Financial Projections

Benay Todzo
Womens Technology Cluster
Benay@wtc-sf.org
415-970-5090
Why Make Financial Projections

• To Test the Viability of Your Idea

• To Determine Your Financing Needs
• To Support Your Valuation
• To Build Credibility
 Steps To Building Financials
Step 1: Develop Revenue Model
• How many Products
• Size the Market (it should be big)
– Use 3rd party data (current & forecasts)
– Support assumptions for growth or new mkt
• Forecast your growth from top down
– What share of market can you expect to attain
– What’s a reasonable growth path to target share
 Steps to Building Financials
Step 1: Components of the Revenue Model
• Development Timeline. Rollout Timeline
• Versions? Upgrades? Customer Support?
• Prices, discounts, price erosion
• Sales/person
• Distribution channels
 Steps to Building Financials
Step 2: Staffing
• How many departments?
• Match staffing needs to development timeline
• R&D how many people to develop product?
Sufficient R&D staff for future products?
• Timing of marketing/sales people (lead time)
• Competitive salaries, benefits, commissions,
recruiting
• What level of customer support for level of sales?
 Steps to Building Financials
Step 3: Marketing and Advertising
• Map marketing plan onto timeline.
• Consider lead times needed pre-launch
• Website, tradeshows, public relations,
advertising, collateral, consultants
• Look at what competitors are spending
• Consider costs to maintain customers,
brand, website
 Steps to Building Financials
Step 4: Estimate other Expenses
• Tie as many exps to headcount as possible
– Office equip, rent, telephone, supplies, recruit
• Add in recurring expenses
– Legal, accounting, tech licenses, telecom
• Fill in one time or occasional charges
– Large capital expenditures (network, tradeshow
booths, launch party, buy tech, TI)
 Steps to Building Financials
Step 5: Evaluate the Results
• Perform scenario analysis
• Evaluate your operating ratios
• Look at comparable companies
• Determine your cash requirements
• Consider a 3 month cash cushion
 Steps to Building Financials
Step 6: Financing Options
• Equity
• Leases
• Lines of Credit
• Loans
 Start-Up Model Standards
• 3-4 year forecast
• Serious 1 year budget
• Focus on top line items
• Thought process/research
• Lead time for sales and marketing
• Use Big Buckets
 Good Models are:
• Based on Reasonable Assumptions
• Flexible
• User-Friendly
 Good Models are Flexible
• Limit hard-coded numbers
• Formulas linked to assumptions
• Changes in assumptions create changes in
formula results
 Good Models are User-Friendly
• Assumptions are labeled and easy to find
• Multiple sheets formatted alike
• Complex calculations are split into steps
• Model is documented
 Check Your Work
• Check Year 1 for hockey sticks, bumps, stairsteps,
gaps, hard numbers
• Check balances between statements
• Circular Errors
– A formula that includes itself in its formula
• Structural Errors
– Hard numbers in formulas
– Clicking in wrong column
– Inaccurate or incomplete copies
 Finding Bad Clicks
• Set up consistent format across all sheets

• Scan columns for bad clicks

• Look for off-column reference
 Audit Your Formulas
• Use Tools
Auditing
To trace the cells in a formula
• Trace Precedents
• Trace Dependents
• Find “orphans”
 Investment Stage Descriptions
• Seed Investments: 0-9 months (concept/planning)
– Investments at very early stages of dev’t, typically with
founders and product developers on board, but without a
complete management team in place.
• First-round: 6-18 mos (product development)
– First round of financing following a seed round
• Second-round : 12-24 mos (market development)
– Round immediately following first round
• Bridge financing: 24 mos+ (sustained growth)
– Round preceding a liquidity event
 Range of VC Investments by
Round

• Seed: $200k-$2million
• First Round: $500k-$12million
• Second Round: $1million-$30million
• Third/Bridge: $2million-$35million
 Median VC Investments
• Seed: $1million
• First: $2.5 million
• Second: $5.5 million
• Bridge: $10 million
 Expected Rates of Return

• Seed: 50%
• First: 40-60%
• Second: 25-50%
• Bridge: 20-40%
 Range of Pre-Money Valuations

• Seed n/a
• First $800k - $16million
• Second $9million - $90million
• Third $7million- $100million
 Median Pre-Money Valuations

• Seed n/a
• First $6.5 million
• Second $20.5 million
• Third/Bridge $50.5 million
 Cash Flow Statement
• Two types: R/D and Statement of Cash
Flows
• SCF is derived from I/S and B/S (formula
driven)
• Watch ending balance – add 3 month cash
cushion
 Documentation
• Fill out Introduction Sheet
• Add Notes
• Use SUM and AVERAGE in formulas
• Break complex formulas into simpler steps
• Color-code input cells
 What Goes in the Plan
• Appendix: Summary Financials
• Narrative: Financial Highlights
* Revenue line for 5 years
* Net Income for 5 years
* Headcount
* Cash needed, when
* Gross margin (if manufacturing)
* Exit strategy
* Use of funds
 What Goes in the Plan
• Executive Summary:SuperHighlights
* Cash needed, when
* Revenue growth rate & 5yr point
* Net Income
* Exit Strategy
* Use of Funds
 Questions Investors Ask of Plan
• Is team capable of growing the business
• Is technology fully developed?
• Is product unique?
• Is market potential big enough
• What are barriers to entry?
• How much $ needed? For what?
 Keys to Success
• Understand Process
• Get referrals (to VCs)
• Allot enough time to raise funds (6-8 mos)
• Timing and appropriateness of VC
investment
• Stage investments to get maximum
valuation
• Know limits of negotiation