FinancialProjections For Start‐ups ForStart ups
Prof.ThomasHellmann UniversityofOxford©2014
• Magicmirrorinmyhand, Magic mirror in my hand whoisthefairestinthe land? • Myqueen,youarethe f i fairestheresotrue. h • ButSnowWhitehasa B tS Whit h thousand times more thousandtimesmore EBITDAthanyou. y
First Mirror Image FirstMirrorImage
Business B i Plan
FP reflect business strategies, t t i milestones milestones, scale and viability
Second Mirror Image SecondMirrorImage
Learning L i about Self
Process of generating FP forces entrepreneurs to reflect on assumptions
Third Mirror Image ThirdMirrorImage
IImage to t Investors
FP reflect to in estors the investors prospects p business p and financial needs; also entrepreneurs’ entrepreneurs financial literacy and conceptual clarity
Limitations • FinancialProjectionsarealwayswrong – Unpredictabilityofstart‐ups – Timinghardtoguess – Bewareoffalseprecision B ff l ii
• FinancialProjectionsarealwaysoutofdate – Goodentrepreneurschangestrategyoften Good entrepreneurs change strategy often – Leanstart‐ups‘pivot’
• FinancialProjectionsarealwaysoptimistic Financial Projections are always optimistic – Codelanguage:“ourprojectionsveryconservative” – Investorsexpectoptimisticprojections – Describethe‘goodcase’,notthe‘averagecase’
• FinancialProjectionsarenotasubstituteforproperfinancial accountingrecordkeeping k
HOWTO HOW TO DEVELOP DEVELOP FINANCIAL FINANCIAL PROJECTIONS?
A Fine Recipe AFineRecipe
Use two pounds of fresh primary market research Mi in Mix i a cup off secondary d market k data d Lightly sprinkle some theoretical reasoning Decorate subtly with wishful thinking Serve hot
Basic Steps BasicSteps • ProjectRevenues Project Revenues • Projectallcosts – Cost Costofgoodsold,Expenses,Developmentcosts, of good sold Expenses Development costs Taxes,etc…
• Buildprojections Build projections – CashFlowStatement – IncomeStatement I St t t – BalanceSheet
• Presentfinancialprojections f l • Managecash
REVENUE REVENUE PROJECTIONS
Revenues Revenues =Price*Volume P i *V l
Define counting unit Definecountingunit • Defineunitsale • Use‘average’transaction • Examples – – – – – – – –
Museum Restaurant Onlinenewspaper O li Onlinevideogame id Nuclearpowerstation F hi Fashionconsultant lt t Militarysubcontractor Etc…
Estimating Prices EstimatingPrices • Customer–centric – Valueproposition – Willingnesstopay – Customersegmentation
• Competitor‐based p – Cost‐qualitycomparison – Marketdynamics Market dynamics – Initialpricingstrategy
• Value‐chainconstraints Value‐chain constraints Supplier costs=$2 t $2
Production costs (COGS) (COGS)= $5
Priceto distributor d st buto =$9
Priceto retailer= eta e $15
Average discounted retailprice t il i =$24
Suggested retailprice eta p ce =$30
Estimating Quantities EstimatingQuantities • Fourapproaches h 1. 2. 3. 4.
