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Financial Projections & Valuation. Income Statement. Balance Sheet. Cash flow. Financial Projections. A change in one must affect the other. The financial projections are a model of your venture, showing how your assumptions will play out.
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Income Statement Balance Sheet Cash flow Financial Projections A change in one must affect the other The financial projections are a model of your venture, showing how your assumptions will play out. The canvas tells the story of your venture in a structured way.
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” soldCHANNEL: 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!
Channel refresher Price paidby buyer(100%) YourRevenue Reseller Channel Cost of Goods Expenses Reseller Profit Price paidby buyer(100%) Direct Sales Profit Cost of Goods (COGS) Expenses 12 Source: Mark Leslie, Stanford GSB
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?
Things to consider (1) BMC sections are inter-dependent. A change in one section will impact other sections. Product design R&D. In house? Outsourced? 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. Bloggers OEMs Manufacturing Hosting Visible product: brand building costs. Embedded or licensed product: IP protection. Direct channel: higher revenue, higher cost. Indirect channel: lower revenue, lower cost.
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 • Your financial projections must closely reflect your business model canvas. They tell the same story! • Investors look for growth rate, high margins, realistic and test-able assumptions. • Revenue should be built bottom-up from your business drivers. • Costs should be driven by achievement of revenue. • Understand the major sensitivities in your model.
Valuation for Startups You need to raise money. How much of the company will you have to give an investor in exchange for funding? 10% 30% More?? 20% 40%
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. Andof course, vice versa.
Valuation & Investment Examples $1,000K Post-money Valuation $665K $290K Investment $100K $300K $20K Angel15% Super angel or group30% Incubator7% Ownership
Determining your valuation Valuation methods: • Multiples of revenue, of EBITDA Hmm, you don’t have any. • Discounted cash flow Don’t have any cash flow either. • Comparables Maybe, 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 needin 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% = $500,000 100% 30% Worth $150K 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.
