This document provides guidance on preparing financial projections for a startup business. It outlines four main rules: 1) financial projections are needed, 2) it is a business rather than accounting exercise, 3) projections will never be perfect but need to make sense, and 4) the goal is to discuss assumptions rather than numbers. It then walks through an example for an education technology startup, demonstrating how to develop a bottom-up market strategy and link it to revenue and cost projections over five years. Key steps include segmenting the market, creating strategies for each segment, and using research and assumptions to build financials and calculate funding needs.

1. Neil Davis
Emerging Technology Centers

2. Target attendee is the start-up entrepreneur.
Preparing budgets and forecasts for the mature business is a
different process.
Agenda
• Talk about some basic & the process.
• Work thru an example.
• Let you do it – case study.
Informal - ask questions as we go!

3. Rule #1…
Yes, you do need to prepare financial projections!
“So…I’ve read about a start-up that raised $20M and never had
any financial projections…what’s up with that?”
“So…Someone told me that the Y Combinator application doesn’t
require financial projections…what’s up with that?”

4. Rule #2…
It's not accounting, it’s business.
•
•
•
Accountants prepare historical financials.
Analysts prepare budgets and forecasts.
Business people prepare financial projections.
So…is there a role in the process for an accountant?

5. Rule #3…
Your 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.
Think of it as a math or chemistry test…so, “show your work”.

6. Rule #4…
The end goal is to be discussing your assumptions, not the actual
numbers.

7. Market
Research
Financial
Projections

8. 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.
It’s a little like using average data to make decisions.

9. Investors want to see a Micro (Bottom Up) approach that starts
with the customer and is grounded in your market research.
•
•
•
It’s also much more meaningful to you and your team.
Anecdotal market research is preferable to published reports.
No one expects you to spend money on this.

10. The K – 12 Education Technology Example
I’m an ex-teacher with a tech co-founder and have convinced my
local district to pilot the technology.
•
•
Over $600B is spent annually in total
Over $95B is spent annually on technology

11. The Bottom Up Go-to-Market Plan
Step 1 – Segment the market:
There are…16,330 US school districts:
o
20 US school districts serving >125K students
o 240 US school districts serving 20K to 125K students
o 7440 US school districts serving 1K to 20K students
o 8600 US school district serving <1K students

12. Step 2 – Create segment strategies:
1. Ignore the 20 largest districts until Year 3.
a.
b.
c.
d.
Extremely long sales cycle
Highly political decision-making
Heavily embedded contractors and consultants
Initial pilot project not deemed “significant”
2. Ignore the 8600 smallest school districts
a.
b.
c.
Budget and staff limited
Extensive technology redesign required
Initial pilot project deemed “overkill”

13. Step 2 – Create segment strategies (cont’d):
3.
Ignore the 7440 districts w/ 1K to 20K students until Year 2.
a.
b.
c.
4.
Need value-engineering to hit price point
Need market presence
Need geographic network of value-added resellers
Target Segment – 240 districts serving 20K to 125K students
a.
b.
c.
d.
Capitalize on initial pilot project
Survey personal contacts re: value proposition and price.
Focus on 45 districts in urban settings where my personal
brand & network is most powerful).
I will personally close 5 sales in 1st year after pilot.

14. Segment Strategy Summary
Year
Strategy
1
Founder to close 5 deals in target segment
2
• Add 2 salespeople in target segment (assume 2 sales in
1st year + 5 sales per year in future years)
• Select and train 3 VAR’s (assume 0 sales in 1st year + 12
sales per year in future years)
3
• Continue to add salespeople + VAR’s as long as justified
by productivity.
• Close strategic alliance for sales into 20 largest school
districts (assume one sale per year, beginning in Year 4)
4
Continue to grow sales in districts >1K students
5
Begin R&D effort on product for schools <1K students

15. Link Segment Strategy to Market Research & Financials
1. Use market research to add credibility to segment strategy &
assumptions.
2. Use segment strategy & assumptions about contract value,
training, maintenance, etc. to build annual revenue projections.
3. Estimate COGS to calculate gross margin % and operating
profit.
4. Use segment strategy and assumptions about sales channels
and other overhead expenses to build annual SG&A budget.
5. Calculate EBIT.
6. Determine your investment needs (see next slide).

16. Financial Projections
Year 1
Year 2
Year 3
-$425,000
-$75,000
$325,000
Year 4
Year 5
School
Districts
Revenue
COGS
(%GM)
Operating
Profit
SG&A
EBIT
$1,700,000 $5,900,000

17. Watch out for…
1. Constant %GM – May increase (as you get more efficient) or
may decrease (as your revenue quality decreases with
expansion).
2. %GM too low – Need room for error, discounting & mistakes.
3. Constant SG&A – Should decrease as a % of sales (or you’re
not managing the business).
4. Multiples of prior years – Makes it look like you’re guessing.
5. Confusing cash with accounting – It’s all about burn rate and
investment needs, not depreciation, amortization, and revenue
recognition rules.

18. Financial Projections
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!”.
And, if you didn’t notice, what was just outlined here is about 2/3 of
your 10 slide investor pitch deck!

19. Let’s try a case study…figure out how much money I need to raise
for my new start-up!