Top‐down Bottom‐up Copy‐cat Copy cat More‐of‐the‐same
• Inpractice,usecombination In practice use combination
The S curve TheScurve Revenues
Time
Top down revenue projections Topdownrevenueprojections
Top down revenue projections Topdownrevenueprojections • Definerelevantmarketsegment g • Existingmarkets: – Lookupcurrentmarketrevenues – Projectmarketgrowthrate – Estimateobtainablemarketshare
• (Hopefully)Emergingmarkets: – Estimatepotentialmarketsize – Estimatemarketadoptioncurve(S‐curve) Estimate market adoption curve (S curve) – Estimateobtainablemarketshare
• Classicalmistakes: Classical mistakes: – “EverybodyinChinawillbuyourproduct” – “Weonlyneed1%ofa$1Billionmarket”
Example:AsiaRenalCare p China Population(inmil) Treatmentrate Incidencerate(inmil) PeoplewithESRD Urban population Urbanpopulation UrbanESRD Insured InsuredUrbanESRD Pricepertreatment Averageyearlyvisits Annualrevenueperpatient Total market size Totalmarketsize
1199 19 629 754171 30 00% 30.00% 226251 30.00% 67875 $53 130 $6,890 $467 661 437 $467,661,437
Taiwan
China/Taiwan 21 57.10 630 630 13230 57.00 100 00% 100.00% 13230 17.10 100.00% 13230 5.13 $156 0.34 130 $20,280 0.34 $268 304 400 $268,304,400 1 74 1.74
Based on “Asia Renal Care” HBS Case Study 9-800-243
Bottom up revenue projections Bottom‐uprevenueprojections
Bottom up revenue projections Bottom‐uprevenueprojections • Basicidea – Definebasicunitofproduct/service Define basic unit of product / service – Estimatecustomerspurchasingunits – Multiplybyaverageprice – Estimatecustomergrowthovertime Estimate customer growth over time
• Approachfocusesonabilitytodeliver!
Example: Fast Ceviche Example:FastCeviche • Revenuesfromtypicalcustomer – Ceviche+sidedish+drinks=£10
• Numberofcustomersandhoursofoperations – Lunch:50customers L h 50 t – Afternoon:20customers – Evening:50customers Evening: 50 customers
• Numberofdaysinoperation – 5daysaweek;48weeks y
• Totalannualrevenues – £10*120=£1,200dailyrevenues – £1,200*5=£6,000weeklyrevenues – $6000*48=£288,000yearlyrevenues
• Ramp‐uptototalrevenues?
Combining Top Down and Bottom Up CombiningTop‐DownandBottomUp • ConstructMarketShare:MS=BU/TD Construct Market Share: MS = BU / TD – BU=Bottomupcounting – TD=Topdownmarketsize p
• Case1:MS<10% – Smallmarketshare – Marketsegmentdefinedtoobroadly – Bottom‐upstrategytooconservative
• Case2:10%<MS<100% – Ismarketsharerealistic? – ForMS>50%:whycanyoudominatethemarket F MS > 50% h d i t th k t
• Case3:MS>100% – Stopdreaming:marketdoesn Stop dreaming: market doesn’ttsupportgrowthstrategy support growth strategy
Copy Cats and More of the same Copy‐CatsandMore‐of‐the‐same
Copy Cats and More of the same Copy‐CatsandMore‐of‐the‐same • Industrycomparables • Competitorcomparables • Forestablishedbusinesses:useownrecentgrowthrates • Pastperformanceisnotareliableindicatoroffutureperformance • WorksbestattopofS‐curve
The S curve TheScurve Revenues Over-estimate rapid growth Reasonable R bl estimates ti t off stable growth
Under-estimate Under estimate early growth
Time
COST PROJECTIONS
27
Cost of goods sold (COGS) Costofgoodssold(COGS) • Estimatecostofsourcingphysicalinputs Estimate cost of sourcing physical inputs • Expressas%ofsales,but... • With“increasingreturnstoscale”COGSdecrease with volume, due to input fixed costs, volume withvolume,duetoinputfixedcosts,volume discounts,etc… • With With “decreasing decreasingreturnstoscale returns to scale”COGSincrease COGS increase withvolume,duetocapacityconstraints
• Estimationmethods E ti ti th d • Directcostestimatesfromsuppliersandexperts • Inferredfromcompetitorcostratios
Example CoffeeCostalot: C ff C t l t Marketleader Priceofstandardcup:£4 Costofgoodsold:£2 f COGS/Revenues=50% Grossmarginof100% Profit of £2 per cup Profitof£2percup
CoffeeCheapo: Coffee Cheapo: Start‐upchallenger Cheaperprice:£3 UseCostalotratio:50% Costofgoodssold:£1.5 Grossmarginof100% Profit of £1 5 per cup Profitof£1.5percup
Example CoffeeCostalot: C ff C t l t Marketleader Priceofstandardcup:£4 C Costofgoodsold:£2 f d ld £2 COGS/Revenues=50% Grossmarginof100% Profit of £2 per cup Profitof£2percup
CoffeeCheapo: Coffee Cheapo: Start‐upchallenger Cheaperprice:£3 UseCostalotratio:50% Costofgoodssold:£1.5 Grossmarginof100% Profit of £1 5 per cup Profitof£1.5percup
Example CoffeeCostalot: C ff C t l t Marketleader Priceofstandardcup:£4 Costofgoodsold:£2 f COGS/Revenues=50% Grossmarginof100% Profit of £2 per cup Profitof£2percup
CoffeeCheapo: Coffee Cheapo: Start‐upchallenger Cheaperprice:£3 RealisticCOGS:£2.40 COGS/Revenues=80% Grossmarginof25% Profit of £0 5 per cup Profitof£0.5percup
Expenses • Costoffacilitiesandequipment q p – Rent/lease:recurringexpense – Own:one‐timecapitalexpenditure
• Labourexpenses – Salary,Benefits,Trainingcosts,Bonuses – Stockoptions? S k i ? – Foundersalaries?
