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What to Include in Your Financial Model

Fundraising /

2 min read  Your Financial Model will consist of several KPI’s, or key performance indicators. The metrics show the business’s overall health and can influence business decisions. You will also share the metrics with investors to glean financial projections when choosing whether or not to invest. Below, we cover several KPI’s to include in your financial statements. Cost of Goods Sold (COGS) The cost to build and deliver your product or service. This includes the building costs of the product or hours to deliver the service.  Capital Expenditures  This KPI accounts for investments into assets. This includes real estate, intellectual property, equipment, facilities, buildings, computers, servers, and office equipment. Depreciation  Depreciation represents the reduced value of assets based on their useful lifetime. One can expense a portion of the value each year over the life of that asset.  Personnel Expenses  Each employee has a salary, benefits, and payroll taxes. Payroll taxes are a calculation off of the salary. In addition, commissions need to be included but are variable expenses related to sales.  Financing  Any financing you have must also be accounted for in the financial statements. So you’ll need to set up a tab in your spreadsheet to capture the details of a loan or other types of financing, such as accounts receivable financing. Valuation  For later-stage startups with revenue, one can use the financial projections to estimate the company’s valuation for fundraising purposes. Your financial projections should have the key elements, including projected cash flows, a chosen discount factor, and a net present valuation of the free cash flows to generate the DCF valuation. Operating Expenses Operating expenses are the day-to-day expenses a business incurs. They support the operational side of the business covering sales, marketing, product development, and administration. Working Capital Working capital is the capital you need to run the business’s daily operations and includes anything converted to cash. This includes cash, accounts receivables, and inventory. Accounts payable reduces your working capital as you must pay it out each month. Taxes  Taxes include payroll and social security taxes, which are based on employees’ salaries and are paid monthly. In addition, income taxes are taken from your profit and loss statement results.  Revenues  For sales forecasting, begin with your current sales funnel and revenue history. Next, use your current sales process for the first two years and then switch to your growth initiatives in years three to five.   Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

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Startup Investing: What You Need to Know

Investing /

2 min read Startup investing is an attractive venture for many in the world of investing. Before investing in a startup company, its important to have a well-thought-out plan. In this article, we discuss what percentage of discretionary funds investors typically allocate for startup investing, the difference in early- and late-stage investing, and how to apply your investment thesis to a startup. Allocate Funds The first thing you need to do when preparing to begin investing in startups is to set aside funds for this purpose. In most cases, investors dedicate 5% to 15% of their discretionary funds to angel investing. There are several issues with asset allocation for angel investing compared to publicly traded stocks, bonds, and mutual funds. Startup investments are illiquid as there’s no market for reselling. Transferring stock is greatly limited due to SEC rules. To achieve again, you must hold the stock for up to 7 to 10 years in most cases. Many startups fail completely and are tax write-offs. Determine upfront how much you want to invest based on 5% to 15% of your portfolio. Divide by ten to get the total number of startups you can invest in. Divide the investment amount by 2 to get the initial investment per startup leaving the second half for a follow on round.  For example, let’s say I have a portfolio of $3.5M. 15% of $3.5M yields $525K to invest in startups. Dividing $525K by 10 gives me $52K per startup that I can invest. Dividing the $52,500 by 2 means I can invest $26K for each startup leaving another $26K for each follow-on investment. It’s important to be selective in the beginning. You should start with only 3 investments per year. After a few years and some gains, you can re-invest some of the profits into more startups. There are tax laws that make it attractive to roll your gains from one startup investment into another.  Choose Your Niche Venture capitalists have two choices in funding startups- they can invest in early-stage or late-stage companies. Each option has its own pros and cons Early-stage companies come with a high risk for startup failure, but an easier time to reach a successful investment exit. Late-stage startups have a lower risk for startup failure but a more challenging time to reach a successful investment exit. As the rule of 5 tells us, a good investment requires an exit of 5 times the post-money valuation.  Later stage companies often come with $20M to $30M post-money valuations which means they would need to exit at $100M to $150M to be a successful investment. Early-stage startups simply need to launch and grow reasonably well. Later stage startups need to become the leader in their category as acquisitions usually focus on the leader and not the various followers. Apply Your Investment Thesis Before investing in a startup apply your investment thesis to it to see if it makes sense. Write out the company’s strategy and how it fits into the overall market. Review their position relative to the competition. For the target company, look for a material event that recently occurred such as a jump in sales or hiring of a new CEO. Write out what is significant about the change and why. Include any challenges the company may face. Consider what factors may impact their performance such as the economy, a new competitor, etc. Writing it out helps you think through the investment thesis and gives you a document to reference later to check your thinking. Reviewing your writeup in light of the outcome may update your investment thesis.     Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

