Financial Models
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Financial Models






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Financial Models Presentation Transcript

  • 1. Financial Models Jason Altieri Member Mintz Levin Jeff Karras General Partner Levensohn Venture Partners
  • 2.
    • “ Plans are useless,
    • but planning is indispensable”
    • - Dwight D. Eisenhower
  • 3. Company Perspective
    • The VC Pitch Forces You to Hone Your Company’s Strategy & Economics
      • Focuses your team on how the enterprise creates value
      • IDs metrics to gauge & guide your execution success
      • Enables you to determine how much investment capital is required - TODAY
    • Revenue & Expense Forecasts Are Critical
      • Your business may be unique, your financial model is not
      • All forecasts are assumptions, the trick is to be reasonable
      • You will be expected to deliver: better to under promise and over perform
      • This document becomes the financial roadmap of the company
    • Determines Valuation
    • Establishes your Credibility as CEO
      • Must know the high level model
      • Must understand Cash Flow implications
      • Must know the key drivers & how they evolve with the plan
  • 4. Venture Perspective
    • Demonstrates mastery of business, company, and market
    • Baseline for board to measure management performance
    • Valuation of a company
      • Comparable analysis
    • VC Economics
    • Cash is Critical
      • Top line revenue indicates pace of growth
      • Cash indicates capital efficiency, VCs required commitment, and returns
  • 5. Model Types
    • Top Down (the 1% solution)
      • Market size down to sales revenue
        • 10m users ->.005% of the market ->2k/user->$10m sales
        • Credible?
    • Bottom Up
      • Sales up to revenue
        • 20 sales people – each selling 21 units/month at $2k/unit
        • Credible?
  • 6. Basics
    • 5 year time horizon
      • First two help set cash flow expectations
      • Last three help define opportunity
    • Income Statement
    • Balance Sheet
    • Cash Flow
    • High-level summary of the growth
  • 7. Basics (cont.)
    • Reasonable and defendable assumptions
      • Highlight key assumptions
      • Have assumptions on separate tab that drive the model
      • Assists in “what if” planning
    • Some Key Assumptions
      • Price
      • Sales Growth
      • COGS
  • 8. Line Items
    • Rent/employee/month
    • Equip costs/employee/month
    • Benefits
    • Bonuses/Commissions
      • Commission plan
      • What is it versus existing players?
    • Payroll Exp/month
      • Capital raising often results in salary increases
      • Change in compensation mix with later employees
      • Less stock heavy more cash intensive
  • 9. Line Items (cont.)
    • Recruiting fees
      • Internal – $2-10k
      • External – 20-30% of first year package
    • Contractors
      • Accounting function
      • H/R
    • Customer acquisition costs
    • Legal
    • Accountants (post financing)
    • Unique business costs
  • 10. Hints
    • Headcount
    • Plan slow/run like hell
      • Slower than expected
        • Hiring
        • Product development
        • Sales/revenue
      • Higher than expected
        • COSTS
  • 11. Hints (cont.)
    • Investment capital is intended to fuel accelerated growth
      • Expectations vs. reality
      • This can kill a business before it hits its stride
    • Economies of Scale
      • Bureaucracies rule (Amazon etc)
      • EoS – so old economy
    • Magic revenue number?
    • Market share in year five
  • 12. Model Input Sources for Startup CEOs
    • Venture Wire Deal size, competitive info, etc.
    • Busy site, but great source of stats
    • Sophisticated contact list builder; build a list of your target market & get the count (you don’t have to buy it)
    • Trade groups Usually publish stat-rich reports that are very relevant
    • Good geographically oriented compensation data
    • Analysts Analyst reports are filled with stats & business model data
    • Your Broker Research papers contain industry economics & an investor perspective
    • Friends, past & present colleagues, etc.
  • 13. Forecast Example Year1 Forecast Year2 Forecast Year3 Forecast Year4 Forecast
  • 14.
    • Financials for ongoing operations
  • 15. Venture Perspective
    • Communication vehicle with investors and shareholder
    • Milestones for progress
    • Benchmarking company efficiency
    • Establishing track record
  • 16. Company Perspective
    • Models are Dynamic
      • Nothing ever works the way you thought
      • Reasonable models provide flexibility to adjust to reality
    • Metrics (from Financing) Become Management Tools
      • P&L dials to flexibly deliver P&L goals
      • Health of the business indicators: ASP, sales cycle, ramp, payment & collections, conversion rates, acquisition costs, etc.
    • Numbers Allow You to Effectively Manage Your Team
      • They are not just your numbers
      • Useful tool for managers to prioritize
    • Cross-Functional Communication
      • Tradeoffs
      • Forces Strategic Decisions
  • 17.
    • What happens if you don’t make your numbers?
  • 18. Venture Perspective
    • Another round quicker than expected
    • A bridge financing with unfavorable terms
    • More dilution to both existing investors and management
    • Lost confidence from board
    • New CEO
    Boards hate surprises!!!!
  • 19. Company Perspective
    • Minor or First Miss:
    • Use the “miss” to realign for success
      • Poor planning vs. execution, market acceptance or economic conditions
    • Focus on what is working &/or eliminate “waste”
    • Ongoing Misses:
    • Morale Suffers
      • Recruiting gets hard
      • Employees leave
    • Confidence in Management Erodes
    • Market Position is Weakened
      • Early fundraising signals weakness
      • Competitors will raise concerns with prospects
    • Board Support Diminishes
      • Boards hate surprises
      • Forewarned is forearmed
    • Looking for a New Job
  • 20. Top Ten Mistakes - VC
    • Presenting financials without ability to discuss detail if asked (while model are seldom reality, it demonstrates that the entrepreneur fully understands the full scope of the business)
    • Plan is overly optimistic. Revenue traction always takes longer. Must understand the sales qualification and challenges
    • Plan is overly pessimistic without clearly identifying upside
    • Revenue plan created solely to match the operational requirements
    • Plan does not tie to pipeline, ASP, sales cycle, and ability to hire team
    • Build plan to try and pump up valuation
    • Failure to understand industry comparables and know the gross margins, expense levels as a % of revenue, and operating margins
    • Failing to account for competition and its affect on prices
    • Using the 1% of the market technique to justify opportunity (market size usually off and most never get 1% of market)
    • Entrepreneur does not understand cash implications and subtleties of the timing of payments and receipts
  • 21. Top Ten Things You Must Do - Company
    • Develop both a top-down and bottom-up plan
    • Ramp-up of new staff must be realistic (including ramp-up and availability)
    • Quality, quantity, and stage of pipeline must be realistic
    • Large deals and timeframe to close must be presented realistically
    • Judgment needs to be applied to sales management
    • In a small start-up, the CEO must know every major account
    • Raise the right amount of money (What you need to deliver your plan with a cushion)
    • Working capital requirements must be carefully considered as they impact CASH
    • There are other ways to smooth out cashflow: AR lines, lease Lines, debt, payables management, etc.
    • Establish mentor/advisor relationships
  • 22. Key questions that you should be able to answer
    • How much cash is in the bank?
    • Forecast for the month?
    • What is the burn rate (Gross and Net)?
    • How long to cash flow break even?
    • How much additional cash will be required?
    • When will additional cash be required?
    • What will you use the cash for?