Financial projections presentation (Venture Fast Track)

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Part of the all day Venture Fast Track: http://www.thecapitalnetwork.org/programs/venture-fast-track/ …

Part of the all day Venture Fast Track: http://www.thecapitalnetwork.org/programs/venture-fast-track/

Financial Projections

Join our experts in an overview discussion of financial projections. Learn the key metrics that will get investors to notice you, as well as those that will get you rejected. If you have no idea where to begin with your financial projections, this program is for you.

Experts:

- Alicia Amaral – Scalar Analytics
-Heather Onstott – LaunchCapital

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  • 1. Financial Projections for Presentations October 24, 2013
  • 2. Today’s  Speakers   Heather  Onsto,   •  Venture  Partner,   former  Director  of   Small  Business  with   LaunchCapital   •  Interim  CEO  of  the   Nanny  Caddy,  a   LaunchCapital   porPolio  company   •  Over  20  years   experience  in  small   business  finance   •  BA,  Wofford  College;   MBA,  Dartmouth   Alicia  Amaral   •  Managing  Director,   Scalar  Analy<cs   (Business   Valua<ons)   •  CPA,  CVA   •  TuDs  Univ  &  Clark   Univ  Professor   (Accoun<ng  and   Business  Valua<on)   •  Prior  CFO   •  BA,  Furman,  MSA,   Bentley  
  • 3. Financial  Projec<ons:  WIFM?   Today’s  presenta<on  will  focus  on  the  how  and  why  of   building  and  pitching  financial  projec<ons   • How:    Crea<ng  financial  projec<ons  using  a  spreadsheet  and  some   common  accoun<ng  knowledge  shows  you  where  to  focus  your   resources   • Why:    Crea<ng  financial  projec<ons  shows  investors  that  you  have   carefully  considered  all  financial  implica<ons  
  • 4. Financial  Projec<ons:  3  Objec<ves   1.  Force  discipline  and  objec<vity  through  crea<ng  a   methodical  approach   2.  Demonstrate  thorough  understanding  of  your   company’s  business  model   3.    Provide  answers  to  “what  if?”  
  • 5. Building  Projec<ons:  Yeah,  but…   I’ve  heard  that  I  don’t  really  have  to  build  a  business  plan  with   financial  projec8ons  because  no  one  actually  reads  it…   •  Business  plans  with  financial  projec<ons  are  necessary…   FOR  YOU       –  Bo,oms-­‐up  vs.  Top-­‐down   –  HINT:  You're  trying  to  talk  yourself  out  of  this!   •  Financial  projec<ons  are  a  key  por<on  of  the  due  diligence   most  investors  perform   Investors  are  more  interested  in  the  assump1ons  made  when   building  financial  projec1ons,  not  the  exact  bo;om  line  
  • 6. Building  Projec<ons:  Pulp  fic<on?   Projec8ons  are  just  imaginary  anyway,  so  what  does  it  maCer   what  I  put  in?     A  common  mistake  is  to  have  illogical  numbers  in  the  projec<ons –  All  numbers  should  be  <ed  to  your  growth  assump<ons   •  Ex  1:  If  sales  cycle  is  6  weeks,  should  there  be  sales  in  month  1?   •  Ex  2:  If  business  is  seasonal,  should  growth  be  smooth  in  every  month?     –  All  numbers  should  <e  with  a  rough  cash  flow  statement •  Either  a  separate  tab  or  at  the  bo,om  of  the  P&L   Projec1ons  that  have  not  been  planned  properly  make  investors   ques1on  your  understanding  of  your  business  model  
  • 7. Building  Projec<ons:  What  if…   Scenario  planning  is  just  worst-­‐case  (out  of  business),  expected   (what  I  really  think  will  happen),  and  best-­‐case  (Google  buys  us   for  a  bazillion  dollars),  right?     Focus  on  YOUR  key  success  metrics  to  drive  scenario  planning   –  Sales  trac<on –  Gross  margins   –  Incremental  headcount   Fundraise  amount  range  should  encompass  most  likely  scenarios  to   avoid  expensive  “Bridge”  or  “A-­‐1”  rounds  
