftheBudgetWorksheet,weaddafewusefulfigures.First,thestandardGrossProfit,bysubtractingthemarketingcosts,andthen,NetProfit.(ReadourarticleonBigProfits.)

CashonHandisacalculationthathelpsyougaugeyourcashposition,startingwithyourinitialcash,andthendeductingoraddingtheprofitsorlosses.Inourexample,$100,000wouldbeenteredbytheuser,butit

willreflecttheactualstartingcash.Newinvestmentiswhenyoureceivenewinvestmentmoney.Itthengetsfactoredintoyourcashposition.Thenextworksheet,Revenuewillshowuswheretherevenuefigurescomefrom.


RevenueWorksheetInanidealInternetbusiness,youwillhavemultiplerevenuestreams.Themoreyouhave,themorelikelythebusinesswillsucceed.TheSIBM(SpartinaInternetBusinessModel)allowsformultiplerevenuestreams,suchasdigitalsubscriptions,advertising,affiliates,andothers.Eachrevenuestreammonetizesatacertainrate.Somemonetizebyvisitorsandsomebypageviews.Forexample,subscriptionsareusuallycalculatedbasedonthenumberofvisitors:SubscriptionRevenue$=Price*%Conversionrate*NumberofvisitorsTheuniquefeatureoftheSIBMistheabilitytotrack/estimaterevenueflowsfromvisitorstoyourwebsitebasedontheirmonetizationaction.Therearemultiplemonetizationactionsthatdescribehowvisitorsconverttorevenue.AllofthiscomplexityofyourbusinessforecastishandledintheRevenueandTrafficForecastWaterfallworksheets.

Revenuebeginswithtraffic,whichcomesfromaTrafficForecastWaterfallworksheet.Inourmodel,weassumeinmonthone,youget500visitors,andthateachvisitorvisits2pages.Thisyields1,000pageviewswheretheycouldgenerateamonetizableaction,suchasclickingonAffiliatelinkorAdsensead.Theycouldalsobuysomething,suchasaSubscriptionorE‐commerceitem.Eachrevenuestreamhasaconversionrateatwhichitoccurs.Theconversionrateiswhereyourfocuswillbe,andyourgoalwillbetodrivetherateup.Ingeneral,youwouldstartyourmodelatalowpercent,(i.e.,alowrateofconversions).Intheabovemodel,weassume

.5%ofpageviewswillgenerateaclick.Asyougetactualdata,adjustyourforecastgoingforward.GoogleAnalyticscanhelpyoutrackconversions.CPM(displayadvertising)isanotherrevenuestream.Inthiscase,youwouldjoinanadnetwork(Glam,etc.),andtheypaybasedonthenumberof1,000sofpageviews.Yousellsomeoneapercentageoftotalpageviewsforthedisplayadvertisingplacement.Sointhispartofthespreadsheetwearetrackingwhatpercentageofourpageshaveadsonthem,i.e.,50%(ratherthantheothernumberswhichwereapercentageofourpageviewsthatgeneratedaclick.)Asyougettherealinformation,youwillchangeyourforecast.That’sthebeautyofthemodel…itcontinuestoadaptbasedonrealconditionsthatyouupdate.(Seeourmetricsdashboard,whichallowsyoutowatchtheperformanceeachweekandupdateyourmodel.)RevenuePerClickAfteryouhaveestimatedtherateofconversion,youcanlookattherevenuethateachactionwillgenerate.Inotherwords,whatiseachclickworth?(NotethatwhilewecallthisRevenuePerClick(RPC),youmayalsoseeitcalledCostPerClick(CPC),asitisthecostthattheadvertiserincursbyhavingtheadsonyoursite.)


TounderstandtherevenuefromAffiliates,ingeneralyouwilllearnfromexperience.Eachaffiliatepaysatadifferentrate,andfordifferentactions:clicks,purchases,etc.Wecancomeupwithalow

average,suchas$.10andadjustasyougoalong.Notethatyouaretakingconversionrateriskforaffiliateprograms,sotest,test,andtesttofindgoodones.ToknowyourmonetizationrateforGoogleAdSense,youwillneedtowatchyourreportsandkeepyourspreadsheetuptodateasrealnumberscomein.$.25isagoodstartingpoint,butbesuretocheckthisatleastweekly.

