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Financials - Workshop
Presented by:
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—Introduction
—Financial Projections
—Revenue Forecasting
—Exercise #1
—Cost Structure
—Exercise #2
—Conclusion
—Exercise #3
Agenda
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Introduction
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Audrius Milukas
LECTOR
•Partner and CEO of VC fund Open Circle Capital
•Co-Founder of the largest non-banking alternative
financing platform in Baltics –SME FINANCE
•14-years experience in:
-Finance
-Banking
-Customer relations
-Startups’ environment
-Investment banking
•Education:
London Business School/BMI/VU
Introductions
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OPEN CIRCLE CAPITAL is an early stage venture capital fund which
aims to invest up to 20M EUR in technology startups. Target Industries:
Product-oriented companies who
have earned their first revenues,
with strong potential for fast
international growth
ICT
—B2B SaaS
—Marketplaces
—Apps
—Infrastructure
solutions
Teams of professionals with
strong track records and
leadership in their fields
Serial entrepreneurs who have past
growth, fundraising and/or exiting
experience are particularly welcome
We look for:
First Revenue Strong teams Experience
Introductions
Deep tech
—ML/AI
—Deep data
—Med-tech
—Optics
—Life-sciences
Robotics
—Gadgets
—Logistics and warehousing
—Consumer electronics
—Industry 4.0
Air & Space
—Components
—Actuators
—Drone Components
Contact us:
hello@opencirclecapital.lt
am@opencirclecapital.lt
www.opencirclecapital.lt
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Financial Projections
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Complete View for Yourself
Detailed forecast for the 1 year period –monthly figures
Revenue Streams
Cost Structure
Investment Need
Cashflow Figures
Financial Projections
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Summary for Investors
Company is raising 150 000 EUR for 6 months period
Milestones:
Developed Product
Established direct sales team –5 specialists = 5k MRR.
Prove how much funding you need and what will be achieved in case of Investment
TIP:
It is recommended to raise
about 20% more funding than
forecasted due to the high
possibility of unexpected cost
occurrence
Financial Projections
Summary
2019 Q1 2019 Q2 2019 Q3 2019 Q4
Recurring Revenue - 9,750 30,030 51,870
Monhtly Recurring Revenue - 5,250 11,880 20,520
Total Revenue - 9,750 33,030 56,370
Cost: Development 50,700 35,700 53,200 60,700
Cost: Sales and Marketing 5,000 30,000 45,000 60,000
Cost: IT Support 9,000 9,000 9,000 6,000
Cost: Other 4,500 4,500 4,500 4,500
Total Cost: 69,200 79,200 111,700 134,200
Income - Cost (Profit or Loss) 69,200- 69,450- 78,670- 77,830-
Rolling Profit or Loss 69,200- 138,650- 217,320- 295,150-
Income - Cost + Investment 80,800 11,350 132,680 54,850
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Long-Term Forecast: 3-5 Years Period
Hard to predict at early stage but is essential in order to show your ambitions
and to understand if your business could be scalable/profitable in the long-term
TIP:
Venture Capital Investors wants
to see 10x opportunity before
making the investment
Hockey-Stick Growth
90
667
3568
2019 2020 2021
Annual Recurring Revenue, thousands
Break-even Point
Financial Projections
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Scenarios
Since the financial forecasting for early stage startups is the game of
assumptions –Scenarios could give you credibility
TIP:
For different scenarios weights
(probabilities) are usually
assigned in order to produce the
ultimate scenario
Pessimistic: 15%
Realistic 50%
Optimistic 35%
90
667
3568
334
600
470
1476
2019 2020 2021
Annual Recurring Revenue, thousands
Optimistic
Pessimistic
Realistic
Early-Stage Uber Scenarios
Financial Projections
Source: https://www.cbinsights.com/research/billion-dollar-startup-pitch-decks/
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Revenue Forecasting
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Revenue Streams:
Recurring revenue:
•Subscription fees
•SaaS
•PaaS
•Licensing content to third parties
•Brokerage fees
•Advertising fees…
Transaction-based revenue:
Proceeds from sales of goods that are usually one-time
customer payments.
Service revenue:
Revenues are generated by providing services to customers
and are calculated based on time. For example, the number
of hours of consulting services provided.
Project revenue:
Revenues earned through one-time projects with existing or
new customers.
The recurring revenue model is the model most anticipated by
Investors because it is predictable and it assures the company’s source
of revenue as ongoing
Terms to always remember:
MRR –Monthly Recurring Revenue
ARR –Annual Recurring Revenue
—LAW companies
—Consulting companies
—Software dev companies…
—Construction companies
—Infrastructure companies…
—Retail
—Hospitality…
Growth is important
VC requests that MRR growth is
equal to 15-20% M-o-M
Revenue Forecasting
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Examples of Revenue Streams
Early-Stage Airbnb business model
Last Mile delivery Startup
Early-Stage Linkedin revenue streams
Typical SaaS
Revenue Forecasting
Source:
https://www.cbinsights.com/research/billion-dollar-startup-pitch-decks/
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Sales Channels
•Direct Sales
Direct selling deals can be closed via personal arrangements, in-person demos, and of course via
online direct sales. A direct sales channel requires building and managing a sales team.