• Otherexpenses Other expenses – – – –
MarketingandSales Legal g AdminOverhead Etc…
Budget for founder salaries? Budgetforfoundersalaries? • Beforeoutsidefinancing,foundersalarieslargely meaningless • Outsideinvestorsnottoofondofpayinghighsalaries inearlystages • Foundersneedtosetexpectationsthatonedaythey wanttoeatsomethingbetterthanRamensoup! a o ea so e g be e a a e soup – Writeemploymentagreement – Definefoundersalary Define founder salary – Takereducedsalaryforinitialyears
Development cost projections Developmentcostprojections • “Mundane”set‐upcosts – Legal,Licenses,Officespace,Basics
• Pre‐revenuedevelopmentplan – Shortforrestaurants Sh f – Longforbiotechs
• Maindevelopmentcosts Main development costs – Employees(seeexpenses) – Capitalexpenditures(e.g.equipment) p p ( g q p ) – Costoflicensing‐intechnology,protectingIP
• Definemilestonesandtiming – Definedemonstrableprogressmarkers • Prototype,Betacustomers,etc…
– Difficultyofpredicting‘pivots’ Diffi lt f di ti ‘ i t ’
Taxes etc Taxesetc… • Taxestobepaid – VAT – Corporatetaxes – Industryspecificlevies Industry specific levies
• Taxcredits – Differbycountry,industry,overtime,etc…
• Other – Interestpayments
Example of “operating Exampleof operatingstacks stacks”
100% 90%
15% 10% Netearnings
80% 70%
Overhead 40%
M&S
60%
R&D
50%
COGS
40%
15%
30% 20%
20%
10% 0% %ofrevenues
INTEGRATED INTEGRATED PROJECTIONS
Some useful links Someusefullinks • StanfordTechnologyVentureFormation http://www.stanford.edu/class/msande273/resources.html – PeterKent’sfinancialmodel(toocomplex) – JeffKuhn’smodel(toosimple)
• HellmannModel http://strategy.sauder.ubc.ca/hellmann/ – Goldilockssays:(Justright)
• WWW – Lotsofmodelsfreelyavailable
FundamentalsversusProFormas • Fundamentalprojections: – Bringtogetherallrevenuesandcosts – Payattentiontotimingofcashflows
• ProFormastatements: – IncomeStatement(a.k.a.Profitandlossstatement) • Establishviability&profitability
– Cashflowstatement • Determinefinancialneeds • Monitorsurvival
– Balancesheet B l h t • Estimate“bookvalue” • Resilience Resilience
How long, how often, how detailed? Howlong,howoften,howdetailed? • Length – Minimum1‐2years;typical3‐5years;maximum??? Minimum 1‐2 years; typical 3‐5 years; maximum ??? – Dependsonindustryanddevelopmentcycle • Retail:afewmonths • Software:afewyears • Biotech/Cleantech:afewdecades
• Frequency Frequency – Monthly:“onlytheparanoidsurvive” – Quarterly: Quarterly: “balanced balancedapproach approach”;;stillcapturesseasonality still captures seasonality – Yearly:“bigpicture”
• Detail – Inapresentationonlyshowshighlights – Bereadyforjustifyingeachnumber!