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Financial Models for Startups

Fundraising /

2 min read A financial model is a summary of a company’s financial performance for a set duration of time. Financial models can be used externally to share information with investors and internally to make important business decisions. In this article, we look at what you need to include when building your financial model, the benefits of using an up-to-date financial model, and possible uses. What To Include in a Financial Model When you are building your financial model, make sure to include the following: Revenue projections: This is an estimate of revenue from all sources. Cost of Goods Sold: This projects how much it will cost to build and deliver the product or service. Customer acquisition costs: This is an estimate of the sales and marketing expenses required to acquire the customer. Operating expenses: This is the cost of running your business, such as the monthly price for office space and utilities.  Capital expenditures: This is an estimate of the cost to acquire physical assets such as equipment and machinery. Cash runway: This refers to the amount of cash available based on operations as well as any fundraises. It is also useful to include metrics such as customer acquisition cost and customer lifetime value. Benefits of Using a Financial Model An up-to-date financial model is a must-have for every startup as it can help you make management decisions. It can be used to: Determine what positions to hire and when. Measure the performance of the team and highlight problem areas. Shows areas that are out of their target cost or performance zone such as having too much of a given resource. Determine your valuation range for a fundraise or exit event Find ways to reduce the risks in the business. Create consistent results by managing both cost and revenue drivers. Provide ongoing monitoring of the business. Consider setting up the financial model for daily and monthly operational use as well as for fundraising. Ways To Use a Financial Model After building your financial model you can use it in several ways. Examples of use cases include: Raising funding for the business by determining how much you need to raise and when. Generating financial forecasts and projections for managing the business. Projecting key financial statements such as profit and loss statements, balance sheets, and cash flow statements. Setting up budgets for daily management of the business, particularly around cash flow. Determining hiring decisions including what roles to fill and when. Setting strategic plans for growing the business. Estimating the value of the business for negotiating acquisitions by other companies.    Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

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How to Use Financial Projections

Fundraising /

2 min read Information derived from financial statements is used to create financial projections and is usually done on a five-year scale. These projections are used internally for business planning and managing. They are shared externally with investors, potential donors, tax agencies, and more. Below, we cover some of the ways you can use your financial projections. Purpose of Financial Projections Your company’s financial projections document, also called the pro forma, is a key document you’ll need for your fundraise. Investors will want to see a detailed, five-year financial projection to show that you’ve thought through the financial side of the business.  A quality financial projection shows investors you know your business and have a good idea about what things cost and what customers will pay. Additionally, investors also glean from the financial projections how you are going to use the funds they offer you. Financial projections are not about predicting the future with great accuracy, but instead showing the causalities and interdependencies of your business. This document answers questions such as: If sales double, what is the impact on costs? If sales drop by 50%, what happens to cash flow? Fundraise Your financial projections will be important for your fundraise. Banks will want to see your projections when you apply for a loan, and investors will want to see them when you raise equity funding.  There are two basic forms of capital: debt and equity. Debt is in the form of a loan with specific terms, including the interest rate and payback plans. Debt has some advantages including: You can maintain ownership over your business. Interest is tax-deductible. Debt can keep management focused on the core business, in particular cash flow and profits. The advantage of equity is that you don’t have to pay it back immediately, only when you sell the business or go public. Your financial projections will help you decide how much funding you should take from debt and equity. Best Case Worst Case After completing the financial projections, you may want to create various scenarios of your financial model. Startups are often optimistic, while investors are pessimistic, so it can be helpful to create a best-case scenario and a worst-case scenario. For the worst-case scenario, keep your revenue at the current level or only with small increases. Check your cash position and runway and adjust the expenses and fundraise plan accordingly. For the best-case scenario, use the revenue targets you have in mind. Check your cash position and runway and adjust the expenses and fundraise plan accordingly. Here are several common errors: As sales grow, so do sales costs – in particular commissions. Make sure these costs are included with the revenue ramp. Fundraises typically take longer than expected. For every $1M of funding you seek, it will take you one calendar year to raise it. Include your working capital needs for your fundraise planning and its impact on cash position. Founders typically work long hours for little to no pay. This is not true with non-founders. Make sure you include reasonable salaries for the work you expect from others.    Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

