Financial Projections¶
Failure to plan is planning to fail
Startup CEO Role¶
Even if you don't understand accounting/finance, you need to know
- Average Selling Price
- Gross margins
- Cost of R&D
- Sales & Marketing Strategy & Expenses
- Start-up and/or Capital Expenses
Venture Capitalist Wants¶
- 3-5x absolute returns
- 5-7yr investment horizon
- 4x in 5yrs = 32% IRR
- Get a significant amount of $ invested
- Own a significant ownership % (50% +)
\[ \text{VC} \% = \dfrac{\$ \text{Invested}}{\$ \text{Invested} + \text{Pre-VC Valuation}} \]
Tech Model¶
- COGS (Cost of Goods/Services): Unit costs + manufacturing O/H + Support
- R&D should be 10-20%
- G&A (General and administrative expensive) should be 5-15%
- Target operating profit of 15-20%
- Distribution strategy
IDK¶
- Do not use business planning software
- Do not project best-case/worst-case
- Build sales projection from the bottom-up
Tech companies rules-of-thumb¶
- Staffing drives departmental expenses
- Employee benefits add 15%
- Salaries wil be 60-70% of total expenses
- Remainder will be rent, utilities, travel
Cashflow Projections¶
- Burn rate
- Monthly operating loss + capital expenditures
- Cash flow projection
- Cumulative operating losses excluding depreciation
- Plus cumulative capital expenses
- Determining total cash required
- Cumulative operating loss + Cumulative capital expenses loss
- On the month you turn cash positive
Presentation¶
Financial Summary
- Always show % next to absolute values
- Show pre-tax only
- Don’t allocate G&A
Executive summmary
- Annual P&L for 4-5yrs
- Data to justify revenue projectison
- Unit sales
- Average Selling Price (ASP)
- When will you be profitable
- Total cash requirement
Full business plan
- Annual P&L for 4years
- Quarterly P&L for 4years
- Quarterly staffing plan for 4years
- Quarterly cash flow for 4years
Equity Distribution¶
Compensate for
- Ownership of IP
- Commitment
- Risk
- Sacrifice
- Past & future contributions
Work to be done > Work already done. Incentivize people to do things in the future
Everyone should vest
You can always grant later
Common ownership breakdown¶
- CEO: 5%
- VP: 1-2.5%
- Sr Manager: 0.25%
-
Sr Ind Contributor: 0.1%
-
Founding management gets 2x to 3x
- Founding employees gets 5x to 10x