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    Ways a Startup Can Achieve an Exit

    2 min read There are many ways to exit a business, each with its own benefits and drawbacks. In this article we discuss the many ways in which a startup can exit the marketplace. Buyer Options There are several options for selling your business. Below are a few buyers from which you can choose: Strategic: The buyer buys your business to provide strategic value for their company. Financial: This buyer looks solely at the financials, in particular the cash flow, and buys the company without consideration to the strategic implications of their business. Management Team/Employee: This buyer works in the company and wants to own the business or continue to run it. Competitor: This buyer is a competitor and wants to take your business off the market by merging it into their own. Private equity: This is a buyer who plans to take over the business with a new management team and business plan. Generational transfer: This is typically a family member who wants to take over the business. Other Exit Options There are several other ways to exit a business. Some options include: Selling the business to an investor. This provides liquidity to the owners. The downside is it’s not clear what happens to the employees and the direction of the company. Develop an employee stock ownership plan. This transfers ownership to the employees and brings tax benefits to you. The downside is that the valuation will most likely be lower than an outright sale. Use a management buyout. This provides liquidity to the owners but can take some time to complete, even years. Transfer the business to a family member. This provides the family member with an income and potentially a career. There are estate tax consequences that must be considered with this option. In exiting your business, consider the impact not only on yourself, but also on the employees, customers, and others associated with the business. What If It Doesn’t Sell? Most startups are launched with the idea of selling the business for a substantial gain in five to seven years. Many companies reach that stage and find they can’t sell the business, at least not for the price they want. Here are some options: Reduce your burn rate to zero and keep running the business. Split up the business into its component parts (team, inventory, technology) and sell to multiple buyers. Sell the business to the other founders or to investors and take a revenue share for your equity portion of the business. Line up a manager of the business to take your place and then dividend back to the investors a portion of the revenue until they receive a payback amount. While you may not reach a full acquisition as planned, there are several ways to exit the business and pay back the investors. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/how-to-achieve-an-exit/ 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 Plan for an Exit

    2 min read At some point, every startup will need to exit the marketplace. Being prepared is key to doing this with success. In this article, we discuss how to plan for an exit and how to prepare for exit negotiations. Planning For an Exit Here are some key steps to take in planning the exit for your company: Understand why you are exiting the business.   Is this exit going to be seller motivated or buyer motivated? Explore the options. Consider who would be the best acquirer or which company would be best to merge with. Consider the market and industry. Is your industry consolidating? Is the market growing? Know what your company is worth. Research comparable valuations of similar companies. Revenue is typically a key factor along with profit. Start talking with potential acquirers and update them regularly on your progress. Ask other founders and CEOs for their exit experience. Find out what they discovered in going through an exit. Ask your current investors about their experience with exits to see what they know. Once you have a target acquirer, make a list of what they want to see in your company in order to buy it. This list becomes your strategic plan. Negotiating an Exit In negotiating the exit with an acquirer you’ll need to know the following: Key metrics about your business, both those that show the company in a positive light as well as a negative one. The total addressable market for your company. The top three opportunities your company can attack. The company’s competition and competitive advantage. The company’s track record in meeting forecasts and accomplishing milestones.  Why are you selling the company, and why now? Why is the acquiring company a good fit for your company? How closely aligned in operations is the company to the acquiring company’s operations? How much integration work will need to be done? What role will the CEO play after the acquisition? Think through the answers to these questions as most of them will come up. Preparing to Achieve an Exit At every fundraise stage the CEO can choose to raise funding or sell the business. If you choose to sell your business, how can you go about doing so? Meet all the C-level people at companies that could acquire you, and the CEOs of companies who are potential acquirers. Gain an introduction and then generate an ongoing dialog with the CEO. In the process of doing so, you can determine their interest in your type of business. If they like what you do and can see how it fits into their business, then you have an opportunity to pursue being acquired. As always in business it is about starting and building relationships. 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 Organizations: Finding Funding

