Financial Projections for Financial Projections for Start-Up BusinessesStart-Up Businesses

Mark LeslieMark Lesliemleslie@leslieventures.com

Financial ProjectionsFinancial Projections

►Why do Financial Plan?Why do Financial Plan?► Basic Building BlocksBasic Building Blocks► Key VariablesKey Variables► Bottoms up / Tops DownBottoms up / Tops Down►Model CompaniesModel Companies► Planning IssuesPlanning Issues► Financial Models – the crucible to test ideasFinancial Models – the crucible to test ideas► ““What-if” ScenariosWhat-if” Scenarios► Rule Number 1Rule Number 1

Why do a financial PlanWhy do a financial Plan

► Can’t raise money without one?Can’t raise money without one?► Feasibility of business modelFeasibility of business model► Understand the key variables for your Understand the key variables for your

businessbusiness► Understand the cash requirementsUnderstand the cash requirements► Sharpens focus on key planning areasSharpens focus on key planning areas► Focus on key operating metricsFocus on key operating metrics►Oh, yeah…Oh, yeah…

Can’t raise money without one!!!Can’t raise money without one!!!

Basic Building Blocks – Basic Building Blocks – Department BudgetDepartment Budget

Eng Eng BudgetBudget

q1q1 q2q2 q3q3 q4q4 y1y1 y2y2

head 1head 1

head 2head 2

Salary totalSalary total

Salary ovhdSalary ovhd

DepreciationDepreciation

expensesexpenses

capitalcapital

Key VariablesKey VariablesDepartment BudgetDepartment Budget

►HeadcountHeadcount Salary / overhead / Salary / overhead /

recruitingrecruiting Facilities / Facilities /

communications / ITcommunications / IT T& E / otherT& E / other

►Capital EquipmentCapital Equipment

Dept Budget

Key VariablesKey VariablesDepartment BudgetDepartment Budget

►G&AG&A HeadcountHeadcount

►Exec office / CFOExec office / CFO

legal legal AccountingAccounting Corporate allocatable Corporate allocatable

expensesexpenses► IT and communications IT and communications

infrastructureinfrastructure►Real estateReal estate

Dept Budget

Key VariablesKey VariablesDepartment BudgetDepartment Budget

►EngineeringEngineering HeadcountHeadcount NRENRE consulting (e.g. FCC consulting (e.g. FCC

approval)approval) prototypes, expensed prototypes, expensed

materialsmaterials product enhancements product enhancements

and sustaining and sustaining engineeringengineering

Dept Budget

Key VariablesKey VariablesDepartment BudgetDepartment Budget

►MarketingMarketing HeadcountHeadcount product launchproduct launch Advertising / PRAdvertising / PR seminars, trade shows, seminars, trade shows,

web siteweb site brochures, literaturebrochures, literature

Dept Budget

Key VariablesKey VariablesDepartment BudgetDepartment Budget

►SalesSales HeadcountHeadcount

►Mgrs, SE’sMgrs, SE’s

Productivity modelProductivity model partnerships, coop. partnerships, coop.

AdvertisingAdvertising remote officesremote offices

Dept Budget

Key VariablesKey VariablesDepartment BudgetDepartment Budget

►HeadcountHeadcount►HeadcountHeadcount►HeadcountHeadcount

Dept Budget

Key Variables –Key Variables –Capital EquipmentCapital Equipment

►Capital equipment per headCapital equipment per head►NRENRE►Technology BuyoutTechnology Buyout►ToolingTooling► IT infrastructureIT infrastructure►Purchased BldgsPurchased Bldgs Corp Cap

Budget

Basic Building BlocksBasic Building BlocksCorp Rollup and Cap Corp Rollup and Cap

ScheduleSchedule

Dept Budget

Dept Budget

Dept Budget

Dept Budget

Corp Exp Budget

Corp Cap Budget

Key VariablesKey VariablesRevenue Model (cross checked)Revenue Model (cross checked)

► MarketMarket Available / ServedAvailable / Served

► PricePrice List / discount / Avg selling priceList / discount / Avg selling price

► Forecast – by ProductForecast – by Product Product mixProduct mix Trajectory of RampTrajectory of Ramp

► Forecast – by ChannelForecast – by Channel Net cost by channelNet cost by channel

► Forecast – by Sales CapacityForecast – by Sales Capacity Sales Yield (sum of quota less safety Sales Yield (sum of quota less safety

margin)margin) Productivity rampProductivity ramp Attrition calculationAttrition calculation Staffing planStaffing plan

► Cost for customer acquisitionCost for customer acquisition

Revenue Model

Key VariablesKey VariablesCost ModelCost Model

► ProductProduct Estimated BOMEstimated BOM

►Rush chargesRush charges►Design changesDesign changes►WarrantyWarranty►Obsolescence / write–offsObsolescence / write–offs

