Financial Projections

&

Valuation

Financial Projections

The canvas tells the story of your venture in a structured way.

Income Statement

Balance Sheet

Cash flow

The financial projections are a model of your venture, showing how your assumptions will play out.

A change in one must affect

the other

Income statement

How much you sold

Your cost for the units you sold

How much is left over

Things you spent money on whether or not you

sold anything

Profit (or in this case loss)

What do you think investors look for?

• You have money to invest, and you are looking at two interesting ventures that are in a similar space

• What is the “investment ask” for each?

• What are the pros and cons of each venture?

Growth rate

Gross margins

What implied assumptions do you see

Cost of acquiring revenue

Amount spent on R&D

What are investors looking for in your financial projections?

• A growth rate that is interesting• Attractive gross margins (50-60% is good if you

are a business with R&D)• Red ink (losses) that match your funding request

• The “Smell test” re assumptions:– Based in reality– Well thought-out and reasonable– You know your assumptions and have a plan for

validating them

Forecasting Revenue – one common approach

We’ve developed an innovative new free-range donut. We plan to open a chain of free-range donut shops starting in Vancouver.

Our revenue projection:

The market size is $100 million in Vancouver.

Conservatively, all we need is 1% of the market.

So our annual sales in Vancouver will be $1,000,000.

We’ll expand our market share, and add cities at 2 per year.

With 10 cities we will be at $15,000,000 annually.

Then we’ll expand into the US.

Forecasting Revenue – better:

A DRIVER is a business lever you can adjust to affect your revenue.

PRICE: for each “unit” sold

CHANNEL: is someone taking a percentage?

Number of UNITS: The number of units you sell increases over time. What are the actions you are taking to cause this?

Consider your initial assumptions to be hypotheses, and determine how to test them. Your test results bring credibility. And these will be your operating metrics in future!

Example: a Web businessDriver Value

Monthly Google searches 1,000,000

Other search engine searches 300,000

Total searches 1,300,000

DRIVER: Clickthru rate 5%

Monthly traffic from search 65,000 (5% of 1.3MM)

Other traffic (Twitter, Facebook..) 26,000

Total traffic 91,000

DRIVER: Conversion - % that buy 10%

PRICE: Revenue per new customer $0.99

New revenue per month $9,009

Revenue/mo from repeat customers $4,000

DRIVER: Attrition rate 10% - $400

Total revenue per month $12,609

Example: a direct sales business

Driver Calculation

Leads generated per $100 marketing spend

Input Marketing $, get lead quantity

Lead conversion rate to opportunity Enter conversion %, get opportunity qty

Opportunities handled per salesperson Get number of salespeople needed

Average deal size & close ratio # of salespeople x avg deal size x close ratio = gross sales

Average sales cycle New Sales per unit time

% of revenue from repeat customers Add repeat Sales per unit time

Channel refresher

12

Cost of Goods ExpensesExpenses Reseller

Source: Mark Leslie, Stanford GSB

ExpensesExpenses

Price paidby buyer(100%)

Cost of Goods (COGS)

Reseller Channel

Direct Sales

YourRevenue

Price paidby buyer(100%)

Costs

• COGS – Cost of goods sold. – How much does each unit cost?

• Expenses– Amounts you spend each period whether or not you

make any sales

• Capital– One time purchases of expensive things like

manufacturing machinery

Jobs to be done

• Think about the “jobs to be done”

• Each “job to be done” has a cost

• Decide who is going to do the job. If indirect channel, then this reduces your revenue rather than increasing your cost.

• If you have indirect channel – do they do the jobs that need to be done completely, partly, or not at all?

See template spreadsheet.

Some expenses to think about

Insurance Consultants

Rent Patent costs

Telecom costs Hosting

Legal Salaries

Accounting Benefits

Travel Commissions

Marketing Bonuses

Trade shows

Financial projections –session 2

Things to consider (1)BMC sections are inter-dependent. A change in

one section will impact other sections.

Direct channel: higher revenue, higher cost.

Indirect channel: lower revenue, lower cost.

Self serve model: low service costs; consider cust acquisition cost.

Hi touch model: high service cost.

Luxury customers: likely hi-touch model. Hi margin.

Commodity customers: lower cost model, higher volume, lower margin.

Visible product: brand building costs.

Embedded or licensed product: IP protection.

Product design

R&D. In house? Outsourced?

Bloggers

OEMs

Manufacturing

Hosting

Things to consider (2)• Think of your costs being driven by revenue (not

the other way around). – If you could double revenue by doubling salespeople,

you’d just keep adding people until you employed the population of the world.

• Watch out for Butterfly Effect – where in your financial projection model will a relatively small change in assumption lead to a big change in results? – Investors will find these. It usually ends badly if you

aren’t prepared to address them.

Financial projections - summary

1. Your financial projections must closely reflect your business model canvas. They tell the same story!

2. Investors look for growth rate, high margins, realistic and test-able assumptions.

3. Revenue should be built bottom-up from your business drivers.

4. Costs should be driven by achievement of revenue.

5. Understand the major sensitivities in your model.

Next up: Valuation

Valuation for Startups

You need to raise money. How much of the company will you

have to give an investor in exchange for funding?

More??

Pre-money and post-money valuation

• Pre-money: the value of the venture before the investor’s money

• Post-money: the value of the venture immediately after the investor’s money

• Example:– Venture is worth $300,000 pre-money– Investor puts in $100,000– Venture is worth $400,000 post-money– What percentage does the investor now own?

Valuation for Startups

You are offering investors an opportunity to participate in your exciting new startup.

What are investors buying when they invest in a raw startup?

Valuation for Startups

What investors are buying in a raw startup:• A good idea together with a good plan• A committed team• Founders with experience• Founders with prior success• Traction (users, revenue, channel…)

The more of these you have, the greater the valuation you may be able to achieve. And

of course, vice versa.

How much should investor take?

Investor Takes: Considerations:

>50%

~ 40%

20 – 30%

5-10%

How much should investor take?

Investor Takes: Considerations:

>50% Founder(s) lose control. Reduced incentive to work hard.

~ 40% Very little equity left for next financing round.

20 - 30% Likely range for substantial seed investment

5-10% Small early investment

Valuation & Investment Examples

Incubator7%

Angel15%

Super angel or group30%

$20K $100K $300K

$290K

$1,000K

$665K

Investment

Post-money

Valuation

Ownership

Determining your valuation

Valuation methods:

• Multiples of revenue, of EBITDAHmm, you don’t have any.

• Discounted cash flowDon’t have any cash flow either.

• ComparablesMaybe, but harder the more unique you are.

First-money-in valuation

• If this is the first money going into the venture, valuation is determined simply by:– The amount of money you raise– The ownership percentage it bought

• Among all the uncertainties, you must be able to show the minimum amount of money you need.

What is the minimumamount of money you need

in the first 18 months, to grow to the next stage?

First-money-in valuation

• Example: you’ve determined you need $150,000 in the first 18 months. – Consider the range of ownership you’ll (realistically)

need to give away– At 15%, your valuation is $150,000/15% = $1,000,000– At 30%, your valuation is $150,000/30% = $500,000

30%30%

Worth $150K

100%100%

Worth $500K

Team Valuation Exercise

• From your team financial projections:– How much cash do you need in the first 18 months?

When you ask investors for money, this is how much you need.

– What is your valuation range?– What percentage will you offer and why?

• Each team will present, first their elevator pitch (not an investor pitch!), followed by an explanation of the above valuation/percentage. You will have 120 seconds.