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Startup Valuations

Fundraising, Investing /

2 min read Startup valuations differ from standard valuations in that they don’t solely rely on expected cash flows, book value, or other tangible aspects of the business. Intangibles such as quality of the team, intellectual property, product status, and customers are the driving factors. In this article, we look at why startups may want to perform a valuation and how they can maximize their results. Why Perform Startup Valuations Most angel investors want 25% of the equity for an initial round of investment. In addition, they want to have a say in the business through a board of directors or advisory role. To justify your startup value, focus on articulating the values that are already in the business as follows: Highlight the team you have built so far and their experience. Show what the team is doing to make the company successful. Show the current product development and highlight what has been done so far. Outline the intellectual property you have including provision patents. Make sure you file your provisional patents in advance of launching a fundraise so you can point to having patent-pending technology. Always note customers even if they are not yet paying for your product. Customer involvement results in a higher valuation. If you have revenue, use it to prove market validation showing customers will pay for it.  If you cannot sell the proposed valuation for the raise consider cutting the fundraise target in half to make the risk appear lower. Maximizing Your Valuation Valuation is a negotiation and not a formula. While there are formulas and rules of thumb to help determine valuation, it ultimately comes down to positioning and negotiating. Here are some key points to maximize your valuation: Emphasize the team and show what they are doing to help your business. Highlight the repeatable, predictable nature of your revenue rather than the absolute value of it. Emphasize your most recent milestones showing customer demand and past market success. Calculate your valuation with various models to find the one that puts your deal in the best light with the highest valuation. Consider the market in timing your fundraise.  The hotter the stock market, the higher the valuation you can demand. Investors pay more for new, trendy technology. Connect your startup to a technology trend if possible. Positioning your deal properly will earn you a higher valuation. And remember, valuation is a negotiation. This means everything counts.    Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

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Building A Financial Model

Fundraising /

2 min read Building a financial model is an important aspect of running a startup and achieving investor funding. Below, we learn how to create a quick version of the financial model, how to capture assumptions and drivers, and mistakes to avoid in financial modeling. Quick Version of The Financial Model When setting up your fundraising plan at a high level, set a revenue target five years out. Then, draw a line from today to that five-year mark. Your fundraise and hiring plan will come from that. To calculate this quick and dirty version of the financial model, follow these steps: Start with current revenue. Apply your organic growth rate and map out your top-line revenue for five years. Calculate your revenue per person metric. Apply your expenses for five years using the revenue per person metric. Identify the negative profit line.  Set your fundraise to cover the negative working capital. If the amount is greater than one million dollars, break the fundraise into two rounds. This will give you a rough idea of how much you need to raise and how many people you will need to hire.  Assumptions and Drivers In building out your financial model, make explicit the assumptions you are using and identify the drivers in your business. Create a tab on your financial modeling spreadsheet for assumptions and drivers for the investor to review. As you build out the revenue forecast, capture the assumptions behind the growth rate. For the costs, make clear which are fixed and which are variable costs. Identify the drivers within the business. Typically, this is the number of products sold or the number of customers signed up. This drives the revenue line as well as the variable costs. For example, the more customers targeted for revenue, the higher the cost of sales and sales commission. Investors look to see if the costs align with the revenue forecast. Understanding what drives your revenue and costs will help you build out your financial model and create more accurate projections. Mistakes To Avoid in Financial Modeling Your financial model can be used not only for fundraising but also for running your startup. Avoid these mistakes in setting up your financial model: Tying your revenue to a factor that doesn’t actually drive revenue. Instead, figure out what actually drives sales and build your model around that. Trying to identify exact numbers for factors such as conversion rate. Instead, use a range of numbers to account for variations. Skipping the research into companies in your sector. Instead, spend time looking at similar companies to find out what drives their business. Trying to include too many drivers in your business model. Instead, focus on the top drivers that account for the majority of your sales. Setting up the financial model for generating financial statements only. Instead, set up the model so it also calculates key performance indicators. Design the spreadsheet for running the business in addition to raising funding.   Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

