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Funding for innovative startups - Part 3 of 5


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Practical funding masterclass: a series of 5 presentations by Benno Groosman.
Session 1: Introduction to funding language + business planning.
Session 2: Determining funding need + milestone-based funding.
Session 3: Building your financial investment plan.
Session 4: Investor readiness.
Session 5: Advanced funding and wrap-up.

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Funding for innovative startups - Part 3 of 5

  2. 2. MASTERCLASS FUNDING FOR INNOVATIVE STARTUPS Benno Groosman MScBA – –Athens, February 16 – OrangeGrove
  3. 3. MASTERCLASS SCHEDULE  Session 1: Introduction to funding language + business planning;  Session 2: Determining funding need + milestone-based funding;  Session 3: Building your financial investment plan;  Session 4: Investor readiness;  Session 5: Advanced funding and wrap-up. www.groosman.infoFUNDING MASTERCLASS
  4. 4. INTHIS PRESENTATION Scope From milestones to investment table How to make assumptions Cash flow and liquidity Revenue and profits Valuation www.groosman.infoFUNDING MASTERCLASS
  5. 5. SCOPE  The financial plan is part of your business plan  See for example for-innovative-startups-part-1-of-5  In this presentation I focus on new ventures that need (high) initial investments and deal with future uncertainty and risk  Though, the basics work for other types of ventures too  This is an introduction; your financial plan requires a lot of practice and updating.  There are many ways of presenting your numbers; I show how I did it in my (funded) business plans and included these examples. www.groosman.infoFUNDING MASTERCLASS
  6. 6. VALUE-ADDING ACTIVITIES (PREVIOUS PRESENTATION) Investors don’t like to pay for marketing, big office space and high salaries. Use all funding to increase the valuation of your venture by investing in prototypes, production, sales, patents, strategic positions etc. www.groosman.infoFUNDING MASTERCLASS
  7. 7. MY DEFINITION: MILESTONE (PREVIOUS PRESENTATION) A milestone is the concrete achievement of a significant step in your venture planning, which adds financial value to your venture. www.groosman.infoFUNDING MASTERCLASS
  8. 8. MILESTONE-BASED FUNDING (PREVIOUS PRESENTATION) Define the milestones in your startup plan Determine the amount of money and time you need to reach each milestone Match milestones with available funding sources Can you combine the milestones for funding? www.groosman.infoFUNDING MASTERCLASS
  11. 11. FUNDING NEED (PREVIOUS PRESENTATION) Ask the money that you really need, not too little, and about 10-20% extra for unforeseen expenses, to achieve the milestone(s) you are aiming for. www.groosman.infoFUNDING MASTERCLASS
  12. 12. FROM MILESTONESTO INVESTMENTTABLE The milestone planning gives you an indication of the amount of money you need and when you need this In your business plan you don’t only present the total costs of each milestone, but you also split it to the category of costs (e.g. R&D, salary, office, materials) www.groosman.infoFUNDING MASTERCLASS
  14. 14. EXAMPLE INVESTMENTTABLE MEDTECH (TYPE OF COSTS) Note: you can define your own categories, this is just an example www.groosman.infoFUNDING MASTERCLASS
  15. 15. ASSUMPTIONS  After the milestone planning and the investment table you have an idea of the amount of money you need to raise  In order to raise money you have to show financial projections for the future  For these projections you have to make estimates of costs and revenues  In new ventures these estimates are assumptions  The number is not very important, how defendable the assumptions are to get to this number is the most important! www.groosman.infoFUNDING MASTERCLASS
  16. 16. HOWTO MAKE ASSUMPTIONS ON REVENUE Percentage of the total market Only in rare cases. Investors don’t like the phrase “we will capture only 0.1% of the market and still will make millions” A percentage of the total market can be feasible when you only take the local market or a very specific niche market It’s good to know the market size, but to determine your share it is better to use the next options www.groosman.infoFUNDING MASTERCLASS
  17. 17. HOWTO MAKE ASSUMPTIONS ON REVENUE Revenues followed by a sound sales plan Look at your operations now and after successful funding and make a sales plan For example: there are 200 big customers in my country, we visit two of them every week and expect a 10% conversion, leading to 52*2*0.1 = ~10 customers in year 1. www.groosman.infoFUNDING MASTERCLASS
  18. 18. HOWTO MAKE ASSUMPTIONS ON REVENUE  Compare with substitute and complementary products or competitors  In case you sell “green roofs” for new houses, you need to know how many new houses are being build. Additionally you can compare with the size and growth of young competitors. What can you do different to capture your part of the market?  If you have a new product that will replace another type of product, see the market of the substitute product and determine the likelihood that somebody would switch to your product. www.groosman.infoFUNDING MASTERCLASS
