The document discusses financial planning and pitching for startups. It provides guidance on creating a financial plan to understand funding needs and describe the vision to partners and investors. It also explains that the purpose of pitching is to generate interest for follow up conversations, as investors rarely provide funding solely based on a pitch. The document then gives suggestions on what financial information to include in a pitch, such as market size, costs, funding requirements, and profitability projections. It also warns against unrealistic assumptions and provides too much detail.

1. FINANCIAL
PLANNING
FOR
STARTUPS
Tom
Schryver,
CFA
Visi3ng
Lecturer,
Johnson
Graduate
School
of
Management
Execu3ve
Director,
Center
for
Regional
Economic
Advancement
Cornell
University

2. Why
Create
a
Financial
Plan?
• Know
when
you’re
running
out
of
money
• Know
how
much
money
you
need
• Enable
you
to
describe
your
vision
– To
partners
– To
employees
– To
funders
©
Tom
Schryver
2014,
All
Rights
Reserved

3. Why
Pitch
a
Startup?
©
Tom
Schryver
2014,
All
Rights
Reserved

4. Why
Pitch
a
Startup?
à
Generate
interest
in
the
next
conversa3on
• Very
very
very
rarely
will
anyone
write
a
check
based
solely
on
a
pitch
• Uninformed
investors
are
dangerous
• Tom’s
rule
of
investors:
they
all
add
value,
the
ques3on
is
the
+/-­‐
sign
©
Tom
Schryver
2014,
All
Rights
Reserved

5. Financials
In
A
Pitch
–
Audience
View
• Does
the
company
have
a
good
understanding
of
its
poten3al
market?
• Does
the
company
have
a
sense
of
how
much
of
that
market
is
obtainable?
Are
poten3al
unit
sales
reasonable?
• Are
sales
prices
reasonable?
Is
there
any
evidence
to
back
them
up?
• Are
projected
costs
complete
and
reasonable?
• How
much
money
will
be
required
to
start
the
business?
• How
much
money
will
be
required
to
get
the
company
to
self-­‐
sustainability?
• How
profitable
could
the
company
be
at
maturity?
©
Tom
Schryver
2014,
All
Rights
Reserved

6. Financials
In
A
Pitch
–
Ideas
of
What
To
Include
You
choose
what
you
think
investors
should
be
most
interested
in
/
know
about
/
have
as
main
takeaways
about
the
opportunity:
• Details
on
target
market:
size,
basis
of
es3ma3on,
es3mate
on
how
much
is
obtainable
by
you
• Es3mate
of
startup
costs
with
details
on
major
items
• Projec3on
of
3me
to
ramp
up
to
cash
flow
breakeven
and
total
startup
+
losses
to
breakeven
• Projec3on
of
profitability
at
scale
©
Tom
Schryver
2014,
All
Rights
Reserved

7. Showing
Returns
To
Investors
• If
you
are
pursuing
a
loan,
demonstra3ng
ability
to
service
payments
with
a
safety
margin
is
cri3cal
• If
you
are
pursuing
an
equity
investment,
demonstra3ng
ability
to
exceed
required
cost
of
capital
is
cri3cal
My
opinion:
• Defining
a
poten3al
exit
is
very
difficult;
only
volunteer
it
if
an
exit
is
the
only
way
an
investor
can
get
their
money
returned
(no
possibility
of
dividends)
• Calcula3ng
an
IRR
or
NPV
on
investment
is
not
your
job
–
it’s
the
investor’s:
give
them
the
informa3on
they
need
around
profit
poten3al
and
allow
them
to
do
their
assessment
themselves
©
Tom
Schryver
2014,
All
Rights
Reserved

8. Financials
In
A
Pitch
–
What
To
Avoid
• $Trillion
markets
• Magical
thinking:
– Unreasonably
high
net
income
margins
(sofware
and
pharma
rarely
exceed
30%)
– Revenue
growing
while
other
costs
remain
flat-­‐line
– Revenue
growth
without
marke3ng
expense
– Free
labor,
free
space,
no
insurance
costs,
etc.
– Ignoring
3ming
impacts
of
acquiring
inventory
or
capital
items
before
revenue
• Showing
loan
proceeds
without
interest
expense
or
repayment
• Providing
excessive
detail
that
demonstrates
lack
of
focus
on
key
performance
indicators
©
Tom
Schryver
2014,
All
Rights
Reserved

9. Key
Building
Blocks
• Revenue
Model
• Key
Resources
• Cost
Model
©
Tom
Schryver
2014,
All
Rights
Reserved

10. Revenue
Model
-­‐
Es3ma3on
©
Tom
Schryver
2014,
All
Rights
Reserved
Month
0
Month
N
Units
Zero
Reasonable
share
of
TM
(total?
per
loca3on
/
store?)
Price
/
Unit
N/A
Validated
Price
Revenue
Zero
Units
*
Price
=
Revenue

