Financial Pro Formas by Paul Silber, Blu Venture Investors

1. FINANCIAL
PRO FORMAS
…CAN REALLY MAKE OR
BREAK YOUR PITCH TO
INVESTORS
Paul Silber, Blu Venture Investors

2. “PRO FORMA”
“A financial statement
prepared on the basis of
some assumed events and
transactions that have not
yet occurred”
Dictionary of Accounting (MIT Press), 1981

3. Pro Formas Are
Always Wrong (but it’s OK..)
• Essentially a “crystal ball”
•
>95% turn out to be wildly optimistic, even
though saying they are based on “conservative
assumptions”
• Overly optimistic in both timing and magnitude
of revenues
• The rule of “twice as long and half as much”
• As a consequence, companies usually
significantly underestimate both the quantity
and timing of cash infusion needs.

4. Why Do You Need Them?
Provide you & prospective investors:
 One possible vision of the future of your
business
 A planning tool to project cash needs
 A model that you can use to test & adjust
assumptions about revenues, expenses & cash
 Confidence in your plan, if done well.

5. What Investors Look For
in a Potential Investment:
 Quality of the CEO and management team
 Strength of company’s product or service
 The business plan
 Size and unmet need of the market
 Competition/barriers to entry
 Deal terms – last cash in?
 Opportunities for a successful exit

6. Common Mistakes Seen
In Pro Formas
• Built on “top down” assumptions of revenue
growth and margins rather than on solid data.
• “Excel-itis” (i.e. 5% revenue growth every
month)
• Assuming all categories of revenues and
expenses will grow at some fixed rate (should
rent cost really increase every month?)
• Insufficiently detailed, sometimes only including
a P&L statement.
• Investors focus just as much on cash flow
statement

7. Telltale signs of “Excel-itis”
2014
2015
2016
2017
Revenues
100
140
196
274.4
COGS
40
56
78.4
109.76
Gross Profit
60
84
117.6
164.64
Gross Margin
60%
60%
60%
60%
Salaries
40
40
40
40
Rent
5
7
9.8
13.72
Total expenses
45
47
49.8
53.72
Net Profit
15
15
67.8
110.92

8. What We See in
Good Pro Formas
•
Numbers “built up” from solid market and research data:
•
•
•
•
•
•
A realistic understanding of expenses:
•
•
•
•
•
•
Knowledge of who the initial customers will be
Pricing (including volume discounts), annual maintenance/installation fees
Understanding of sales cycle
Knowledge of A/R and cash-flow
Production and inventory plan
Hiring plan: who, why, when and how much to pay
Production costs, including economies of scale
Costs associated with channel partners
Continued investment in R&D
Ongoing customer support costs
Will include financial statements based on both “expected” and “much
more conservative” assumptions

9. It Does Not Have To Be Hard!
If none of the founders are financially-strong:
• Learn how to generate & work with pro formas, or
• Find an outsourced “resource” that does