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070801 financial presentation

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  • 1. Financial Projections forFinancial Projections forStart-Up BusinessesStart-Up BusinessesMark LeslieMark Lesliemleslie@leslieventures.commleslie@leslieventures.com
  • 2. Financial ProjectionsFinancial Projections► Why do Financial Plan?Why do Financial Plan?► Basic Building BlocksBasic Building Blocks► Key VariablesKey Variables► Bottoms up / Tops DownBottoms up / Tops Down► Model CompaniesModel Companies► Planning IssuesPlanning Issues► Financial Models – the crucible to test ideasFinancial Models – the crucible to test ideas► ““What-if” ScenariosWhat-if” Scenarios► Rule Number 1Rule Number 1
  • 3. Why do a financial PlanWhy do a financial Plan► Can’t raise money without one?Can’t raise money without one?► Feasibility of business modelFeasibility of business model► Understand the key variables for your businessUnderstand the key variables for your business► Understand the cash requirementsUnderstand the cash requirements► Sharpens focus on key planning areasSharpens focus on key planning areas► Focus on key operating metricsFocus on key operating metrics► Oh, yeah…Oh, yeah… Can’t raise money without one!!!Can’t raise money without one!!!
  • 4. Basic Building Blocks –Basic Building Blocks –Department BudgetDepartment BudgetEng BudgetEng Budget q1q1 q2q2 q3q3 q4q4 y1y1 y2y2head 1head 1head 2head 2Salary totalSalary totalSalary ovhdSalary ovhdDepreciationDepreciationexpensesexpensescapitalcapital
  • 5. Key VariablesKey VariablesDepartment BudgetDepartment Budget►HeadcountHeadcount Salary / overhead /Salary / overhead /recruitingrecruiting Facilities /Facilities /communications / ITcommunications / IT T& E / otherT& E / other►Capital EquipmentCapital EquipmentDept Budget
  • 6. Key VariablesKey VariablesDepartment BudgetDepartment Budget► G&AG&A HeadcountHeadcount► Exec office / CFOExec office / CFO legallegal AccountingAccounting Corporate allocatable expensesCorporate allocatable expenses► IT and communicationsIT and communicationsinfrastructureinfrastructure► Real estateReal estateDept Budget
  • 7. Key VariablesKey VariablesDepartment BudgetDepartment Budget►EngineeringEngineering HeadcountHeadcount NRENRE consulting (e.g. FCCconsulting (e.g. FCCapproval)approval) prototypes, expensedprototypes, expensedmaterialsmaterials product enhancements andproduct enhancements andsustaining engineeringsustaining engineeringDept Budget
  • 8. Key VariablesKey VariablesDepartment BudgetDepartment Budget►MarketingMarketing HeadcountHeadcount product launchproduct launch Advertising / PRAdvertising / PR seminars, trade shows,seminars, trade shows,web siteweb site brochures, literaturebrochures, literatureDept Budget
  • 9. Key VariablesKey VariablesDepartment BudgetDepartment Budget►SalesSales HeadcountHeadcount►Mgrs, SE’sMgrs, SE’s Productivity modelProductivity model partnerships, coop.partnerships, coop.AdvertisingAdvertising remote officesremote officesDept Budget
  • 10. Key VariablesKey VariablesDepartment BudgetDepartment Budget►HeadcountHeadcount►HeadcountHeadcount►HeadcountHeadcountDept Budget
  • 11. Key Variables –Key Variables –Capital EquipmentCapital Equipment►Capital equipment per headCapital equipment per head►NRENRE►Technology BuyoutTechnology Buyout►ToolingTooling►IT infrastructureIT infrastructure►Purchased BldgsPurchased Bldgs Corp Cap Budget
  • 12. Basic Building BlocksBasic Building BlocksCorp Rollup and Cap ScheduleCorp Rollup and Cap ScheduleDept BudgetDept BudgetDept BudgetDept BudgetCorp Exp BudgetCorp Cap Budget
  • 13. Key VariablesKey VariablesRevenue Model (cross checked)Revenue Model (cross checked)► MarketMarket Available / ServedAvailable / Served► PricePrice List / discount / Avg selling priceList / discount / Avg selling price► Forecast – by ProductForecast – by Product Product mixProduct mix Trajectory of RampTrajectory of Ramp► Forecast – by ChannelForecast – by Channel Net cost by channelNet cost by channel► Forecast – by Sales CapacityForecast – by Sales Capacity Sales Yield (sum of quota less safetySales Yield (sum of quota less safetymargin)margin) Productivity rampProductivity ramp Attrition calculationAttrition calculation Staffing planStaffing plan► Cost for customer acquisitionCost for customer acquisitionRevenue Model
