"Understanding Financial Projections for Investment Presentations"

“CREATING AN EFFECTIVE SET OF FINANCIAL PROJECTIONS”

JULY 21, 2015

Neil Davis

TEDCO

PREPARING FINANCIAL PROJECTIONS

Target attendee is the start-up entrepreneur.

Preparing budgets and forecasts for the mature business is a different process.

Agenda• Talk about some basic & the process.• Work thru an example.• Let you do it – case study.

Informal - ask questions as we go!


Rule #1…

Yes, you do need to prepare financial projections!

“So…I’ve read about a start-up that raised $20M and never had any financial projections…what’s up with that?”

“So…Someone told me that the Y Combinator application doesn’t require financial projections…what’s up with that?”


Rule #2…

It's not accounting, it’s business.

• Accountants prepare historical financials.• Analysts prepare budgets and forecasts.• Business people prepare financial projections.

So…is there a role in the process for an accountant?


Rule #3…

Your financial projections will never be correct…but they have to make sense.

• Investors will always discount your projections.• They have to be “big enough” to matter.• They are a reflection of your assumptions about the business,

dressed up to look like a P&L.• Think of it as a math or chemistry test…so, “show your work”.


Rule #4…

The end goal is to be discussing your assumptions, not the actual numbers.


Financial Projections

Go-to-market

strategy

Market Research

Operating Assumptions


Oh, yeah – and just one more thing…

“I only need 0.01% of this really big market to make money.”

The Macro (Top Down) approach is not acceptable because no one, including you, can assess whether your execution plan is reasonable and whether you can execute.

It’s a little like using average data to make decisions.


Investors want to see a Micro (Bottom Up) approach that starts with the customer and is grounded in your market research.

• It’s also much more meaningful to you and your team.• Anecdotal market research is preferable to published reports.• No one expects you to spend money on this.


The K – 12 Education Technology Example

I’m an ex-teacher with a tech co-founder and have convinced my local district to pilot the technology.

• Over $600B is spent annually in total• Over $95B is spent annually on technology


The Bottom Up Go-to-Market Plan

Step 1 – Segment the market:

There are…16,330 US school districts:

o 20 US school districts serving >125K studentso 240 US school districts serving 20K to 125K studentso 7440 US school districts serving 1K to 20K students o 8600 US school district serving <1K students


Step 2 – Create segment strategies:

1. Ignore the 20 largest districts until Year 3.a. Extremely long sales cycle

b. Highly political decision-making

c. Heavily embedded contractors and consultants

d. Initial pilot project not deemed “significant”

2. Ignore the 8600 smallest school districtse. Budget and staff limited

f. Extensive technology redesign required

g. Initial pilot project deemed “overkill”


Step 2 – Create segment strategies (cont’d):

3. Ignore the 7440 districts w/ 1K to 20K students until Year 2.

a. Need value-engineering to hit price point

b. Need market presence

c. Need geographic network of value-added resellers

4. Target Segment – 240 districts serving 20K to 125K studentsd. Capitalize on initial pilot project

e. Survey personal contacts re: value proposition and price.

f. Focus on 45 districts in urban settings where my personal brand & network is most powerful).

g. I will personally close 5 sales in 1st year after pilot.


Segment Strategy Summary

Year Strategy

1 Founder to close 5 deals in target segment

2 • Add 2 salespeople in target segment (assume 2 sales in 1st year + 5 sales per year in future years)

• Select and train 3 VAR’s (assume 0 sales in 1st year + 12 sales per year in future years)

3 • Continue to add salespeople + VAR’s as long as justified by productivity.

• Close strategic alliance for sales into 20 largest school districts (assume one sale per year, beginning in Year 4)

4 Continue to grow sales in districts >1K students

5 Begin R&D effort on product for schools <1K students


Link Segment Strategy to Market Research & Financials

1. Use market research to add credibility to segment strategy & assumptions.

2. Use segment strategy & assumptions about contract value, training, maintenance, etc. to build annual revenue projections.

3. Estimate COGS to calculate gross margin % and operating profit.

4. Use segment strategy and assumptions about sales channels and other overhead expenses to build annual SG&A budget.

5. Calculate EBIT.

6. Determine your investment needs (see next slide).


Financial Projections ($1000)

Year 1 Year 2 Year 3 Year 4 Year 5Units 20 40 80 160 320

Revenues 100 200 400 800 1600COGS (25) (50) (100) (200) (400)Gross Margin

75 150 300 600 1200

SG&A (150) (200) (250) (300) (350)EBIT (75) (50) 50 300 850R&D

Spending(100) 0 (500) 0 0

CAPEX 0 (25) 0 (100) 0Beginning

Cash0 100 25 175 375

Investment 275 0 600 0 0Ending Cash

100 25 175 375 1225


Watch out for…

1. Constant %GM – May increase (as you get more efficient) or may decrease (as your revenue quality decreases with expansion).

2. %GM too low – Need room for error, discounting & mistakes.

3. Constant SG&A – Should decrease as a % of sales (or you’re not managing the business).

4. Multiples of prior years – Makes it look like you’re guessing.

5. Confusing cash with accounting – It’s all about burn rate and investment needs, not depreciation, amortization, and revenue recognition rules.

FINANCIAL PROJECTIONS

Financial Projections

Now that you’re all done building your projections from the bottom up…you should calculate your % share of the total market.

That % should be reasonably attainable, allowing for plenty of downside risk and upside opportunity. In other words “not too large and not too small…just right!”.


Conclusion

…and, if you didn’t notice, what was just outlined here is about 2/3 of your 10 slide investor pitch deck!

Questions? Comments?


Neil Davis

TEDCO

Director, Entrepreneurial Development

410.715.4164

[email protected]

mailto:[email protected]

"Understanding Financial Projections for Investment Presentations"

Small Business & Entrepreneurship

Transcript of "Understanding Financial Projections for Investment Presentations"