CashFlowForecastingg MonthlyCashBalances
QuarterlyCashBalances 45000
45000
40000
40000
35000
35000
30000
30000
25000
25000
20000
20000
15000
15000
10000 10000 5000 5000 0 0 Q1
Q2
Q3
Q4
Q5
‐5000
CASHFLOW CASH FLOW MANAGEMENT
Working capital Workingcapital • WorkingCapital=Currentassets– Currentliabilities • Ifworkingcapitalpositive:cashburn! g p p – Needcashtorunthebusiness
• Ifworkingcapitalnegative:cashmachine! – Getpaidbeforedeliveringservices p g
• Ingrowingbusiness,positiveworkingcapitalmeanscashburn increasingovertime Beware of the fume date!!! • Bewareofthefumedate!!!
Hellmann’ssHaiku Hellmann Haiku
TAMO = Then A Miracle Occurs TAMO=ThenAMiracleOccurs
Tradecredit • Prerequisites – Repeatpurchasing R h i – Goodcustomerstanding
• Standardizedterms(industryspecific) – Payinlessthanxdaystogetdiscount(1‐d) Pay in less than x days to get discount (1 d)*p p – Payinlessthanydaysandpayinfull(p) – Payinmorethanydaysandpayincurpenalty
• Tradecreditlooksattractivetocash‐ constrainedentrepreneurs • Tradecreditcanbesurprisinglyexpensive T d dit b ii l i – Dothemath!!!
Implied capital cost of trade credit Impliedcapitalcostoftradecredit Discount
Extra Days
1%
2%
3%
5%
10%
15
27.28%
62.40%
107.72%
242.48%
1153.66%
30
12.82%
27.43%
44.12%
85.06%
254.07%
45
8.37%
17.54%
27.59%
50.73%
132.31%
60
6.22%
12.89%
20.05%
36.04%
88.17%
90
4.10%
8.42%
12.96%
22.77%
52.42%
120
3.06%
6.25%
9.57%
16.64%
37.17%
CLASSIC CLASSIC MISTAKES
Classicmistakes(I) • Revenues – Overestimatespeedofrevenues Overestimate speed of revenues – Unjustifiablerevenuespurts – Missingcostsofgeneratingsales – Distinguishlistedandactualaverageprice g g p • Cost – Forgetcostsofrunningbusiness Forget costs of running business – Planforunderutilizedassets – Fulllaborcosts • includingbenefits,training,bonuses,etc…
Classicmistakes(II) • Cashflows – Latepaymentsandcollectioncosts – Underestimatetruecostoftradecredit – Underestimatedelaysinraisingfunding • Overall – Ignoreindustrynorms – Falseprecision – Toomuchdetail – Mismatchbetweenfinancialsandbusinessplan
Final words of wisdom Finalwordsofwisdom Cashflows C h fl aremoreimportant p thanyourmommy!