•Inbound Marketing
Content marketing/Social Media/Paid Ad campaigns
•Outbound Marketing
Traditional advertising (TV/RADIO/Press)
•Distributors
Value added Resellers/Partners/Agents/Integrators/Retail/E-Commerce
Early-Stage Dropbox Sales Channels Early-Stage WeWork list of partners
Important Metrics in order to value sales channel:
LTV –Customer lifetime value
CAC –Customer Acquisition Cost
LTV/CAC –3:1
Revenue Forecasting
Source:
https://www.cbinsights.com/research/billion-dollar-startup-pitch-decks/
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Assumptions/Drivers/Metrics
Revenue in your financial plans should be a derived number –meaning that behind every
revenue entry should be assumptions and rationale
Simplified Example:
Total Projected Sales Leads -> Conversion Rate -> Total projected paying clients x Avg Price -> Revenue
In order to always monitor your assumptions/drivers you need to maintain Metrics sheet:
Key Revenue-Related Metrics:
Source: a16z.com
Revenue Forecasting
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Exercise #1
REVENUE FORECASTING
Build your company’s revenue model for 12 months. Think
about what type of revenue streams (income) are you going
to have and what type of sales channels are you going to
use. How many customers can you expect? How many units
will be sold or clients served? How will you price your
product/service?
Think of all possible revenue streams and channels and
show them separately. Draw sales channels graph.
Calculate / predict:
•Quantity (units, number of daily sales)
•Selling price (EUR, in average)
Sales Channels Graph - Example
Revenue Forecasting - Example
TIME: 20 Minutes
Exercise #1
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Cost Structure
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Structure
It is recommended to structure cost according to set milestones
How much cash you need to burn in order to achieve quantified goals
•Development
R&D, salaries of tech/business dev employees, contracts
etc.
•Cost of Goods Sold (COGS)
Variable costs –increase at around constant rate to
output/revenue (materials etc.)
•Sales and Marketing
Direct Sales, Content Marketing, Paid-Marketing
•Support
•Other
Fixed Costs: Rent, Legal, Accounting, Admin
Cost Structure
Costs: Development
Salaries: 11,900 11,900 11,900
CEO 2,500 2,500 2,500
CMO 2,200 2,200 2,200
CTO 2,200 2,200 2,200
Other key people - - -
Other 5,000 5,000 5,000
Contracting: 5,000 5,000 5,000
Position 1 (Name Surname) 5,000 5,000 5,000
Total: 16,900 16,900 16,900
Costs: Marketing
Customer relationships (Sales, research, marketing) - - 5,000
Total: - - 5,000
Costs: IT costs
Servers & related costs 3,000 3,000 3,000
Equipment - -
Total: 3,000 3,000 3,000
Costs: Other
Facilities 500 500 500
Legal + Investment 500 500 500
Acountant 500 500 500
Unexpected expendidures - - -
Other - - -
Total: 1,500 1,500 1,500
Total costs: 21,400 21,400 26,400
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Importance of Cash-Flows
According to the analysis by CB Insights –29% fail due to they ran out of cash –2nd most
common reason.
It is essential to always monitor your cash-flow situation and use techniques in order to
enhance it
Simple techniques
- Accelerate Payments –for instance try to charge on the annual basis instead of monthly basis.
- Delay your payments as much as you can
- Reduce your need for inventory –optimize the process
- Alternative Financing –Factoring
Key Cashflow-Related Metrics:
Source: a16z.com
Cost Structure
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Break-even Point and Margins
It is essential to forecast the point in the future when you will start to generate profit
Break-Even Point –point where total revenue and total cost are equal
Conduct Break-Even analysis:
- Determine and evaluate your fixed and variable cost and their patterns;
- Evaluate your pricing strategy in context of break-even perspective;
- Find out the output (units, clients, licenses) at which your total cost and total revenue would be equal;
- Make the forecast –when you will be able to reach break-even enabling amount of units.
Margins –critical metrics to understand rationale behind your business:
Gross profit Margin: (Sales –COGS)/Sales. It indicates how efficiently management uses supplies and
production. % Depends on the industry. For software startups margin should be around 50-80%
Operating profit Margin: (Sales –COGS –Operating expenses)/Sales
Net profit Margin: Net Income/Sales
Cost Structure
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Exercise #2
Cost Structure
Build your company’s cost model for 12 months. You don’t
need to do an incredibly detailed breakdown (such as listing
the cost every chain you plan to purchase), but you do need
general figure of staff, office, tools/software, marketing, etc.
It will give you an approximate investment needs for the 1st
business year.
Calculate / predict by category:
•Solution features (R&D/ Development)
•Operations (Manufacturing/Support)
•Marketing and Sales
•Other
Structure of Total Cost- Example
TIME: 20 Minutes
Cost Model - Example
Exercise #2
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Conclusion –Key Points
Financial Projections:
•Detailed forecast for the 1 year period –monthly figures
•Summarize data for Investors –Set Milestones
•Long-Term Forecast: 3-5 Years period
•Sales Growth is important: Benchmark 15-20%
Revenue Streams:
•Recurring Revenue
•Transaction-based Revenue
•Service Revenue
•Project Revenue
Sales Channels:
•Direct Sales
•Inbound Marketing
•Outbound Marketing
•Distributors
Cost Structure:
•Development
•COGS
•Sales and Marketing
•Support
•Other
Importance of Cash-Flow:
METRICS:
Source: a16z.com
Conclusion
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Exercise #3
Prepare Slide “Financials”
Combine your Revenue Model and Cost Structure.
This slide should represent your costs and revenues in 1st
year. Show how much does it cost to make and to sell your
product/service, explain the cost structure.
TIME: 10 Minutes
Exercise #3
