SESSION THREE: BUILDING THE FINANCIAL INVESTMENT PLAN

Benno Groosman MScBA – www.groosman.info – Athens, February 24 –

MASTERCLASS FUNDING FOR INNOVATIVE STARTUPSBenno Groosman MScBA – www.groosman.info – Athens, February 16 – Orange Grove

MASTERCLASS SCHEDULE

Session 1: Introduction to funding language + business planning;

Session 2: Determining funding need + milestone-based funding;

Session 3: Building your financial investment plan;

Session 4: Investor readiness;Session 5: Advanced funding and wrap-up.

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IN THIS PRESENTATION

ScopeFrom milestones to investment tableHow to make assumptionsCash flow and liquidityRevenue and profitsValuation

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SCOPE The financial plan is part of your business plan

See for example http://www.slideshare.net/benno_groosman/funding-for-innovative-startups-part-1-of-5

In this presentation I focus on new ventures that need (high) initial investments and deal with future uncertainty and risk Though, the basics work for other types of ventures too

This is an introduction; your financial plan requires a lot of practice and updating.

There are many ways of presenting your numbers; I show how I did it in my (funded) business plans and included these examples.

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VALUE-ADDING ACTIVITIES (PREVIOUS PRESENTATION)Investors don’t like to pay for marketing, big office space and high salaries.

Use all funding to increase the valuation of your venture by investing in prototypes, production, sales, patents, strategic positions etc.

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MY DEFINITION: MILESTONE(PREVIOUS PRESENTATION)

A milestone is the concrete achievement of a significant step in your venture planning, which adds financial value to your venture.

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MILESTONE-BASED FUNDING(PREVIOUS PRESENTATION)Define the milestones in your startup planDetermine the amount of money and time you need to reach each milestoneMatch milestones with available funding sourcesCan you combine the milestones for funding?

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MILESTONE-BASED FUNDING QUICK SHEET(PREVIOUS PRESENTATION)

Download at:www.groosman.info/#!funding/cbvu

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EXAMPLE(PREVIOUS PRESENTATION)

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FUNDING NEED(PREVIOUS PRESENTATION)

Ask the money that you really need, not too little,and about 10-20% extra for unforeseen expenses,to achieve the milestone(s) you are aiming for.

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FROM MILESTONES TO INVESTMENT TABLEThe milestone planning gives you an indication of the amount of money you need and when you need thisIn your business plan you don’t only present the total costs of each milestone, but you also split it to the category of costs (e.g. R&D, salary, office, materials)

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EXAMPLE INVESTMENT TABLE MEDTECH

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EXAMPLE INVESTMENT TABLE MEDTECH (TYPE OF COSTS)

Note: you can define your own categories, this is just an example

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ASSUMPTIONS

After the milestone planning and the investment table you have an idea of the amount of money you need to raise

In order to raise money you have to show financial projections for the future

For these projections you have to make estimates of costs and revenues

In new ventures these estimates are assumptionsThe number is not very important, how defendable the assumptions are to get to this number is the most important!

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HOW TO MAKE ASSUMPTIONS ON REVENUEPercentage of the total marketOnly in rare cases. Investors don’t like the phrase “we will capture only 0.1% of the market and still will make millions”

A percentage of the total market can be feasible when you only take the local market or a very specific niche market

It’s good to know the market size, but to determine your share it is better to use the next options www.groosman.i

nfo

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HOW TO MAKE ASSUMPTIONS ON REVENUERevenues followed by a sound sales planLook at your operations now and after successful funding and make a sales plan

For example: there are 200 big customers in my country, we visit two of them every week and expect a 10% conversion, leading to 52*2*0.1 = ~10 customers in year 1.

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HOW TO MAKE ASSUMPTIONS ON REVENUECompare with substitute and complementary products or competitors In case you sell “green roofs” for new houses, you need to know how many new houses are being build. Additionally you can compare with the size and growth of young competitors. What can you do different to capture your part of the market?

If you have a new product that will replace another type of product, see the market of the substitute product and determine the likelihood that somebody would switch to your product.