Thank You! ThankYou! • • • • • •
ThomasHellmann ProfessorofEntrepreneurshipandInnovation SaïdBusinessSchool,UniversityofOxford ParkEndStreet,OxfordOX11HP,UK T:+44(0)1865288937 [emailprotected]
APPENDIX
PRESENTATION PRESENTATION EXAMPLE #1 EXAMPLE#1
FinancialProjection $120 $100 $80
$Millionss
$60 $40 $20 $ $0 ‐$20 TotalRevenue GrossMargin TotalOperatingExpenses IncomeBeforeInt&Taxes
2012
2013
2014
2015
2016
$8,800 ($18,939)
$132,800 ($175,748)
$864,000 ($48,167)
$21,160,000 $9,971,397
$99,550,000 $48,566,526
$2,642,643 ($2,661,581)
$6,339,171 ($6,514,919)
$12,303,334 ($12,351,500)
$21,733,046 ($11,761,650)
$43,654,877 $4,911,649
OperatingStacks 84%
15%
PRESENTATION PRESENTATION EXAMPLE #2 EXAMPLE#2
Financials: Business Model
Unit economics Uniteconomics
Annual Recurring AnnualRecurring
SalePrice:$3250 $
PremiumPackage:$500
UnitCost:$1700
AnnualCosts:
‐ Goggles/Sensor$950 gg / $
‐ ExtendedWarranty Extended Warranty
‐ Gloves$400
‐ LiveTechSupport
‐ Accelerometer$350 Accelerometer $350
‐ TrainingWebsite Training Website
U it Gross Unit G Margin: M i 40%
Financial Model: Assumptions p Product perCustomer per Customer
•1
• 50% UptakeofPremiumPackage • 2% TargetMarketEntryShare
Growth Rate GrowthRate
• 2%+1%nyears 2% + 1%
Inventory
• 10%AnnualSales
Salary
• +5%Annual
S ft SoftwareUpdates U d t
• Quarterly Q t l
ProductIterations
• Every2years
Profit and Loss $MM
Year1
Year2
Year 3
Year4
Year5
Year6
UnitSales
9
862
1679
2934
5478
Head Count HeadCount
5
5
8
13
15
21
Revenue
0.03
2.9
6.0
10.7
20.1
GrossProfit
0.02
1.5
3.2
5.7
10.7
Gross Margin % Margin%
49
49
49
50
51
51
Operating Expenses
0.8
0.7
1.5
1.9
2.5
3.8
EBITDA
‐0.8
‐0.7
1.2
3.2
6.9
N tI NetIncome
‐0.8 08
‐0.7 07
09 0.9
22 2.2
49 4.9
Revenue and Net Income
P b k Payback X
Break Even Break-Even Point X
S d Round Seed R d1 X
X
Operating p g Stacks
PRESENTATION PRESENTATION EXAMPLE #3 EXAMPLE#3
Millions
R Revenue&MarketPenetration &M k P i $160 $160
$152 $152
100% 90%
$140
80%
$116 $116
$ $120
70%
$100
60% $76
$80
50% 40%
$60 $41
$40
30% 30% 23%
20%
15%
$20 $20
10%
8%
$‐
0% 2013
2014
2015
Revenue
2016
2017
MarketPenetration
2018
2019
G GotoMarket M k 2013 Sales
Alpha p customer
Head Count Cou
13
Hardware
First release
Software
Mouse, keyboard
2014
2015 Distributor Phase I
Beta customer
31 Shrink
final
2017
Distributor Phase II
67 Rev 2
PACS specific
2016
102
139
Ongoing development
2 PACS/year
A Assumptions i 25%ofall operations
• 50%‐75%ofoperationsuseimaging. • Halfofthosearelongenough.
33%Distributor Markup
• Retailpriceof$112.50 • Wholesalepriceof$75.00 Wholesale price of $75 00
SlowMedical Market
• 15%penetrationin5years • 30%penetrationin7years
ClassIDevice
• NoFDAapproval No FDA approval • 90daypre‐marketnotification
SteadyAdoption
• Growthrateislinear
Millions
Fi FinancialProjections i lP j i $160 $140 $120 $100 $80 $60 $40 $20 $‐ ‐$20
$ $3.4 ‐$1.4 2013
‐$4.1 2014 Revenue
‐$8.6 2015
$9.6
$16.2
‐$0.8 2016
GrossProfit
2017 EBITDA
2018
2019
O OperatingStacks i S k 100% 26%
14% 18%
80% 16% 60%
14%
28%
45%
40%
15%
18%
18%
30%
22%
22%
21%
25%
26%
35%
35%
34%
40% 20% 0% 2013 R&D
2014
Sales/Marketing
2015 Operations
2016
2017
General&Administrative
F di Mil FundingMilestones 2013 Cash R Reserve
Q1
Q2
Q3
2014 Q4
Q2
13
Hardware
First release
Software
Mouse, keyboard
Alpha customer
Q3
Q4
Q1
Q2
Q3
31
67
Shrink
final
Beta customer
2017
2016 Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Series C $8.5 MM
Series B $ MM $5
Series A $1.5 MM
Head Count
Sales
Q1
2015
Rev 2
PACS specific
Distributor Phase I
102
139
Ongoing development
2 PACS/year
Distributor Phase II
Q4
