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The Brode Report
The Brode Report | July 2016


Summer is moving right along. While I appreciate the 90 degree days, I know it’s coming to an end soon. I’ve finally gotten my head back into lead climbing, which is immensely satisfying. But I love these days of trail running and hiking and hope you’re enjoying these long hours of sunlight as well.

I’ve also been busy at work and this month am happy to share a new presentation breakthrough below.

Let’s stay in touch. As Bilbo Baggins said at his birthday, “I don’t know half of you half as well as I should like” (we’ll leave off the rest of it).



I have a new niche website at www.brodetelecom.com. It details the specific work I’ve been doing in telecom including wireless, cable, fiber, small cells, etc.

Narrative Reports in a Model

I do a fair number of models for startups (ranging from those seeking a few million to those who need a few billion to execute). Just this month I realized that I want to add a new output report to the standard set. It used to be that I’d deliver an income statement, balance sheet, cash flow statement, and a summary report with highlights from the financials along with some statistics. Often we’d also have a 6-line summary to paste into a PowerPoint deck. Those, along with the cap table output, would round out the model results.

Of course, behind the scenes was a scenario manager/inputs page, and model consumers would see that when I gave a model tour. On the tour we’d go through sections: typically volume and revenue, with all the assumptions that went into that and intermediate calculations like breakouts by mix or such. Then we’d move on to expenses, capex, investment, etc. All the while we’re flipping back and forth between the assumptions, calcs, and reports while adding a verbal overlay.

And this is where the magic happens (if I may) in delivering a model. It’s more than just the bits that you email. It’s the process of taking people through the model and explaining it to them and getting them on board with it. Often the value of a model is in letting investors know what assumptions they need to believe for this plan to be a good idea. During the back-and-forth of the presentation investors ask questions the management team justifies the assumptions. All the while we’re seeing in real time how the model changes as we tweak the assumptions.

At times I’ve created videos
of me giving the model tour and made that available to clients, who would send that out directly to potential investors. That kept the explanation part of the tour intact, but clearly doesn’t allow for questioning.

And this leads us to the new report. I call it the Narrative. What makes it unique is that it’s a subjective presentation of the key inputs and outputs to the model along with a measure of explanatory text. Here’s a portion of one:

Products and Pricing
   XYZ Company sells products in keeping with the classic "razors and razor blades" model.
      The OCT Unit (the "razor") is a piece of equipment that jugglers use to hypnotize their crowds by spraying the Consumable (the "razor blade").

MDC Unit Cost ($/Unit)
Consumables ($/Unit)
US Prices

The goal of the Narrative is to walk people through the key assumptions so they get a sense of the economic dynamics at play and the scale of the company. If done well, you can explain most models in two to four pages of mixed text and numbers.

In this next example the Narrative explains nearly half a billion dollars of costs in half a page:

Cost of Service/Cost of Good Sold

Margins are different on hardware versus service.

Hardware margins are
on just the equipment, without any customer service time or credit card charges
Service margins are
in Y5, at full scale
Overall gross margin is 33% in Y5, at full scale

The hardware margins are straightforward. The largest component is, naturally, the cost of the unit itself.

Unit COGS ($/unit)
Hardware Fulfillment ($/unit)
Warehousing ($ 000/year)

The service margins are based on these factors:

Y5 Costs($M)
Licensing Fees
Based on royalty rate of 25% on gross service revenue
Based on $/sub/mo of $2.00 ... this is likely to decline. Hosting and bandwidth are commodity markets
Credit Card
Based on % of US Revs 2.0%  
Salary and Related
Largely customer service. See analysis below.

COS Headcount
   Customer Service
And customer service is based on a ratio of subs per customer service rep
      Subs per CSR Rep

Why the Narrative is good:

It’s an intellectually honest way of explaining assumptions and methodology. It’s both clear and open. As it is a customized section for every model, it forces me to think about the dynamics we’re really modeling here.

I’ve seen models where, say, you see the equivalent of “Energy is an $800 Billion market. If we capture 1% of the market, we’ll be an $8 Billion company.” And I always laugh because the idea is that it’s conservative because, as we all know, there’s no number smaller than one. (Except zero, for starters.) So that model’s Narrative would show $800B x 1% = $8B pretty easily and you’d realize there’s no meat to this plan.

The problems with the Narrative:

Unlike a standard income statement which is part of the core model and thus is technically correct every time, the Narrative might be custom to a particular scenario or methodology and might not update perfectly if there are big changes to the model. I’m willing to live with this fault because I’m seeing first-hand how people can use the Narrative to quickly understand a financial model.

As I’ve done model tours for two different businesses recently, the presentation focused on the Narrative and used it to structure the tour. For both startups the presentations were great successes, and I’m planning to stick with this new method.

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The Brode Group
Strategic Financial Consulting - Real-World Results
(303) 444-3300