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Gorge OEN Boot Camp
Funding Strategy & Plan
Gorge OEN Boot Camp
You need it
They’ve got it$
Money
You need a funding plan!
Gorge OEN Boot Camp
Investor$
Bank$
Government$
Family/Friend$
Your Pocket$
$pendingYourCo
Supplier$Infra$tructure
Employee$Facilitie$
Who Are They?
“Crowd$”
Customer$
Gorge OEN Boot Camp
Funding Plan
Concept
Development
Pilot
Go-To-Market
Expansion
Define clear milestones
Gorge OEN Boot Camp
Founders$
Family, Friend$, Fan$
Customer$ (Bootstrapping)
SBIR/STTR Grant$
Seed Fund$
CrowdFunding
Angel$
Angel Group$
Venture Fund$
Venture Bank$
Loan$/Bond$
Factoring Receivable$
Merger or IPO
Private Equity
Strategic Investor$
Concept
Development
Pilot
Go-To-Market
Expansion
Potential Sources by StageRoughly speaking…
Gorge OEN Boot Camp
Funding Plan
How much will you need when?
Concept
Development
Pilot
Go-To-Market
Expansion
Gorge OEN Boot Camp
Concept
Development
Pilot
Go-To-Market
Expansion
Funding Plan
Investor$ Loan$Grant$Family/Friend$Your Pocket$
Align sources with stages
Gorge OEN Boot Camp
Bootstrapping
• Do you really need to raise money?• Consider pay-as-you-go growth instead
• Can you get customers to fund you?• Try to get product pre-orders
“A self-sustaining process that proceeds without external help”
100% ownership100% control
Slower growthCompetitive risk
Pros Cons
Gorge OEN Boot Camp
AngelsJust people who want to make money by investing…
… their own money
Gorge OEN Boot Camp
VC’sMore people who want to make (lots of) money by investing…
… (lots of) other people’s money
Gorge OEN Boot Camp
Expectations
You Them
Hard WorkLow Pay
Twice as longTwice as hard
High RiskHigh ReturnPreferences
Align expectations early; Check frequently
Gorge OEN Boot Camp
Valuation
• Investors expect to own ~ 1/3 post-money• How much do you need to achieve the next milestone?• Q.E.D. Pre-money valuation = 2 x Raise• This is not a rule!
• Stage/risk will determine actual valuation
• Can you convince investors to own less of the company?
• Can you show why the risks are low?
• If the risks are low, is there a high potential ROI?
Gorge OEN Boot Camp
Stock
Preferred Stock – InvestorsSeries ASeries B
.
.
.
Common Stock – Everyone ElseFounders
EmployeesContractorsLandlords
Preferred ShareholdersGet their money back first - more than 1X
Have additional rights – approval of major events
Gorge OEN Boot Camp
The So-Called “Exit”This is where shareholders get liquidity
Investors get their money back – several XWhile you may be “locked up” for a while
Common shares may get less than preferredYou may need to keep working (beware earn-outs)
You
Them
Gorge OEN Boot Camp
Summary
• Funding needs a Strategy and a Plan• Like all important elements of your business
• “Build it and they will come” is a terrible strategy
• Alignment is key• Right source(s) at right time(s)
• Investor/management expectations
• Can’t run a company for “the exit”• But investors need to know you’re willing to sell
• Bootstrapping is the cheapest way
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Exit Strategy
Gorge OEN Boot Camp
Exit Strategy
• Investors require return on investment• How will investors get between 10x and 30x
return in 3-5 years?• Convincing investors to put money in your
company requires that you have thought this through
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Gorge OEN Boot Camp
10x to 30x: Why so High?
• Investors think in terms of portfolio• Most startups in their portfolio return zero• And there will be dilution• And it may take 5-7 years to get any return• So 20-30% portfolio return requires some home
runs
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Exit Example
Series AJan-96
Series BSep-96
Series CMay-97
Series DSep-98
Pre-money $4.6
Investment $2.0
Post-money $6.6
Series A % 30%
Gadzoox Networks Cap Table
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Exit Example
Series AJan-96
Series BSep-96
Series CMay-97
Series DSep-98
Pre-money $4.6 $17.0 $69.0 $135.1
Investment $2.0 $8.0 $10.1 $21.0
Post-money $6.6 $25.0 $79.5 $156.1
Series A % 30% 19% 16% 13%
Gadzoox Networks Cap Table
Gorge OEN Boot Camp
Exit Strategy
• “We’ll get bought” is a bit too vague• Name 3 potential buyers• Why would they buy your company?• When?• For how much
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How Much?
• Typical valuation metric is multiple of revenue• What multiple-of-revenue is the typical valuation
for companies in your industry?• Comparable examples give you credible justification for
a revenue-multiple
• Find out by:• Networking with investors and CEOs
• Check 10K reports for info on public company acquisitions
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Investor Expectations
• You are not guaranteeing that one of the companies you name will be the buyer - your just claiming it’s credible
• The more data you have (comparable examples) the more credible your valuation will be
• And having comparable examples shows you did your homework
• That’s more compelling than “we’ll get bought”
• Alignment is key
• Among your team
• Between you and investors
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Financial Projections
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How much funding do you need - and when?