LaborLabor VolumeVolume

► ServicesServices LaborLabor Training Training EfficiencyEfficiency

Cost Model

Basic Building Blocks – Basic Building Blocks – Income StatementIncome Statement

Revenue Model

Income StatementRevenue

COGSExpenses

Profit

Product Cost Model

Dept Budget

Dept Budget

Dept Budget

Dept Budget

Key VariablesKey VariablesCapitalization (Funding) PlanCapitalization (Funding) Plan► Equity Financing – amount and timingEquity Financing – amount and timing

SeedSeed Startup AStartup A Development BDevelopment B Mezzanine CMezzanine C IPOIPO Post IPOPost IPO

► Debt FinancingDebt Financing Capital equipment LeasingCapital equipment Leasing Working capital bank LineWorking capital bank Line Convertible debt securitiesConvertible debt securities Capitalization

Plan

Key Variables –Key Variables –Capital EquipmentCapital Equipment

►Cost per headCost per head►NRENRE►Technology BuyoutTechnology Buyout►ToolingTooling► IT infrastructureIT infrastructure►Purchased BldgsPurchased Bldgs

Corp Cap Budget

Key Variables –Key Variables –Working Capital AssumptionsWorking Capital Assumptions►Account ReceivableAccount Receivable►Accounts PayableAccounts Payable► InventoryInventory

Work Cap Assumptions

Basic Building Blocks – Basic Building Blocks – Balance Sheet and Cash FlowBalance Sheet and Cash Flow

Balance Sheet

Cash Flow

Dept Budget

Dept Budget

Dept Budget

Dept Budget

Revenue Model

Income StatementRevenue

COGS

ExpensesProfit

Product Cost Model

Capitalization Plan

Corp Cap Budget

Work Cap Assumptions

Bottoms-up / Tops-downBottoms-up / Tops-down

► Bottom-upBottom-up Built from detailsBuilt from details Variable assumptionsVariable assumptions Start up and growth stageStart up and growth stage

► Top-downTop-down ““model” of the mature companymodel” of the mature company Similar to other companies / products / marketsSimilar to other companies / products / markets

► The Five-Year PlanThe Five-Year Plan Year 5 = model company (or close to it)Year 5 = model company (or close to it) Year 1 = raw start upYear 1 = raw start up Year 2 Year 2 5 development stage to mature company 5 development stage to mature company

The Model CompanyThe Model Company

► Income StatementIncome Statement RevenueRevenue Gross MarginGross Margin Departmental expenses as percentage of revenueDepartmental expenses as percentage of revenue Operating IncomeOperating Income

► Balance sheet itemsBalance sheet items DSO (A/R days sales outstanding)DSO (A/R days sales outstanding) Inventory turnsInventory turns

► Employee MetricsEmployee Metrics Revenue / employeeRevenue / employee Expense / employeeExpense / employee Expenses as a percent of revenueExpenses as a percent of revenue

The Five Year PlanThe Five Year Plan

S t a r t u p M o d e l

Income Statement

Balance Sheet

Cash Flow

Y1Income Statement

Balance Sheet

Cash Flow

Y4Income Statement

Balance Sheet

Cash Flow

Y2Income Statement

Balance Sheet

Cash Flow

Y5

Critical AssumptionsCritical Assumptions

► Income StatementIncome Statement Unit RevenueUnit Revenue Number of unitsNumber of units Cost of goods and servicesCost of goods and services Operating costsOperating costs

► R&DR&D► S G & AS G & A

Interest ratesInterest rates► Balance SheetBalance Sheet

Collections of receivablesCollections of receivables Inventory turnsInventory turns Capital equipment and depreciationCapital equipment and depreciation Payable timingPayable timing Debt and equity financing availableDebt and equity financing available

Intergalactic Optical Nanotubes, Inc. Intergalactic Optical Nanotubes, Inc. (ION)(ION)

Income StatementIncome Statement

Y1Y1 Y2Y2 Y3Y3 Y4Y4 Y5Y5RevenueRevenue 00 2.02.0 20.020.0 160.160.

00350.350.

00Gross MrgnGross Mrgn 00 1.61.6 16.016.0 128.128.

00280.280.

00EngineeringEngineering 2.02.0 2.52.5 2.52.5 2.52.5 2.52.5SG&ASG&A 0.50.5 1.51.5 1.51.5 1.51.5 1.51.5Total Op ExTotal Op Ex 2.52.5 4.04.0 4.04.0 4.04.0 4.04.0Op ProfitOp Profit (2.5)(2.5) (2.0)(2.0) 12.012.0 124.124.

00176.176.