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Key Points to Know Before Building Your Financial Model

Fundraising /

2 min read The financial model summarizes a company’s performance using key factors such as revenues, assets, cost of goods sold, and more. The information derived from this model is used to create financial projects about future years’ performance. In this article, we look at key metrics including cash flow, financial model outputs, and the purpose of financial projections derived from the financial model. Key Metrics to Capture Your financial statements will generate a wealth of metrics on your business called Key Performance Indicators (KPI). Investors want to know these metrics, and they are useful to you as a business owner as well. Metrics help you focus your efforts on the important things. You can use them to identify new opportunities for growing sales and reducing costs. Key metrics for the overall health of the business include sales growth, gross margin, and profitability. For cash flow, you’ll find the burn rate, runway, and fundraise requirements will be useful. For recurring revenue, businesses measure the cost of customer acquisition, track the lifetime value of a customer, and indicate the churn rate.  Cash Flow The most important financial statement is the cash flow statement as cash is the most important financial metric for the business. If you run out of cash, you most likely will have to put the business on hold or shut it down entirely. There are two ways to account for cash: cash-based accounting and accrual-based accounting. As a startup, you’ll want to focus on cash-based accounting as it matches expenses with cash more tightly. The cash flow statement will give a runway number of months of operation. Run what-if scenarios based on different outcomes of the sales funnel. If your runway falls to six months or less, you must take steps such as launching a round of fundraising. It’s also helpful to understand your costs — you have variable and fixed expenses. Variable expenses rise and fall with sales activity, while fixed expenses stay the same regardless of activity. In the early days of the startup, you want to push as many expenses into the variable side as you can. As you grow larger, you’ll want to move from variable to fixed expenses as the overall cost will be lower.  Outputs of The Financial Model A financial model provides three outputs- key financial statements, an operational cash-flow forecast, and key metrics for the business. Key financial statements include the profit and loss statement (P&L), the balance sheet (BS), and the cash-flow statement (CF). The P&L shows revenue matched with costs and indicates whether or not you are profitable over a period of time. It can be used to compare different time periods such as this year versus last year or this quarter versus last quarter. It’s often used to compare the actual results with the budget.  The balance sheet shows the company’s assets and liabilities. This is a snapshot in time. The difference between assets and liabilities must always equal shareholder equity (assets = liabilities + equity). The cash-flow statement shows cash inflows and outflows over a period of time. Key metrics include gross margin, profit margin, cash runway, and more.  Purpose of Financial Projections Your company’s financial projections document, also called the pro forma, is a key document you’ll need for your fundraise. Investors will want to see a detailed, five-year financial projection to show that you’ve thought through the financial side of the business.  A quality financial projection shows investors you know your business and have a good idea about what things cost and what customers will pay. Investors also glean from the financial projections how you are going to use the funds they offer you. Financial projections are not about predicting the future with great accuracy, but instead showing the causalities and interdependencies of your business. This document answers questions such as: If sales double, what is the impact on costs? If sales drop by 50%, what happens to cash flow?  Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

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Tips For Starting an Angel Investment Group