Copyright © 2012, Oregon Technology Business Center
Gorge OEN Boot Camp
Gorge OEN Boot Camp
What do we mean by “Projections”?
• 5 Year estimates of your
• Balance sheet,
• Income statement, &
• Cash flow statement
• And a list of key assumptions
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A Summary Version:
Units 10 100 300 1000 2500
Head count
10 15 25 30 80
Break Even
Revenue
Net Income
2012 2013 2014 2015 2016
Gorge OEN Boot Camp
Cash Runway vs. Accounting
• Revenue ≠cash-in• Typically, revenue is recognized upon shipment
• For subscriptions, revenue may be monthly
• Expense ≠ cash-out• Typically accrued when the product or service is
delivered
• Expenses include depreciation
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Financial StatementForecast
Cash Runway
Managing Cash is critical!
≠
Gorge OEN Boot Camp
Financial Statements
•Balance sheet
•Income statement
•Cash flow statement
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Gorge OEN Boot Camp
Balance Sheet
• Assets
• Short Term
• Long Term
• Liabilities & Shareholder Equity
• Short Term liabilities
• Long Term liabilities
• Shareholder Equity
• Stock
• Retained Earnings
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Gorge OEN Boot Camp
Income Statement
• Revenue
• Cost of Goods Sold (COGS)
• Gross Profit
• Expenses
• Admin/Sales & Marketing/R&D/Operations
• Depreciation
• Net Income
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Cash Flow Statement
• Beginning Cash
• + Net Income
• + Depreciation
• - Change in assets
• - Property/equipment purchases
• + Borrowings
• + Proceeds of stock sales
• = Ending cash
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Projection Challenges
• You probably haven’t done this before
• Emerging markets have no historic sales data
• No direct “comparable” example
• No sure way to estimate customer adoption of something new
• Do you really have to do this?
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Yes, you do
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What if my projections are wrong?
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What if my projections are wrong?
Not to worry - they will be wrong
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What if my projections are wrong?
Not to worry - they will be wrong
But they must be credible & defensible
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How to get started?
Gorge OEN Boot Camp
Think Bottoms Up: Revenue
• Start with month 1• What will you do that month to:
• Market (create leads) and sell (close orders)?
• How many leads will that create?
• How much in sales will that create that month?
• Are there channel discounts?
• Payment terms?
• Now do month 2 - and keep repeating!
• Document your assumptions!
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Gorge OEN Boot Camp
Revenue: Things to Think About
• How quickly can you bring on sales people?• How long will it take for new sales people will be
productive?• How long will the sales cycle be?• How many times must you connect with a
prospect before they buy?
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Gorge OEN Boot Camp
Expenses: Think Bottoms Up
• Start with month 1• What will sales/marketing efforts cost? • What other expenses (people, rent, etc.) ?• Now do month 2 - and keep repeating!
• Document your assumptions!
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Gorge OEN Boot Camp
Expenses
• People
• Rent
• Insurance – Liability, Property, D&O
• Telecom/Broadband
• Cloud Expenses
• Legal
• Accounting
• Office Supplies
• Training
• Capital equipment
• Sales• Travel & Entertainment• Commissions• Salesforce.com
• Marketing• Branding• White papers• Trade Shows &
Conferences• Collateral• Google Adwords• Other Advertising
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Predicting Expenses
• Remember: expenses tend to scale with revenue!
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Iterate
Plan
Projections
Assess
Gorge OEN Boot Camp
Suggestion: Use a Forecasting Tool
• Templates help remind you of categories• OTBC Excel forecast spreadsheet
• SCORE budget/forecast tool
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Gorge OEN Boot Camp
OTBC Forecast Spreadsheet
• You fill in Blue text items• Black text items are calculated
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OTBC Forecast Spreadsheet
Gorge OEN Boot Camp
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OTBC Forecast Spreadsheet
Gorge OEN Boot Camp
OTBC Forecast Spreadsheet
• Engineering• Sales and Marketing• Admin• Operations
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Gorge OEN Boot Camp
OTBC Forecast Spreadsheet
• Engineering
• Sales and Marketing
• Admin
• Operations
• People
• Expenses
• Capital purchases
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Gorge OEN Boot Camp
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OTBC Forecast Spreadsheet
Gorge OEN Boot Camp
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OTBC Forecast Spreadsheet
Gorge OEN Boot Camp
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OTBC Forecast Spreadsheet
Gorge OEN Boot Camp
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OTBC Forecast Spreadsheet
Gorge OEN Boot Camp
Document your Assumptions
• Possible examples:
• Length of sales process
• Average sales price
• Sales channel (& discount)
• Changes in COGS
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Gorge OEN Boot Camp
Your Mission:
• Document your forecast assumptions
• Create a 12 month forecast
• Prepare your Financial Forecast slide
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