funding for innovative startups - part 3 of 5

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Masterclass funding for innovative startups

Session three: building the financial investment planBenno Groosman MScBA Athens, February 24

Masterclass funding for innovative startupsBenno Groosman MScBA Athens, February 16 Orange Grove

Masterclass scheduleSession 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. FUNDING MASTERCLASS

In this presentationScopeFrom milestones to investment tableHow to make assumptionsCash flow and liquidityRevenue and profitsValuation FUNDING MASTERCLASS

SCOPEThe financial plan is part of your business planSee for example In this presentation I focus on new ventures that need (high) initial investments and deal with future uncertainty and riskThough, the basics work for other types of ventures tooThis 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 FUNDING MASTERCLASS

Value-adding activities (previous presentation)Investors dont 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. FUNDING MASTERCLASS

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. FUNDING MASTERCLASS

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? FUNDING MASTERCLASS

Milestone-based funding quick sheet(previous presentation)

Download!funding/cbvu FUNDING MASTERCLASS

example(previous presentation) FUNDING MASTERCLASS

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 FUNDING MASTERCLASS

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 dont 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) FUNDING MASTERCLASS

Example investment table medtech FUNDING MASTERCLASS

Example investment table medtech (type of costs)

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

assumptionsAfter the milestone planning and the investment table you have an idea of the amount of money you need to raiseIn order to raise money you have to show financial projections for the futureFor these projections you have to make estimates of costs and revenuesIn 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! FUNDING MASTERCLASS

How to make assumptions on revenuePercentage of the total marketOnly in rare cases. Investors dont like the phrase we will capture only 0.1% of the market and still will make millionsA percentage of the total market can be feasible when you only take the local market or a very specific niche marketIts good to know the market size, but to determine your share it is better to use the next FUNDING MASTERCLASS

How to make assumptions on revenueRevenues followed by a sound sales planLook at your operations now and after successful funding and make a sales planFor 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. FUNDING MASTERCLASS

How to make assumptions on revenueCompare with substitute and complementary products or competitorsIn 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. FUNDING MASTERCLASS

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 yearsFor 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) FUNDING MASTERCLASS

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 FUNDING MASTERCLASS

Cash flow and liquidityCashflow 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 FUNDING MASTERCLASS

Cashflow statementYou can define your own cash inflow and outflow categories, but keep the number of posts limited. FUNDING MASTERCLASS

liquidityThe liquidity (money on your bank account and cash) is crucial for a startup, this determines the survival of the ventureIf you dont have money to pay obligations: For this reason the prognosis per month is requiredA negative liquidity gives the need for additional funding (on top of the funding need that came from your investment table) FUNDING MASTERCLASS

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



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) FUNDING MASTERCLASS

Example 5-year cashflow and liquidity statement (quarterly)

Download from:!funding/cbvu and adjust it to make your own statements FUNDING MASTERCLASS

Revenue and profitIf you agree on a sale or purchase today, the revenue or cost occurs todayThe cashflow in or out, occurs days to months later or earlier thoughTherefor is your cashflow and liquidity statement not the same as your revenue, profit and loss statement FUNDING MASTERCLASS

Revenue and profitFor 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 yearBut: the costs for making that product (cashflow out and cost) usually do both occur in FUNDING MASTERCLASS

Valuation (more in the next session)Your financial prognoses can give an indication on valuationFor this you can also refer to from sheet 26 or wait for the next 2 sessions of this master classOn the next slides we will focus on the discounted cashflow FUNDING MASTERCLASS

Discounted cashflowTake the total cashflow for each yearIn the 5 year prognosis at!funding/cbvu this is 18.800; 153.500; 87.615; - 14.963 113.460 in year 1, 2, 3, 4 and 5The 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 yearsThis number is not totally fair, as it also includes the funding in these 5 years FUNDING MASTERCLASS

Sneak preview Next session:investor readinessGO / NO GO decision after every stage in the deal making process:

First contact, pitchPersonal connectionBusiness plan and/or presentationTerm sheetNegotiationsSigning term sheet (exclusivity phase investor)Due diligencePartic