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HOW TO MAKE ASSUMPTIONS ON REVENUEBuild an operational plan for first years, then add a growth percentage afterTake the previous suggestions to make assumptions and plan the first 3 years

For the other years you can add growth percentages that are reasonable in your market, this can be any number from 20% to 1000% in general (many exceptions apply)

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ASSUMPTIONS (EXAMPLE)“For the cash flow prognosis a conservative, base scenario was chosen. Only from 2018 we calculate revenues out of a sale of initially 3 to 20 products per month by end 2020 (target price €2000 start and €1500 end of this period). End 2017 we expect to have IP license income and production deals with strategic partners (of which one already signed a first right of refusal).The costs for maintenance of our patents are included. The IP license costs are also included. A 25% cost for production is taken of the product sales. As it is a medical product, certification costs are taken into account. The overhead costs consist of rent, office, administrative and regular insurance costs. Paying back loans is included in the prognosis.”

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CASH FLOW AND LIQUIDITY

Cashflow is the moment that the money reaches or leaves your bank account (this is timed differently than revenue or costs).

Cashflow = SUM(cashflow in – cashflow out)

Liquidity = Start number bank account + cashflow

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CASHFLOW STATEMENT

You can define your own cash inflow and outflow categories, but keep the number of posts limited.

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LIQUIDITY

The liquidity (money on your bank account and cash) is crucial for a startup, this determines the survival of the venture

If you don’t have money to pay obligations: For this reason the prognosis per month is required

A negative liquidity gives the need for additional funding (on top of the funding need that came from your investment table)

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LIQUIDITY

What is the extra funding needed on the next slide? (considering that the cashflow cannot be changed)

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LIQUIDITY

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LIQUIDITY

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Although the liquidity at the end of the year is -47,7k, the lowest number is -62,5k and therefor 62,5k is the minimal required extra funding amount (on top of the 100k + 83,2k in the cashflow statement)

EXAMPLE 5-YEAR CASHFLOW AND LIQUIDITY STATEMENT (QUARTERLY)

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EXAMPLE 5-YEAR CASHFLOW AND LIQUIDITY STATEMENT (QUARTERLY)

Download from: http://www.groosman.info/#!funding/cbvu and adjust it to make your own statements

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REVENUE AND PROFIT

If you agree on a sale or purchase today, the revenue or cost occurs today

The cashflow in or out, occurs days to months later or earlier though

Therefor is your cashflow and liquidity statement not the same as your revenue, profit and loss statement

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REVENUE AND PROFIT

For example: a product you deliver to a customer at 28-12-2016 with a 3 week payment term, does not show up in your 2016 cashflow in, but does show up in the revenues that year

But: the costs for making that product (cashflow out and cost) usually do both occur in 2016

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VALUATION (MORE IN THE NEXT SESSION)Your financial prognoses can give an indication on valuation

For this you can also refer to http://www.slideshare.net/benno_groosman/how-to-close-an-investment-deal-2015 from sheet 26 or wait for the next 2 sessions of this master class

On the next slides we will focus on the discounted cashflow method

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DISCOUNTED CASHFLOW Take the total cashflow for each year In the 5 year prognosis at http://www.groosman.info/#!funding/cbvu this is €18.800; € 153.500; € 87.615; -€ 14.963 € 113.460 in year 1, 2, 3, 4 and 5

The discount rate is 0,15 (15 percent) =18800/1,15+153500/(1,15^2)+87615/(1,15^3)+(-14963)/(1,15^4)+113460/(1,15^5)

So, the DCF is €237.878 in 5 years This number is not totally fair, as it also includes the funding in these 5 years

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SNEAK PREVIEW NEXT SESSION:INVESTOR READINESSGO / NO GO decision after every stage in the deal making process: First contact, pitch Personal connection Business plan and/or presentation Term sheet Negotiations Signing term sheet (exclusivity phase investor) Due diligence Participation contract Deposit of money and changes of legal structure

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SNEAK PREVIEW NEXT SESSION:INVESTOR READINESSValuation of startups is not just a numbers game. It’s more about expectations, feelings, investment limits etc.

But, start to quantify your value by: Real option pricing; Discounted cash flow; Comparing to other startups.

Science, art or random?

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MASTERCLASS SCHEDULE

Session 1: Introduction to funding language + business planning;

Session 2: Determining funding need + milestone-based funding;

Session 3: Building your financial investment plan;

Session 4: Investor readiness;Session 5: Advanced funding and wrap-up.

www.groosman.info

FUNDING MASTERCLASS

FOLLOW ME

Benno Groosman MScBAExperienced startup entrepreneurwww.groosman.info

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