This document provides guidance on preparing financial projections for startups seeking investment. It recommends starting with market research to establish credible assumptions about potential market share and revenue. Financial projections should be built from the bottom up based on assumptions about contract value, sales channels, costs of goods sold, and operating expenses rather than just multiplying prior years' numbers. The goal is for investors to discuss the underlying assumptions rather than the specific projected numbers. It warns against constant percentages for gross margin and expenses or projections that don't make logical sense based on the business model and market opportunity.

1. Neil Davis
TEDCO

2. We explain that…
• Target attendee is the start-up entrepreneur.
• Preparing budgets and forecasts for the mature business is a
different process.
And then we…
• Talk about some of the basics & the process.
• Work thru an example.
• Let the attendee practice via a case study.

3. Basic Rules…
1. Yes, you do need to prepare financial projections!
2. It's not accounting, it’s business.
3. Financial projections will never be correct…but they have to
make sense.
• Investors will always discount your projections.
• They have to be “big enough” to matter.
• They are a reflection of your assumptions about the
business, dressed up to look like a P&L.
4. The end goal is to be discussing your assumptions, not the
actual numbers.

4. Oh, yeah – and just one more thing…
“I only need 0.01% of this really big market to make money.”
The Macro (Top Down) approach is not acceptable because no
one, including you, can assess whether your execution plan is
reasonable and whether you can execute.
Investors want to see a Micro (Bottom Up) approach that starts
with the customer and is grounded in market research.

5. Financial
Projections
Market
Research

6. We advocate a Market Segmentation Strategy that is linked to
Market Research & Financials.
1. Use market research to add credibility to assumptions.
2. Use segment strategy & assumptions about contract value &
structure to build annual revenue projections.
3. Use estimate of COGS to calculate gross margin % and
operating profit.
4. Use segment strategy & assumptions about sales channels &
other overhead expenses to build annual SG&A budget.
5. Calculate EBIT and determine investment needs.

7. Financial Projections ($1000)
Year 1 Year 2 Year 3 Year 4 Year 5
Units 20 40 80 160 320
Revenues 100 200 400 800 1600
COGS (25) (50) (100) (200) (400)
Gross
Margin
75 150 300 600 1200
SG&A (150) (200) (250) (300) (350)
EBIT (75) (50) 50 300 850
R&D
Spending
(100) 0 (500) 0 0
CAPEX 0 (25) 0 (100) 0
Beginning
Cash
0 100 25 175 375
Investment 275 0 600 0 0
Ending
Cash
100 25 175 375 1225

8. Watch out for…
1. Constant %GM
2. %GM too low.
3. Constant %SG&A.
4. Multiples of prior years.
5. Confusing cash with accounting – It’s all about burn rate and
investment needs, not depreciation, amortization, and revenue
recognition rules.

9. Now that you’re all done building your projections from the bottom
up…you should calculate your % share of the total market.
That % should be reasonably attainable, allowing for plenty of
downside risk and upside opportunity. In other words “not too large
and not too small…just right!”.
Conclusion
…and, if you didn’t notice, what was just outlined here is about 2/3 of a
10 slide investor pitch deck!

10. Neil Davis
TEDCO
Director, Entrepreneurial Development
410.715.4164
ndavis@tedco.md