Investing /

2 min read There are many things to consider when starting an angel investment group. What kind of deals you will pursue, how much you will invest, and who will be on your team are all things you will need to consider during the planning process. Below are some tips and best practices for recruiting members, branding, and allocating funds for your angel investment group. Recruiting Members It’s important to recruit members to join your angel investment group. The first step of recruitment is showcasing the deals you have to prospective investors to gauge interest. Send them recently funded deals as an example of the type of deals your group offers. You can also give them access to all of your deals for a period of time and then see if they want to join. Network through your current investors to find potential new members. Have the current members bring friends and colleagues to the presentation meetings and invite them to invest in deals the members are funding. Provide the returns for the group to show the track record. It helps to have a fund that investors can join for those who don’t have the time to review specific deals. For every four investors who want to participate, three will join the fund and one will join the group. Setup a syndicate that takes care of the diligence and makes it easy for investors to join the deals. Make the goal and mission of the group clear to prospective investors as the why is stronger than the return in gaining new members. Branding Your Group In running an angel network it’s important to establish a brand for the group and to then promote it. Branding can make your group appear larger and shows it is an established and well-thought organization. A brand consists of a unique name, logo, mission statement, and mantra. Your brand helps your group stand out from the crowd. It helps build trust and is a promise to the investors and startups you serve. It helps people remember your group by giving them a name to associate it with. A brand also helps attract investors as investors want to belong to a group that stands for something. Finally, a brand helps attract startups. Startups need to recognize your group as a viable source of funding for their company.  Allocating Funds In preparing for Startup investing, determine upfront how much you are willing to invest. In general, it’s best to keep your startup investing to 3-5% of your discretionary investment funds- funds you can lose and not impact your lifestyle or other investments. When determining how much you plan to invest, use a five-year window. Separate these funds from the rest of your investments to make it easier to manage the process. The amount you invest per deal will determine what platforms you will use. You invest $5K you will most likely be on an online funding platform. If you invest $25K you can join a group and invest with angel investors. If you invest $50K you can join a syndicate. And if you invest $100K or more you can invest through investment banks.  Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

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Startup Forecasting Using Financial Projections

Fundraising /

2 min read  Startups use key performance indicators to gather financial projections on a five-year scale. These outcomes are then listed in the financial projections document. This document can be used for many purposes, including startup forecasting. More than one forecasting method is available to startups. Let’s take a look at the different methods you can use. Best Case Worst Case After completing the financial projections, you may want to create various scenarios of your financial model. Startups are often optimistic, while investors are pessimistic, so it can be helpful to create a best-case scenario and a worst-case scenario. For the worst-case scenario, keep your revenue at the current level or only with small increases. Check your cash position and runway and adjust the expenses and fundraise plan accordingly. For the best-case scenario, use the revenue targets you have in mind. Check your cash position and runway and adjust the expenses and fundraise plan accordingly. Here are several common errors: As sales grow, so do sales costs – in particular commissions. Make sure these costs are included with the revenue ramp. Fundraises typically take longer than expected. For every $1M of funding you seek, it will take you one calendar year to raise it. Include your working capital needs for your fundraise planning and its impact on cash position. Founders typically work long hours for little to no pay. This is not true with non-founders. Make sure you include reasonable salaries for the work you expect from others. Top-Down Forecasting There are two approaches to financial forecasting for startups. The first is top-down forecasting. Top-down takes a macro perspective by using the overall market sizes and industry estimates for your type of business.  The top-down approach uses market share. Market share is divided into three segments: Total Available Market- anyone you can sell to Serviceable market- your target market Beachhead market- your initial segment to pursue Base your financials as a percent of market share. Look at similar companies in the space to identify the COGS, gross margin, and operating expenses. Give yourself three years to ramp to profitability. Bottom-up Forecasting The second approach to financial forecasting for startups is bottom-up forecasting. Bottom-up forecasting uses the company’s historical data for cost and sales. It takes a micro-view and focuses on the core drivers in the business.  Through experimentation, the startup learns the cost of sales and marketing through various channels. Having sold some units of the product will guide the revenue forecast based on the sales funnel and the sales resources available.  The bottom-up approach may generate a forecast that looks weak to an investor. You may add your growth initiatives in to show what will drive the growth upwards past the organic growth rate. The initial growth (1-2 years out) comes from the current state of the business, while the future growth (3-5 years out) comes from your growth initiatives. Make clear your assumptions in the spreadsheet. Your thought process and approach will weigh more heavily than the numbers themselves. Include attributions for market research such as websites, news articles, and market reports.  Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

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