11. Revenue
Model
-­‐
Details
©
Tom
Schryver
2014,
All
Rights
Reserved
• Experiment
with
reasonable
growth
rates
• Es3mate
number
of
months
to
get
to
“N”
• Compartmentalize
by
product
line,
loca3on,
store,
etc.
as
much
as
possible
• Must
stack
up
to
a
reasonable
share
of
reasonable
market

12. Key
Resources
• What
do
our
value
proposi3ons
require
to
happen?
• How
do
we
support
our
channels?
• Do
we
need
resources
to
have
the
customer
rela3onships
we
want?
• How
about
suppor3ng
our
revenue
streams?
©
Tom
Schryver
2014,
All
Rights
Reserved
Key
Resources
are
all
the
things
required
to
open
your
business

13. Key
Resources
-­‐
Types
• Physical
–
buildings,
cash
registers,
phones,
trucks,
etc.
• Intellectual
–
patents,
databases,
process
knowledge
• Human
–
salespeople,
customer
service
reps,
store
managers,
produc3on
staff,
R&D
• Financial
–
funds
to
pre-­‐buy
inventory,
vendor
financing
©
Tom
Schryver
2014,
All
Rights
Reserved

14. Key
Resources
-­‐
Examples
• Physical
–
Dean
&
Deluca
store;
FedEx
trucks
• Intellectual
–
drug
patent;
process
knowledge
on
how
to
make
beer
• Human
–
people
to
fill
and
cap
toothpaste
tubes;
picking
orders
and
packaging
goods
for
shipment;
people
to
answer
the
phone
• Financial
–
money
to
buy
the
product
that
will
be
sold
in
the
store,
or
to
buy
raw
materials
to
be
made
into
finished
goods;
funds
to
cover
gap
between
sending
an
invoice
and
receiving
payment;
vendor
lease
©
Tom
Schryver
2014,
All
Rights
Reserved

15. Key
Resources
-­‐
Es3ma3on
©
Tom
Schryver
2014,
All
Rights
Reserved
Month
-­‐N
Month
0
Building
Equipment
Patents
Beginning
Inventory
Etc.

16. Key
Resources
• What
key
resources
will
be
required?
• What
are
a
few
hidden
things
that
might
otherwise
get
forgoren?
• How
much
will
it
cost
to
get
these
in
place?
©
Tom
Schryver
2014,
All
Rights
Reserved

17. Cost
Model
• What
will
your
costs
be
when
you
are
up
and
running?
• How
will
those
costs
change
as
you
grow?
• What
risks
are
inherent
in
your
cost
assump3ons?
©
Tom
Schryver
2014,
All
Rights
Reserved

18. Cost
Types
• Fixed
costs
–
remain
the
same
(mostly)
regardless
of
volume
• Variable
costs
–
vary
propor3onally
based
on
how
many
you
make
Consider:
• Economies
of
scale
–
savings
as
you
grow
in
volume
• Economies
of
scope
–
savings
as
you
grow
in
breadth
©
Tom
Schryver
2014,
All
Rights
Reserved

19. Fixed
Costs
• Management
and
overhead
compensa3on
• Buildings
• Machinery
• Permits
and
licenses
©
Tom
Schryver
2014,
All
Rights
Reserved

20. Variable
Costs
• Direct
labor
• Raw
materials
• Shipping
• U3li3es
©
Tom
Schryver
2014,
All
Rights
Reserved

21. Economies
of
Scale
• Buying
in
bulk
• Shipping
in
larger
volumes
• More
efficient
use
of
machinery
• More
efficient
use
of
labor
(ie:
specializa3on)
©
Tom
Schryver
2014,
All
Rights
Reserved

22. Economies
of
Scope
• One
store
selling
many
products
• Mul3ple
value
proposi3ons
for
a
single
customer
• Mul3ple
revenue
streams
from
the
same
transac3on
(product
+
extended
warranty)
©
Tom
Schryver
2014,
All
Rights
Reserved

23. Categorizing
Expenses
by
Type:
COGS
• Cost
of
Goods
Sold
(COGS)
are
the
direct
costs
associated
with
providing
the
product
or
service.
Examples:
– Direct
labor
– Raw
materials
– Warehousing
– Produc3on
equipment
• Revenue
–
COGS
=
Gross
Profit
©
Tom
Schryver
2014,
All
Rights
Reserved

24. Categorizing
Expenses
by
Type:
SG&A
• Selling,
General
and
Administra3ve
expenses
(SG&A)
are
the
indirect
costs
associated
with
opera3ng
a
business.
Examples:
– Adver3sing
– Sales
salaries
and
commissions
– Management
salaries
– Fringe
benefits
– Office
rents
– Insurance
• Revenue
–
COGS
=
Gross
Profit
• Gross
Profit
–
SG&A
=
Opera3ng
Profit
©
Tom
Schryver
2014,
All
Rights
Reserved

25. Categorizing
Expenses
by
Type:
Non-­‐Opera3ng
• Non-­‐Opera3ng
Expenses
are
business
costs
that
do
not
impact
regular
opera3ons.
Examples:
– Interest
– Income
taxes
– One-­‐3me
revenues
and
expenses
(ie
asset
sales)
– Foreign
exchange
gain
/
loss
• Revenue
–
COGS
=
Gross
Profit
• Gross
Profit
–
SG&A
=
Opera3ng
Profit
• Opera3ng
Profit
–
Non-­‐Opera3ng
Expenses
=
Net
Income
©
Tom
Schryver
2014,
All
Rights
Reserved