  • 14. Key VariablesKey VariablesCost ModelCost Model► ProductProduct Estimated BOMEstimated BOM► Rush chargesRush charges► Design changesDesign changes► WarrantyWarranty► Obsolescence / write–offsObsolescence / write–offs LaborLabor VolumeVolume► ServicesServices LaborLabor TrainingTraining EfficiencyEfficiencyCost Model
  • 15. Basic Building Blocks – IncomeBasic Building Blocks – IncomeStatementStatementRevenue ModelIncome StatementRevenueCOGSExpensesProfitProduct CostModelDept BudgetDept BudgetDept BudgetDept Budget
  • 16. Key VariablesKey VariablesCapitalization (Funding) PlanCapitalization (Funding) Plan► Equity Financing – amount and timingEquity Financing – amount and timing SeedSeed Startup AStartup A Development BDevelopment B Mezzanine CMezzanine C IPOIPO Post IPOPost IPO► Debt FinancingDebt Financing Capital equipment LeasingCapital equipment Leasing Working capital bank LineWorking capital bank Line Convertible debt securitiesConvertible debt securities CapitalizationPlan
  • 17. Key Variables –Key Variables –Capital EquipmentCapital Equipment►Cost per headCost per head►NRENRE►Technology BuyoutTechnology Buyout►ToolingTooling►IT infrastructureIT infrastructure►Purchased BldgsPurchased BldgsCorp Cap Budget
  • 18. Key Variables –Key Variables –Working Capital AssumptionsWorking Capital Assumptions►Account ReceivableAccount Receivable►Accounts PayableAccounts Payable►InventoryInventoryWork CapAssumptions
  • 19. Basic Building Blocks – BalanceBasic Building Blocks – BalanceSheet and Cash FlowSheet and Cash FlowBalance SheetCash FlowDept BudgetDept BudgetDept BudgetDept BudgetRevenue ModelIncome StatementRevenueCOGSExpensesProfitProduct CostModelCapitalizationPlanCorp Cap BudgetWork CapAssumptions
  • 20. Bottoms-up / Tops-downBottoms-up / Tops-down► Bottom-upBottom-up Built from detailsBuilt from details Variable assumptionsVariable assumptions Start up and growth stageStart up and growth stage► Top-downTop-down ““model” of the mature companymodel” of the mature company Similar to other companies / products / marketsSimilar to other companies / products / markets► The Five-Year PlanThe Five-Year Plan Year 5 = model company (or close to it)Year 5 = model company (or close to it) Year 1 = raw start upYear 1 = raw start up Year 2Year 2  5 development stage to mature company5 development stage to mature company
  • 21. The Model CompanyThe Model Company► Income StatementIncome Statement RevenueRevenue Gross MarginGross Margin Departmental expenses as percentage of revenueDepartmental expenses as percentage of revenue Operating IncomeOperating Income► Balance sheet itemsBalance sheet items DSO (A/R days sales outstanding)DSO (A/R days sales outstanding) Inventory turnsInventory turns► Employee MetricsEmployee Metrics Revenue / employeeRevenue / employee Expense / employeeExpense / employee Expenses as a percent of revenueExpenses as a percent of revenue
  • 22. The Five Year PlanThe Five Year PlanS t a r t u p  M o d e lIncomeStatementBalanceSheetCash FlowY1IncomeStatementBalanceSheetCash FlowY4IncomeStatementBalanceSheetCash FlowY2IncomeStatementBalanceSheetCash FlowY5
  • 23. Critical AssumptionsCritical Assumptions► Income StatementIncome Statement Unit RevenueUnit Revenue Number of unitsNumber of units Cost of goods and servicesCost of goods and services Operating costsOperating costs► R&DR&D► S G & AS G & A Interest ratesInterest rates► Balance SheetBalance Sheet Collections of receivablesCollections of receivables Inventory turnsInventory turns Capital equipment and depreciationCapital equipment and depreciation Payable timingPayable timing Debt and equity financing availableDebt and equity financing available
  • 24. Intergalactic Optical Nanotubes, Inc.Intergalactic Optical Nanotubes, Inc.(ION)(ION)Income StatementIncome StatementY1Y1 Y2Y2 Y3Y3 Y4Y4 Y5Y5RevenueRevenue 00 2.02.0 20.020.0 160.0160.0 350.0350.0Gross MrgnGross Mrgn 00 1.61.6 16.016.0 128.0128.0 280.0280.0EngineeringEngineering 2.02.0 2.52.5 2.52.5 2.52.5 2.52.5SG&ASG&A 0.50.5 1.51.5 1.51.5 1.51.5 1.51.5Total Op ExTotal Op Ex 2.52.5 4.04.0 4.04.0 4.04.0 4.04.0Op ProfitOp Profit (2.5)(2.5) (2.0)(2.0) 12.012.0 124.0124.0 176.0176.0
  • 25. Model Companies – Operating Stacks ($M)Model Companies – Operating Stacks ($M)CiscoCisco DellDell MicrosoftMicrosoft YahooYahoo RambusRambusRevenueRevenue 18,87818,878 35,40435,404 32,18732,187 953953 9797CogsCogs 5,6455,645 29,05529,055 5,6865,686 163163 88Gross MarginGross Margin 13,23313,233 6,3496,349 26,50126,501 790790 8989EngEng 3,1353,135 455455 4,6594,659 143143 2222SG&ASG&A 4,8184,818 3,0503,050 8,6258,625 537537 3535Total Op ExpTotal Op Exp 8,3518,351 3,5053,505 13,28413,284 702702 5757OperatingOperatingIncomeIncome4,8824,882 2,8442,844 13,21713,217 8888 3131Net IncomeNet Income 3,5783,578 2,1222,122 9,9939,993 4343 2525EPSEPS .50.50 .91.91 .19.19 .20.20 .20.20
