This course builds on previous concepts and outlines strategies and tactics for forming, financing and launching a new venture. Topics to be addressed will include building the new venture’s initial management team, identifying and reaching out to early customers, developing financial plans, raising startup and initial growth financing, and preparing for and managing rapid growth. Course objectives: Entrepreneurial Team Building: Develop an understanding of the what is required in a new venture Initial Go-to-Market Strategy: Develop a plan to identify and approach your first customers Financial Forecasting: Building financial projections for the new venture Entrepreneurial Financing: Raising Equity Capital for the new venture Growing the Business: Monitoring the new venture’s health and scalability
Projections: Presenting Financial Forecasts
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From the course by University of Illinois at Urbana-Champaign
Entrepreneurship II: Practices and Approaches
31 ratings
University of Illinois at Urbana-Champaign
31 ratings
Course 6 of 7 in the Specialization Innovation: From Creativity to Entrepreneurship
From the lesson
Module 2: Financial Planning
This module focuses on laying the financial foundation for a new startup company. It starts with discussions of revenue models and pricing strategies for bringing new products or services to the market, and continues with lessons on preparing and presenting financial projections.
Meet the Instructors
Thomas E. ParkinsonVisiting Professor
University of Illinois College of Business
I'm Tom Parkinson. Welcome to Entrepreneurship two: Practices and Approaches.
Hopefully, by now, you've started to pull together
a reasonable set of financial projections
for your startup, and they're looking pretty good.
In this lesson, we're going to talk about how you can best present
the financial prospects for your business to potential investors.
Keep in mind, the goal of an investor presentation is not to get the investment,
the goal is to get the next meeting,
and in that meeting you can really start to dig in.
As a reminder, you're going to need to have
some well-thought through and understandable financial projections before you're
able to get very far in your conversations with most investors.
You'll probably need at least three years worth of projections,
income or profit and loss statements,
balance sheets and cash flow statements,
preferably ones that are consistent with
generally accepted accounting principles so that
they're consistent with your investors expectations.
You also want to have a worksheet or two that lay out
the key assumptions on which your projections are based,
especially the assumptions behind your revenue and growth projections.
You'll have to defend these assumptions at some point.
It can also be productive to have a worksheet or two that provide
additional details like the number of employees you're going to need to hire over time.
You'll also need to have a monthly cash budget that forecasts cash inflows,
cash outflows, and your cash balance each month,
at least for the first year.
This helps to show your cash runway.
How long can you be able to operate before you have to raise additional capital?
Finally, you'll need to be able to discuss your financing plan.
How much money do you need to raise today,
and what will you spend it on to create value in
the company and for its shareholders, including yourself?
Entrepreneurs frequently ask if they need to be
prepared to present a sensitivity analysis.
This is a tool for determining how the business and its finances would be
impacted if some of the key assumptions underlying the forecasts are changed.
For example, what happens to your profit margin if you lower your price by 15 percent?
What happens to your revenue growth rate if it takes
30 days longer than you expected to close sales?
What happens to your cash runway if your customers take 40 days to pay,
instead of 30 days?
A sensitivity analysis is not that hard to prepare as long as you have
clearly laid out these assumptions in
a way that makes them easy to change in your models.
Frequently, a sensitivity analysis is a way
for you to understand and share your best case,
worst case, and most likely projections.
When you're meeting with an investor for the first time,
my advice is to focus entirely on your most likely model.
Your worst case model may not look good enough to get you to that second meeting,
and your best case model might make the investor think you have stars in your eyes.
You can always dig into your sensitivity analysis later,
and it will help you demonstrate to the investor that you've clearly
identified the assumptions that will really matter.
So what should you include in your initial investor presentation?
At this early stage,
you really only want to present highlights.
You want them to be enough for you to clearly communicate the attractiveness of
the opportunity without getting either you or the investor bogged down in the details.
Remember, the purpose of an investor presentation is to get a follow up meeting.
You want him or her to be interested in learning more.
At a minimum, you need to present enough to
communicate the potential size and scope of the business.
Is it a niche business that will steadily gain market share,
or is it a market dominating company that has the
potential to disrupt an entire industry?
Is it a lifestyle business,
or a rocket ship to the moon?
You also need to be clear about the nature and
size of the investment that's going to be required.
Is it equity or debt?
Do you need to raise tens of thousands of dollars, or tens of millions?
If possible, it's good to be able to give the investor clues
about the potential return on the investment if the company is successful.
That's not to say that you need to calculate the IRR for them.
You certainly don't want to do that.
A better way to do this is to discuss what you
think the potential liquidity options for your investors will be.
Are you planning to have the company throw off lots of cash in the form of dividends?
Do you think the company will eventually be purchased
by a larger company in your industry?
If so, can you point to similar transactions.
Do you think the company has the potential to go public in an IPO?
How long do you think it'll take before your company will be
ready for any of these options?
Make sure you've done your homework so that you
can be credible when you discuss these alternatives.