00

Model Companies – Operating Stacks Model Companies – Operating Stacks ($M)($M)

CiscoCisco DellDell MicrosoftMicrosoft YahooYahoo RambusRambus

RevenueRevenue 18,87818,878 35,40435,404 32,18732,187 953953 9797

CogsCogs 5,6455,645 29,05529,055 5,6865,686 163163 88

Gross MarginGross Margin 13,23313,233 6,3496,349 26,50126,501 790790 8989

EngEng 3,1353,135 455455 4,6594,659 143143 2222

SG&ASG&A 4,8184,818 3,0503,050 8,6258,625 537537 3535

Total Op ExpTotal Op Exp 8,3518,351 3,5053,505 13,28413,284 702702 5757

Operating Operating IncomeIncome

4,8824,882 2,8442,844 13,21713,217 8888 3131

Net IncomeNet Income 3,5783,578 2,1222,122 9,9939,993 4343 2525

EPSEPS .50.50 .91.91 .19.19 .20.20 .20.20

Model Companies – Common Sizing Model Companies – Common Sizing (%)(%)

CiscoCisco DellDell MicrosoftMicrosoft YahooYahoo RambusRambus

RevenueRevenue 100100 100100 100100 100100 100100

CogsCogs 3030 8282 1818 1717 88

Gross MarginGross Margin 7070 1818 8282 8383 9292

EngEng 1717 11 1515 1515 2323

SG&ASG&A 2525 99 2626 5656 3636

Total Op ExpTotal Op Exp 4444 1010 4242 7474 5959

Operating Operating IncomeIncome

2626 88 4141 99 3232

Net IncomeNet Income 1919 66 3131 4.54.5 2626

Model Companies – Market ValueModel Companies – Market ValueCiscoCisco DellDell MicrosoftMicrosoft YahooYahoo RambusRambus

Market Cap ($B)Market Cap ($B) 146146 9595 317317 33 22

Revenue ($B)Revenue ($B) 1919 3535 3232 11 .1.1

Multiple of Multiple of RevenueRevenue

88 33 1010 33 2020

Earnings ($B)Earnings ($B) 3.63.6 2.12.1 1010 .04.04 .02.02

Multiple of Multiple of EarningsEarnings

4141 3838 3131 7575 100100

Planning IssuesPlanning Issues

► Revenues (always) take longerRevenues (always) take longer Sales forecasts are optimisticSales forecasts are optimistic Un-tested “sales model”Un-tested “sales model” Unrealistic productivity assumptionsUnrealistic productivity assumptions

► Margins aren’t as great as plannedMargins aren’t as great as planned Design creepDesign creep Hidden costs like yield, scrap, obsolescence, warrantyHidden costs like yield, scrap, obsolescence, warranty

► Operating expenses higher than planOperating expenses higher than plan► Capital needs are high . . . and not freeCapital needs are high . . . and not free

Cost of capital is inversely proportional to the execution of Cost of capital is inversely proportional to the execution of the planthe plan

Sanity TestingSanity Testing

► Income StatementIncome Statement Rate of Sales GrowthRate of Sales Growth StaffingStaffing

►GrowthGrowth►Non-growthNon-growth

(engineer one product, sell it forever)(engineer one product, sell it forever)

ProfitsProfits

Sanity TestingSanity Testing

►Balance SheetBalance Sheet A/R, Inventory levelsA/R, Inventory levels Capitalization PlanCapitalization Plan

►How much money to build what size business?How much money to build what size business? Can your investors realize 10 – 100X return on Can your investors realize 10 – 100X return on

investment?investment?

►More information later on VC fundingMore information later on VC funding

►Proxy – compare your plan to the Proxy – compare your plan to the experience of existing companiesexperience of existing companies

Financial Models --Financial Models --The crucible to test your ideas!The crucible to test your ideas!► If you understand the model, feasibility If you understand the model, feasibility

of ideas are more self-evidentof ideas are more self-evident►Make Key Assumptions into variablesMake Key Assumptions into variables

Investigate alternativesInvestigate alternatives Sensitivity AnalysisSensitivity Analysis

►Determine CASH consumptionDetermine CASH consumption►Understand the path to profitabilityUnderstand the path to profitability

Modeling –Modeling –“What-if” Scenarios“What-if” Scenarios

►Document assumptionsDocument assumptions Facilitates changes in futureFacilitates changes in future Operational (e.g.,product engineering Operational (e.g.,product engineering

plan/milestones)plan/milestones)

►Develop a feel for the dynamicsDevelop a feel for the dynamics E.g., Reduced investment in engineering E.g., Reduced investment in engineering

= product schedule slip of X months = = product schedule slip of X months = revenue delayrevenue delay

Rule Number 1Rule Number 1

Cash is Oxygen… Cash is Oxygen…

……Oxygen is LifeOxygen is Life

Financial Projections for Financial Projections for Start-Up BusinessesStart-Up Businesses

Mark LeslieMark Lesliemleslie@leslieventures.com

650.561.1228650.561.1228

Copyright Mark LeslieCopyright Mark Leslie

One Final Thought…One Final Thought…

Copyright Mark LeslieCopyright Mark Leslie

it is regret for the things we did it is regret for the things we did not do that is inconsolablenot do that is inconsolable..

Sidney J. Harris (1917–86)Sidney J. Harris (1917–86)

Regret for the things we did can be tempered by time;