  • 26. Model Companies – Common Sizing (%)Model Companies – Common Sizing (%)CiscoCisco DellDell MicrosoftMicrosoft YahooYahoo RambusRambusRevenueRevenue 100100 100100 100100 100100 100100CogsCogs 3030 8282 1818 1717 88Gross MarginGross Margin 7070 1818 8282 8383 9292EngEng 1717 11 1515 1515 2323SG&ASG&A 2525 99 2626 5656 3636Total Op ExpTotal Op Exp 4444 1010 4242 7474 5959Operating IncomeOperating Income 2626 88 4141 99 3232Net IncomeNet Income 1919 66 3131 4.54.5 2626
  • 27. Model Companies – Market ValueModel Companies – Market ValueCiscoCisco DellDell MicrosoftMicrosoft YahooYahoo RambusRambusMarket Cap ($B)Market Cap ($B) 146146 9595 317317 33 22Revenue ($B)Revenue ($B) 1919 3535 3232 11 .1.1Multiple ofMultiple ofRevenueRevenue88 33 1010 33 2020Earnings ($B)Earnings ($B) 3.63.6 2.12.1 1010 .04.04 .02.02Multiple ofMultiple ofEarningsEarnings4141 3838 3131 7575 100100
  • 28. Planning IssuesPlanning Issues► Revenues (always) take longerRevenues (always) take longer Sales forecasts are optimisticSales forecasts are optimistic Un-tested “sales model”Un-tested “sales model” Unrealistic productivity assumptionsUnrealistic productivity assumptions► Margins aren’t as great as plannedMargins aren’t as great as planned Design creepDesign creep Hidden costs like yield, scrap, obsolescence, warrantyHidden costs like yield, scrap, obsolescence, warranty► Operating expenses higher than planOperating expenses higher than plan► Capital needs are high . . . and not freeCapital needs are high . . . and not free Cost of capital is inversely proportional to the execution of the planCost of capital is inversely proportional to the execution of the plan
  • 29. Sanity TestingSanity Testing►Income StatementIncome Statement Rate of Sales GrowthRate of Sales Growth StaffingStaffing►GrowthGrowth►Non-growthNon-growth (engineer one product, sell it forever)(engineer one product, sell it forever) ProfitsProfits
  • 30. Sanity TestingSanity Testing►Balance SheetBalance Sheet A/R, Inventory levelsA/R, Inventory levels Capitalization PlanCapitalization Plan►How much money to build what size business?How much money to build what size business? Can your investors realize 10 – 100X return onCan your investors realize 10 – 100X return oninvestment?investment?►More information later on VC fundingMore information later on VC funding►Proxy – compare your plan to theProxy – compare your plan to theexperience of existing companiesexperience of existing companies
  • 31. Financial Models --Financial Models --The crucible to test your ideas!The crucible to test your ideas!►If you understand the model, feasibility ofIf you understand the model, feasibility ofideas are more self-evidentideas are more self-evident►Make Key Assumptions into variablesMake Key Assumptions into variables Investigate alternativesInvestigate alternatives Sensitivity AnalysisSensitivity Analysis►Determine CASH consumptionDetermine CASH consumption►Understand the path to profitabilityUnderstand the path to profitability
  • 32. Modeling –Modeling –“What-if” Scenarios“What-if” Scenarios►Document assumptionsDocument assumptions Facilitates changes in futureFacilitates changes in future Operational (e.g.,product engineeringOperational (e.g.,product engineeringplan/milestones)plan/milestones)►Develop a feel for the dynamicsDevelop a feel for the dynamics E.g., Reduced investment in engineering =E.g., Reduced investment in engineering =product schedule slip of X months = revenueproduct schedule slip of X months = revenuedelaydelay
  • 33. Rule Number 1Rule Number 1Cash is Oxygen…Cash is Oxygen………Oxygen isOxygen isLifeLife
  • 34. Financial Projections forFinancial Projections forStart-Up BusinessesStart-Up BusinessesMark LeslieMark Lesliemleslie@leslieventures.commleslie@leslieventures.com650.561.1228650.561.1228
  • 35. Copyright Mark LeslieCopyright Mark LeslieOne Final Thought…One Final Thought…
  • 36. Copyright Mark LeslieCopyright Mark Leslieit is regret for the things we didit is regret for the things we didnot do that is inconsolablenot do that is inconsolable..Sidney J. Harris (1917–86)Sidney J. Harris (1917–86)Regret for the things we did canbe tempered by time;

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