  • 8. More  on  Scenario  Planning…   Worst-­‐case  scenarios  should  answer  “What  happens  if  there  is   no  outside  capital?”   –  if  the  answer  isn't  'grow  slower',  is  this  a  pipe  dream?   Best-­‐case  scenarios  should  answer  “What  does  this  business   look  like  if  everything  goes  right?”   –  if  the  answer  isn’t  a  huge  financial  win  for  your  investor,  is  this  a  pipe   dream?   Most-­‐likely  scenarios  should  answer  “What  does  this  business   look  like  following  comparable  companies’  growth  paths?”   –  if  the  answer  isn’t  able  to  be  funded  with  the  current  “ask”,  is  this  a   pipe  dream?   Goldilocks  got  it  right:  examine  all  op1ons!  
  • 9. Building  Projec<ons:  Common  terms   •  •  •  •  •  •  •  •  •  •  P&L   Retained  earnings  (best  source  of  funding!)   EBITDA   Gross  profit  margin  (GP  or  GPM)   Working  capital   CapEx   Burn  rate   Accrual  vs.  cash  basis   Cash  flow  breakeven  (CFBE)   Capital  structure  
  • 10. Building  Projec<ons:  How  it  works   •  Have  an  assump8ons  page  and  reference  cells     (don’t  hard  code  anything)   – A  separate  assump<ons  page  allows  flexibility   –  change  them  for  different  growth  scenarios   – Assump<ons  are  the  backbone  of  your   projec<ons,  so  you  should  know  them  COLD   Excel  is  your  friend,  but  be  careful  with  cell   references  –  it’s  easy  to  make  a  mistake!  
  • 11. Building  Projec<ons:  Proper  start…?   Es<mate  1%  of  $100   million  market  share  
  • 12. Building  Projec<ons:  Proper  start…?   Es<mate  1%  of  $100   million  market  share   JUST KIDDING!
  • 13. Projec<ons:  Start  with  Revenue   Take  a  “Bo,om  Up”  approach   •  Ex:  We  have  tracked  X  unique  visitors  to  our  website   and  with  an  industry  averages  2%  conversion  rate,   sales  will  be  Y.   •  Ex:  Survey  revealed  customers  are  willing  to  pay  $X   for  a  product  with  Y  features.   •  Ex:  Q4  sales  were  $X.  With  a  customer  acquisi<on   cost  of  $Y,  we  expect  a  20%  growth  rate  as  a  result  of   marke<ng  efforts   Econ  101:  revenue  =  price  *  volume.    Knowing  which  element  is   driving  your  company’s  revenue  is  a  key  metric.  
  • 14. Projec<ons:  Add  in  expenses   This  also  has  a  “Bo,om-­‐up”  approach   •  Include  details  of  all  categories   –  Ex.  Inventory  =  raw  materials,  WIP,  and  finished  goods   –  Ex.  Headcount  is  a  step-­‐func<on  (hard  to  find  .25  person)   –  Ex.  Income  taxes,  no;  Sales  tax,  use  tax,  payroll  tax…  yes!   •  COGS  (gross  profit  margin)   –  Inventory,  shipping,  packaging,  direct  labor   •  SG&A     –  Business  Development/Sales   –  Marke<ng   –  Overhead  
  • 15. Projec<ons:  Understand  EBITDA  piPalls   •  EBITDA  excludes  expenses  that  are  not  core  to  a   company’s  opera<ons;  allows  for  comparisons   without  regard  to  capital  structure   •  Be  careful  about  using  EBITDA  as  proxy  for  cash  flow   even  though  most  investors  expect  it   •  EBITDA  excludes  deprecia<on  because  it’s  noncash   but  CapEx  requires  cash   “References  to  EBITDA  make  us  shudder  –  does  management  think  the   tooth  fairy  pays  for  capital  expenditures?”  –  Warren  Buffet    
  • 16. Projec<ons:  final  checks   •  Map  out  cash  inflows  and  ouPlows  to  determine   funding  needs  –  do  this  by  month!   •  Revenue  collec<on  –  <ming  impacts  cash  projec<ons.   30  or  60  days?  2/10,  n30?   •  Inventory  turn  –  becomes  COGS  when  you  sell  it  but   need  cash  up  front   •  Deprecia<on  =  noncash  expense  (include?)   •  Don’t  forget  to  include  CapEx  in  cash  flow  (tooth  fairy   doesn’t  visit  adults)  
  • 17. Projec<ons:  MORE  final  checks   "The  GOAL”  is  to  make  money   –  Social  jus<ce,  triple  net  bo,om  line,  etc,  come  AFTER   profitability   •  "You  can't  give  away  what  you  don't  have"     –  You'll  need  space  one  day  that  isn't  free   –  It  is  illegal  to  hire  someone  and  not  pay  them   –  Equity  +  cash  =  total  compensa<on   •  As  equity  values  increase,  cash  compensa<on  should  increase  as  the   less  expensive  long-­‐run  pay  op<on  (this  means  you  are  WINNING!)   –  Research  financial  statements  to  get  an  idea  of  expenses  you   may  have  missed     –  Research  how  much  things  cost  –  don’t  guess!   •  Call  your  iden<fied  suppliers  for  costs,  terms  of  materials  and   development  costs  