Assuming that you're successful in getting that follow up meeting,
that's when you should expect to have to
explain and defend your assumptions and your models,
especially when it comes to revenue growth, profit margins,
customer acquisition costs, company overhead,
and cash requirements over time.
I think it's always a good idea to have a slide near the end of your presentation called,
The Ask, or Financing Requirements, or something like that.
This is your call to action.
In any presentation that doesn't include a call to action,
has the potential to be a waste of everyone's time.
So be specific.
What do you need, and how can they help?
How much money are you trying to raise right now?
It should probably be enough to last you for at least 12 to 18 months so that you have
enough time and resources to
accomplish the key milestones that you've set for the company,
before you have to go out and raise money again.
If you don't achieve these milestones,
it'll be hard for you to raise
that next round on the terms that you're probably hoping for.
I've said this before but I think you really should
describe how you intend to spend the money that you raise.
Investors will want to see that it's really creating value.
Company overhead is not a very exciting use of proceeds.
They're going to want to see that you're spending as much of the money as
possible to advance your technology,
get real actionable feedback from customers,
grow your sales, and improve your profit margins.
Please make sure that you understand your audience and their capacity to invest.
It makes very little sense to talk with
an angel investor about a multi-million dollar investment,
unless they're going to be one of many investors.
It makes even less sense to talk to
a 500 million dollar venture capital fund about a 25 or 50 thousand dollar investment.
Have you already raised any of the money?
If you've already gotten an investor on board,
make sure that they know that.
It's so much easier to raise money if new investors
can see that there's already smart money in the deal.
A word about valuation.
I think it's a mistake for you to mention the valuation you think
you deserve in an initial investor presentation.
Most venture capital firms and
most sophisticated angel investors
expect that they'll be the ones who propose the valuation,
and that will come only after they've decided that they want to invest in the business.
If you lead off by proposing a valuation that they think is too high,
they may lose interest entirely,
because they think they'll never be able to come to terms with you.
If you lead off with evaluation that's too low,
you're going to leave money on the table,
because they'll never agree to a higher valuation after you've
basically said you'd accept a lower one.
There's plenty of time to discuss valuation and other important deal terms later,
once it looks like you've got a real thing going.
The only time when I think you should be the first to bring it up,
is if you already have a lead investor on
board and the terms have already been agreed to,
and now you're just trying to bring on some additional investors to fill
out the financing round.
So let's take a look at a few examples.
There are lots of ways to present financial information in an investor presentation.
Let's start with what not to do.
Don't just copy and paste your spreadsheets into your slide presentation.
For one thing, it's not even close to being legible.
For another, it does nothing to highlight the numbers that matter.
The investor has to try to pick them out on his or her own. Less is More.
There's almost never a reason to present
monthly or even quarterly revenue or cash projections like this.
There is also no reason to include more than a few line items.
Remember, you can get into the details in the follow up meeting.
If the investor asks you to send them your detailed projections
after your first meeting so that they can review them, that's a win for you.
You want them to be interested enough to ask for more.
So here's a bare bones approach.
Many of the investors that you meet with will have financial backgrounds.
And this may mean that they relate better to numbers than they do to graphs,
so give them what they want.
The key numbers, revenue and profits,
with the dollar amounts in thousands so that they're easy to read.
Maybe throw in an additional metric to provide additional context,
the employee headcount forecast in this example.
You really don't need a whole lot more than this.
This bare-bones table has the same information from the squint chart on my last slide.
A company growing from 4 million to 25 million in two years,
with a really strong profit margin by year three.
It's a software company so one would hope the profit margins would be high.
You can also see that the headcount is growing but not nearly as fast as revenue.
Hence, the dramatically improving profit margins.
Now here's another example.
Same numbers, but we've added
a simple line graph for those who aren't so numerically inclined.
You can see revenue growing.
In fact, you can see that the rate of growth is
improving from the way that the revenue line gets steeper,
which is something that was a little harder to get from the last example.
Profits are going from negative to positive,
and the rate of increase is also getting better.
The numbers are provided in a small table at the bottom,
as it's sometimes hard to determine
the actual amounts without squinting at the graph for a while.
Finally, for those of you who absolutely insist on having busy presentation slides,
here's an example of a way to communicate a lot of information.
The revenue and profit projections are here as they were in the previous examples,
but we've added gross profits and
percentage margins for both gross profits and net profits.
We've also added the projected cash balances,
which can be pretty important after all,
and some revenue growth and efficiency metrics,
new users per year,
and the number of new users per full time employee.
The cash totals help to demonstrate that this company may
not need to raise any more money from investors after this round.
There are even some highlights over there to the right to make absolutely
certain that the investor understands that we're
talking about a company that's expected to grow fast,
while significantly improving its sales efficiency and profit margins over time.
Finally, attractive target for acquisition by 2017 is all you
really have to say to tell the investor when and how you think
they'll be able to realize a return on their investment.
There are quite a few blogs and websites out there that offer really good advice
for entrepreneurs about preparing and presenting their financial projections.
I definitely recommend Guy Kawasaki's blog,
as well as these other sites. Good luck.
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