RegardingtheCPMadrevenue,agoodestimateisthatforevery1,000pageviewsyougetsomethinglike$1‐$5cpm.Thiscansometimesbemuchhigherifyoursiteisinahighlymonetizablecategorysuchasrealestate,finance,ortravel.SubscriptionRevenueisassumingthatyousellasubscriptionproduct.Deletetherowifitdoesn’tapply.Otherwise,youwouldfillinthevalueofthesubscriptionthatyouareselling.Youmightconsidernettingthepricetoreflectyourrefund/cancelrate.Forexample,ifyoursubscriptionpriceis$50/yr,butyouexperience20%refunds,usea$40/yrpricefortheSubscriptionprice.E‐commercerepresentsanydigitalorphysicalproductsyouareselling,suchasreports,books,software,etc.AfterfillingintheRevenueRates,thetotalrevenueisthencalculatedforyoubasedontheRateofConversionstimestheRevenueRates.TheRevenuePerVisitor(RPV)iscalculatedbydividingbytheTotalRevenuedividedbythenumberofvisitors.Thebottomline“TotalRevenue”iscarriedbackintotheBudgetworksheet.Revenue:CostsTheRevenueWorksheetalsocontainsfiguresoncostsfortherevenuesothatwegetaccuratenetresults.

Thefirstfigure,PaidTrafficBudget,ishowmuchyouarespendingonyourpaidtraffic.ThislineitemshowsupintheBudgetunderMarketing:PaidTraffic,i.e.,itiscarriedfromthisworksheettotheBudgetworksheet.TheCostpervisitorcomesfromthereportsyougetviatheAdWordsdashboard.(AssumingyouuseGoogleAdwordstobuytraffic.)Onceyou

knowthecostpervisitor,youcancalculatethenumberofPaidvisitors.Inotherwords,dividingyourtotalbudgetforpaidtrafficbythecostpervisitortellsyouhowmanyvisitorsyouare“buying.”WecanalsolookatthePaidtrafficversusfreetrafficandcomeupwithaBlendedcostpervisitor.


Thegoalovertimeistoincreasethenumberoffreevisitors,anddecreasethepaidvisitors,sothecostpervisitorbeginstogodown.Finally,RPVminusCPVisthenetrevenuepervisitor(NRPV).Tocalculateyournetmarginpervisitor,divideRPVbyNRPV.ManagingyourRevenueTheRevenuesheetoftheFinancialModelspreadsheetofferstwoimportantnumbers:TotalrevenuepervisitorsandCostspervisitor.Themanagementgoalistoincreasetherevenue/visitoranddecreasethecost/visitor.Thisusuallyhappensnaturallyasyouattractfreetraffic.Ourfinancialmodelhastwomoreuniqueworksheets:TrafficForecastWaterfallandCashWaterfall.Wewillexplorethesenext.TrafficForecastWaterfallAwaterfallspreadsheetisanamazingcreation,andonceyougetthehangofusingit,youwillprobablyturntoitformanyapplications.AgreatarticleonUsingtheWaterfallcanbefoundonSpartina.com.

OurTrafficForecastWaterfallallowsfordynamicupdatingwithoutlosingperspectiveofwhatyouthoughtyouwoulddointheyearorlastmonth.Everymonthyougetabettersenseofhowthingsareprogressing,andmakechangesaccordingly.Onthissheet,theverticalcolumniswhatyouthinkwillhappeninamonth,andthelastvalueineachcolumniswhatactuallyhappened.Monthbymonth,youentertheactuallydataandreforecasttheremainingmonths.Asthenumberschangehere,theywillaffecttheRevenueworksheet.Theprocessiskeepingthewaterfallup‐to‐datebyfixingtheactualtrafficnumber,re‐forecastingtherestoftheyear,whichthenrecreatestherevenueandadjuststhebudget.CashWaterfallThesameprocessisusedformanagingcash.Thegoalistomakesureyouarenotgoingtorunoutofmoney.


Youstartwithyourprojections.Theneachmonth,takethecashfigurefromyouraccountingsystem,andentertherealcashthathasgoneout.(Thisdoesn’taccountfortheaccruals.)Thetoplinerepresentstheplanorforecastforyear,anditwon’tchange.Bylookingatthiswaterfallsheet,youcancompareactualstotheplan.RollUpWorksheetThelastsheetoffersasummaryofthefirstyearRevenue,Expenses,andkeymetrics.Itisawaytothinkaboutthesubsequentyearswithouttryingtogetprecise.Ratheryougetasenseforthetotalrevenuepotentialfor5years,andhowcostsrelatetothatrevenue.Theimportantprincipleisthatyouwanttoinsurethatrevenuegrowsfasterthanexpenses.Aportionofthisroll‐updatagoesintotheexecutivesummariesthatyoumightuseforinvestorpresentations.ConclusionNowyou’veseenalltheelementsoftheSpartinaInternetBusinessModel,andit’stimetoputittoworkforyourbusiness,soyoucanmanageyourcash,increaseyourrevenueandgrowyourprofits.Bestofluck!