  • 18. Pitching  projec<ons:  What’s  the  “ask”?   Fin  projec<ons  need  to  <e  to  the  amount  of  the  raise   –  Fundraising  takes  <me,  so  12-­‐18  months  of  cash  per  raise   –  Iden<fy  milestones  to  be  hit  and  cost  of  each  one   –  The  sum  of  those  milestone  costs  is  the  raise  amount   –  The  "cushion"  in  the  raise  is  not  X%,  it's  the  cost  difference  in   the  most  likely  scenarios   The  secret  to  life  is  “t”   –  “t”  is  the  variable  for  “<me”  in  mathema<cal  equa<ons…  and   <me  in  projec<ons  is  everything  
  • 19. Pitching  Projec<ons:  Rookie  moves   –  CTRL+C+P  en<re  excel  model  into  a  slide   –  Using  anything  less  than  18-­‐point  font     –  Li,ering  clipart  from  1995…  or  2013   –  Sta<ng  projec<ons  to  the  $.01   –  Failing  to  summarize  projec<ons   –  Using  ANY  of  the  following  phrases:   •  “conserva<vely  es<mated…”   •  “at  only  X%  of  the  market…”   •  “with  no  compe<<on…”   –  Forgeyng  to  explain  what  the  amount  you  raise  achieves   –  Expec<ng  a  short-­‐term  exit  at  a  high  mul<ple  
  • 20. BAD  EXAMPLE   Revenue Custom runners Standard runners Total Revenue 120000.00 52500.00 172500.00 360000.00 157500.00 517500.00 1080000.00 472500.00 1552500.00 2160000.00 945000.00 3105000.00 4320000.00 1890000.00 6210000.00 30000.00 23625.00 53625.00 90000.00 70875.00 160875.00 270000.00 212625.00 482625.00 540000.00 425250.00 965250.00 1080000.00 850500.00 1930500.00 118875.00 356625.00 1069875.00 2139750.00 4279500.00 10500.00 50000.00 40000.00 31500.00 50000.00 50000.00 94500.00 100000.00 62500.00 189000.00 150000.00 78125.00 378000.00 200000.00 97656.25 30000.00 9600.00 4800.00 18000.00 120000.00 30000.00 21600.00 334500.00 30000.00 9600.00 4800.00 18000.00 120000.00 30000.00 21600.00 365500.00 30000.00 9600.00 4800.00 18000.00 120000.00 30000.00 21600.00 491000.00 30000.00 9600.00 4800.00 18000.00 120000.00 30000.00 21600.00 651125.00 30000.00 9600.00 4800.00 18000.00 120000.00 30000.00 21600.00 909656.25 -215625.00 -8875.00 578875.00 1488625.00 3369843.75 -4500.00 -24761.90 -3600.00 -31904.76 -2700.00 -31904.76 -1800.00 -28571.43 -900.00 -28571.43 -244886.90 -44379.76 544270.24 1458253.57 3340372.32 0.00 0.00 217708.10 583301.43 1336148.93 -244886.90 -44379.76 326562.14 874952.14 2004223.39 COGS Custom runners Standard runners Total COGS GROSS PROFIT Expenses Selling Expenses Commission Marketing/Advertising Research and Development General and Administrative Expenses Office Rent Insurance Office Utilities Supplies Salaries Benefits Miscellaneous Total Expenses EBITDA Interest Expense Depreciation Expense Pretax Income Income Tax Expense NET INCOME
  • 21. Pitching  Projec<ons:  Expert  moves   •  Know  your  audience   –  The  earlier  you  are,  the  more  interested  in  your   assump<ons  the  investors  are  –  so  know  you’ll  be   discussing  them  in  detail.    Painstaking  detail.     •  Be  rich,  not  king   –  Does  a  new  hire  cut  costs  or  increase  revenue?    This  will   drive  the  <ming  of  a  new  hire.   •  Don’t  forget  that  headcount  is  a  step-­‐func<on     •  What  is  B/E  expecta<on  for  a  new  hire?   –  Good  metric  for  HC  is  sales/employee  –  these  numbers  are   benchmarked  and  available  with  some  research.  
  • 22. Good  Example  -­‐  Financial  Projec<ons   INCOME STATEMENT 2013   2014   2015   2016   2017   Sales Net Sales $110 $220 $330 $440 $550 COGS $75 $120 $175 $220 $275 Gross Margin $35 $100 $155 $220 $275 32% 45% 47% 50% 50% Sales $80 $70 $70 $80 $100 Marketing $50 $75 $50 $75 $100 R&D Product Development $25 $35 $25 $15 $15 General & Administrative $20 $30 $40 $45 $50 $175 $210 $185 $215 $265 ($140) ($110) ($30) $5 $10 $300 $0 $0 $0 $0 $160 $50 $20 $25 $35 Gross margin % Expenses Total Expenses Net Income (Loss) Outside Capital Annual Cash Balance