26. Expense
Checklist
©
Tom
Schryver
2014,
All
Rights
Reserved
q Rent
q Furnishings
q Computers
q Sofware!
q U3li3es
q Electric
q Internet
q Payroll
q Payroll
taxes
q Workman’s
comp
q Unemployment
insurance
q Gen.
liab.
Insurance
q Key
man
Insurance
q Banking
and
Credit
Card
fees
q Patent
fees
q Professional
services
q Cleaning
services
q Lawn
care
q Lawyers
q Accountant
q Bookkeeper
q Recrui3ng
q Other
freelance
q Marke3ng
expenses
q Web
development
q Print
q Conferences
q Memberships
q Ads
q trademarks
q Other
q Travel
q Discounts
q Sales
taxes
q Shipping
q Customs
q Supplies
q Toner!
q Misc
q Repairs
and
Maintenance
q Facili3es
q Equipment
q Licenses
q Royal3es
Use
this
as
a
guide
and
apply
the
level
of
detail
that
matches
your
business

27. Cost
Model
-­‐
Es3ma3on
©
Tom
Schryver
2014,
All
Rights
Reserved
Month
1
Month
N
Raw
Material
/
Unit
Costs
at
Low
Volume
Costs
at
Full
Volume
Labor
Divide
total
by
units
/
mo
Divide
total
by
units
/
mo
Produc3on
Equipment
Divide
total
by
units
/
mo
Divide
total
by
units
/
mo
Total
COGS
/
Unit
Adver3sing
Startup
Run-­‐Rate
Other
SG&A
Startup
Run-­‐Rate
Non-­‐Opera3ng
Expenses

28. Cost
Model
-­‐
Es3ma3on
• Start
to
link
revenue
growth
with
costs
• Keep
in
mind
3ming
of
costs
compared
to
revenues!
• Use
unit
growth
to
drive
breakpoints
in
cost
decreases
as
you
get
to
scale
©
Tom
Schryver
2014,
All
Rights
Reserved

29. Building
Your
Cash
Basis
Financial
Model
©
Tom
Schryver
2014,
All
Rights
Reserved
Startup
Costs:
Acquire
Key
Resources
Revenue:
Units
*
Price
Cost
of
Goods
Sold:
Units
*
COGS
/
Unit
Selling,
General,
Administra3ve
Non-­‐Opera3ng
Expenses
(Including
Costs
of
Financing!)
Net
Income
(Cash
Basis)
Pre-­‐Revenue
Startup
Growth
Profitable
Maturity
Source
of
Cash:
Investments

30. PLUG
N’
CHUG

31. “I
have
no
idea
what
the
poten3al
financial
performance
of
my
business
is”
>
“I
don’t
know
what
these
numbers
signify,
there’s
lirle
thinking
behind
them
–
I
just
have
them
because
I
was
told
I
have
to”
“I
don’t
know
what
this
model
does
–
I
just
filled
out
someone
else’s
form”

32. Cash
vs.
Accrual
Method:
When
To
Go
Accrual
©
Tom
Schryver
2014,
All
Rights
Reserved
• Do
you
have
significant
3ming
risks?
• Inventory
• Holding
other
peoples’
money
• Other
people
holding
your
money
• High
upfront
capex

33. Hypothesis
Tes3ng
©
Tom
Schryver
2014,
All
Rights
Reserved
Fundamental
principles:
• The
financial
plan
you
just
created
is
made
up
of
a
large
number
of
hypotheses
• It
is
cri3cal
to
maintain
your
plan
as
a
living
document
to
reflect
new
knowledge
• Your
financial
plan
should
help
you
iden3fy
key
areas
of
risk
–
which
is
made
up
of:
1. Areas
of
high
magnitude:
large
profit
drivers,
big
capital
expenses
2. Areas
of
high
uncertainty:
shaky
es3mates,
factors
with
a
large
number
of
con3ngencies

34. What
Do
You
Do
About
It?
©
Tom
Schryver
2014,
All
Rights
Reserved
• If
an
item
is
substan3al
and
you
are
es3ma3ng,
dig
to
ensure
no
cheap
/
free
informa3on
is
available
that
could
help
you
refine
• Treat
revenue
model,
key
resources,
and
cost
model
as
areas
of
testable
hypotheses
• Iden3fy
key
data,
test,
and
measure

35. What
to
Present
©
Tom
Schryver
2014,
All
Rights
Reserved
• How
much
will
it
cost
to
get
started
–
and
how
long
• How
long
will
it
take
you
to
become
self-­‐sustaining
• What
does
the
sunny,
happy
future
look
like
(how
profitable)
• Choose
metrics
and
graphs
based
on
industry
norms

36. Q&A
©
Tom
Schryver
2014,
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Rights
Reserved