    2 min read Every startup eventually asks the question: “Where will our funding come from?” There are several sources of funding that your organization can tap into. Some of the most common funding sources include consultation, contractor, crowdfunding, and supplier funding. Let’s take a closer look at each. Consultation Funding Consultation funding is using consultation work to pay the bills and salaries while you are building out your product. Consider looking for consultation work in addition to selling the product as some customers want more assistance in installing and using the product than in just buying the product itself.  The consultation also brings new insight into how the customer intends to use the product and what problem they are trying to solve. This is useful information to guide your product roadmap. Consulting work gives you more information about the market and the competition as you’ll encounter competitive solutions. This is also a great way to generate positive references to use when you launch your standard product into the market. While consulting may not be your ultimate goal, it can be a useful way to fund a portion of your product development. Contractor Funding Many enterprise software programs come from service businesses solving a problem for their clients. In searching for a solution on the market, they find none, so they build their own. Later, other clients come ready to buy it. This is one of the most overlooked forms of funding in the startup space. In contractor funding, you sell a customized version of what you want to build to an anchor customer for a substantial one-time fee and then use the funds to build out the platform you envision of which the customer gets a non-exclusive license.   The advantage here is you have a customer telling you exactly what they need and what they will pay for. They improve the product by testing it and telling you what changes to make. They become a happy customer that you can use to attract prospective customers. After three more of these engagements, you will have $1M of investment in your platform with zero dilution. Crowdfunding Crowdfunding can be sourced as prepayment for a good or service, or from accredited or non-accredited investors. Prepayments let you pre-sell your product before you build it. This works best for physical products that require funding for the design and manufacturing of the product. It’s a great way to test the market for a new product as it provides customer feedback on the product, price, and promotion. There are several platforms available for showcasing your product. There’s also crowdfunding from non-accredited investors. On these platforms, anyone can invest in your startup. It is for equity, so you need to understand the implications of it on your cap table. Finally, there’s crowdfunding from accredited investors which is no different than raising funding through angel investors and venture capitalists. The only difference is using a crowdfunding platform to find and engage the investors. There are a growing number of crowdfunding portals offering both general and specialized sites. Crowdfunding works well for startups with a product that is clear to grasp and easy to understand.  Supplier Funding Another source of funding is supplier funding. Supplier funding comes from those who provide services to your company such as contract manufacturing, software development, legal, accounting services, and more. Suppliers provide their services in exchange not only for cash but also for equity. This reduces the amount of equity funding you need to raise from investors. Contract manufacturers will invest in your business and in exchange they look for the startup to use their manufacturing services. Software development firms invest in startups by taking a portion of their software development fee in the form of equity. There are other examples, including lawyers and accountants who provide services in return for equity. This aligns their interest with your interest as the business must succeed for the equity to be worth something.  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 Using Your Financial Model

    2 min read Financial models contain numerical data about the past, present, and future of your business. This information can be used to make business decisions, analyze the financial health of the company, and can also be presented to potential investors. In this article, we provide tips for using your financial model. Using Your Financial Model in Your Pitch The financial model is a key component of your pitch. You should be using key financial numbers from the model to tell the story of how your business can scale up. To do this, start with your unit economics to show the business works. Show how the systems you have built drive the business using the financial model. Highlight the market size and how fast the market is growing as well as how you will go to market if you are in the early stage. Call out key cost figures to demonstrate you know the numbers that drive your customer acquisition process and retention rates. Show how you will use the funds by pointing to the costs for building products, generating leads, or closing sales. Show your cash burn and how the fundraise will give you runway. The financial projections alone don’t tell the story of your business. You have to pull out key numbers to tell the story. Using Your Financial Model in Your Pitch Deck Many founders cut and paste cells from the financial model spreadsheet into a slide. This renders the information unreadable as the spreadsheet doesn’t fit with the presentation format. To show your financial projections, consider the following: Don’t cut and paste from the spreadsheet. Investors cannot take in a detailed spreadsheet on a slide, only the high-level information. Instead, choose specific numbers from your financial model and place them into the slide using the same font and format as the rest of the deck. Choose three sets of numbers: Revenue, costs, and profits. For these categories, show last year, this year, and projections for the next three years. This provides a five-year window into the company. For each of the three categories, create a line graph. Avoid hockey sticks as investors will discount those numbers as unrealistic. Investors will look for the growth rate you are projecting. They will look to see when you go cash flow positive. Investors will look at the burn rate on the profit line and then check the fundraise to see how much cash runway you are proposing. The key takeaway regarding how to present your financial projections is the importance of calling out three key numbers such as the growth rate, months to cash flow positive, and the number of months of cash runway. How Investors Use Your Financial Model Investors use the financial model to understand not only the business but also to learn about the founder and their skills.  Here are some key points investors look for: Salaries: How well is the team compensated, and does this fit the stage of the business? Customer acquisition and retention: Have you built a system for acquiring customers and retaining them? Traction: What traction do you have going so far? Knowledge of the business: How well do you know the costs of running the business as well as what factors drive revenue? Scale factors: Based on the costs and customer acquisition model, how well can the business scale? Use of funds: How are you are going to spend the funds raised? Does it make sense for the stage of the business? Potential outcome: Is this a venture business or a lifestyle business? Consider how the investor will view your deal in building out your financial projections.  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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    What to Include in Your Financial Model

    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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    Financial Models for Startups

    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

    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

    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

    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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