  19. 19. HOWTO MAKE ASSUMPTIONS ON REVENUE Build an operational plan for first years, then add a growth percentage after Take the previous suggestions to make assumptions and plan the first 3 years For the other years you can add growth percentages that are reasonable in your market, this can be any number from 20% to 1000% in general (many exceptions apply) www.groosman.infoFUNDING MASTERCLASS
  20. 20. ASSUMPTIONS (EXAMPLE) “For the cash flow prognosis a conservative, base scenario was chosen. Only from 2018 we calculate revenues out of a sale of initially 3 to 20 products per month by end 2020 (target price €2000 start and €1500 end of this period). End 2017 we expect to have IP license income and production deals with strategic partners (of which one already signed a first right of refusal). The costs for maintenance of our patents are included.The IP license costs are also included. A 25% cost for production is taken of the product sales.As it is a medical product, certification costs are taken into account.The overhead costs consist of rent, office, administrative and regular insurance costs. Paying back loans is included in the prognosis.” www.groosman.infoFUNDING MASTERCLASS
  21. 21. CASH FLOW AND LIQUIDITY Cashflow is the moment that the money reaches or leaves your bank account (this is timed differently than revenue or costs). Cashflow = SUM(cashflow in – cashflow out) Liquidity = Start number bank account + cashflow www.groosman.infoFUNDING MASTERCLASS
  22. 22. CASHFLOW STATEMENT You can define your own cash inflow and outflow categories, but keep the number of posts limited. www.groosman.infoFUNDING MASTERCLASS
  23. 23. LIQUIDITY The liquidity (money on your bank account and cash) is crucial for a startup, this determines the survival of the venture If you don’t have money to pay obligations: For this reason the prognosis per month is required A negative liquidity gives the need for additional funding (on top of the funding need that came from your investment table) www.groosman.infoFUNDING MASTERCLASS
  24. 24. LIQUIDITY What is the extra funding needed on the next slide? (considering that the cashflow cannot be changed) www.groosman.infoFUNDING MASTERCLASS
  25. 25. LIQUIDITY www.groosman.infoFUNDING MASTERCLASS
  26. 26. LIQUIDITY www.groosman.infoFUNDING MASTERCLASS Although the liquidity at the end of the year is -47,7k, the lowest number is -62,5k and therefor 62,5k is the minimal required extra funding amount (on top of the 100k + 83,2k in the cashflow statement)
  28. 28. EXAMPLE 5-YEAR CASHFLOW AND LIQUIDITY STATEMENT (QUARTERLY) Download from:!funding/cbvu and adjust it to make your own statements www.groosman.infoFUNDING MASTERCLASS
  29. 29. REVENUE AND PROFIT If you agree on a sale or purchase today, the revenue or cost occurs today The cashflow in or out, occurs days to months later or earlier though Therefor is your cashflow and liquidity statement not the same as your revenue, profit and loss statement www.groosman.infoFUNDING MASTERCLASS
  30. 30. REVENUE AND PROFIT For example: a product you deliver to a customer at 28-12-2016 with a 3 week payment term, does not show up in your 2016 cashflow in, but does show up in the revenues that year But: the costs for making that product (cashflow out and cost) usually do both occur in 2016 www.groosman.infoFUNDING MASTERCLASS
  31. 31. VALUATION (MORE INTHE NEXT SESSION) Your financial prognoses can give an indication on valuation For this you can also refer to close-an-investment-deal-2015 from sheet 26 or wait for the next 2 sessions of this master class On the next slides we will focus on the discounted cashflow method www.groosman.infoFUNDING MASTERCLASS
  32. 32. DISCOUNTED CASHFLOW  Take the total cashflow for each year  In the 5 year prognosis at!funding/cbvu this is €18.800; € 153.500; € 87.615; -€ 14.963 € 113.460 in year 1, 2, 3, 4 and 5  The discount rate is 0,15 (15 percent)  =18800/1,15+153500/(1,15^2)+87615/(1,15^3)+(- 14963)/(1,15^4)+113460/(1,15^5)  So, the DCF is €237.878 in 5 years  This number is not totally fair, as it also includes the funding in these 5 years www.groosman.infoFUNDING MASTERCLASS
  33. 33. SNEAK PREVIEW NEXT SESSION: INVESTOR READINESS GO / NO GO decision after every stage in the deal making process:  First contact, pitch  Personal connection  Business plan and/or presentation  Term sheet  Negotiations  Signing term sheet (exclusivity phase investor)  Due diligence  Participation contract  Deposit of money and changes of legal structure www.groosman.infoFUNDING MASTERCLASS
  34. 34. SNEAK PREVIEW NEXT SESSION: INVESTOR READINESS Valuation of startups is not just a numbers game. It’s more about expectations, feelings, investment limits etc. But, start to quantify your value by:  Real option pricing;  Discounted cash flow;  Comparing to other startups. Science, art or random? www.groosman.infoFUNDING MASTERCLASS
  35. 35. MASTERCLASS SCHEDULE  Session 1: Introduction to funding language + business planning;  Session 2: Determining funding need + milestone-based funding;  Session 3: Building your financial investment plan;  Session 4: Investor readiness;  Session 5: Advanced funding and wrap-up. www.groosman.infoFUNDING MASTERCLASS
  36. 36. FOLLOW ME Benno Groosman MScBA Experienced startup entrepreneur www.groosman.infoFUNDING MASTERCLASS