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, I'm going to talk about how you can best present your financial projections to potential investors. Investors are going to need to see your financial projections, but it's just as important for them to understand the assumptions that they're based on. Before you have that initial meeting with a potential investor, remember what the purpose of the meeting really is. It's not to get the investment, it's to get a follow-up meeting. So, the financial information that you present during your initial meeting has to be concise and understandable, but it has to be backed up by an appropriate level of detail. You will probably need to have prepared at least 3 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' experience and expectations. You'll 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 you can 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 how will you spend it 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 forecaster changed. For example, what happens to your profit margin if you lower your price by 15%? What happens to your revenue growth rate if it takes 30 days longer than you expected to close sales? Or what happens to your cash runway if your customers take 40 days to pay instead of 30? 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 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 on 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 will take before your company will be ready for any of these options? Make sure that 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 review your full forecast. You should also be ready to explain and defend the assumptions behind your forecast, especially when it comes to revenue growth and profit margins. Of course, everything is fair game when you're digging through your detailed forecasts. In addition to revenue and profit margins, the questions you're likely to get will be about your selling and marketing expenses, major administrative, or overhead expenses, especially if they're not typical for a company in your industry, your capital expenditures, and your use of proceeds. That's the list of items you're raising capital to pay for. You should 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, and 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 the milestones, it'll be very hard for you to raise that next round on the favorable 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. Make sure that you understand your audience and their capacity to invest when you're asking for money. It makes very little sense to talk with an angel investor about a multi-million-dollar investment unless they're going to be just one of many investors. It makes even less sense to talk to a $500 million venture capital fund about a $25,000 or $50,000 investment. Have you already raised any of the money? If you've already got an investor on board, make sure 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 proposed 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 because they think they'll never be able to come to terms with you. If you lead off with a valuation 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'll 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. The terms have been agreed to and you're just trying to bring on some additional investors to fill out the financing round. So, now, let's 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 their own. Less is more. There's almost never a reason to present monthly or even quarterly revenue or cash projections like this. There's also no reason to include more than a few line items. Remember, you can get into the details in a follow-up meeting. If the investor asks you to send your detailed projections after the 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. Here's a bare-bones approach. Many of the investors that you meet 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 2 years with a really strong profit margin by year 3. It's a software company, so one would hope that 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. 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 percentages 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.
