Forecasting Financial Statements in StartUps

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Forecasting Financial Statements in Start-Ups

• Michael E. Solt, SJSU
• Solt_m_at_cob.sjsu.edu
• Rob Fernandez, Comerica Bank
• rfernandez_at_comerica.com

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What is a Business Plan?

• The business plan is a document meant to
  communicate and provide information.
• Timmons Spinelli in New Venture Creation say
  that it reveals the business ability to
• Create or add value to a customer or end user
• Solve a significant problem, or meet a
  significant want or need, for which a premium
  will be paid
• Have a robust market, profit margin, and
  money-making characteristics
• Fit well with 1) the Founding Team, 2) the
  Market Space, and 3) the Risk-Reward Balance

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Why Is the Business Plan Important?

• The B.P. has three main purposes it is a
• Fund-raising tool
• Communication tool
• Management tool
• An entrepreneur wants to approach investors for
  financing, but if he or she cannot
• Communicate effectively, no one will invest
• Manage the business and achieve milestones, no
  one will invest in future rounds of financing

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The Timmons Model of the Entrepreneurial Process
Communication
Opportunity (2)
Resources (4)
Business Plan
Fits and gaps
Ambiguity
Exogenous forces
Team (3)
Creativity
Leadership
Capital market context
Uncertainty
Founder (1)
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Timmons Thoughts about Business Plans

• The B.P. is obsolete at the printer
• You will always get feedback and learn more
• The B.P. is a work in progress
• Be flexible and ready to continually adjust
  course
• The B.P. is not the business
• A polished B.P. is not enough it defines the
  blueprint, strategy, and resource requirements
• The entrepreneur/team should write the plan
• Dont hire someone to write your B.P.
• You should be intimately involved in its writing

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Resources for Writing a Business Plan

• Engineering Your Start-Up, A Guide for the
  Hi-Tech Entrepreneur, by Swanson and Baird, 2nd
  Edition
• PriceWaterhouseCoopers Vision to Reality
  http//www.pwcglobal.com/Extweb/industry.nsf/docid
  /466A775D8620563985256AB2007BEBB5/
• The Silicon Valley Business Competition web page
  offers many good links
• http//www.cob.sjsu.edu/svbpc/

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Business Plan Table of Contents
I. EXECUTIVE SUMMARY II. THE INDUSTRY
AND THE COMPANY III. MARKET RESEARCH AND
ANALYSIS IV. COMPETITIVE ANALYSIS V.
MARKETING PLAN VI. DESIGN AND DEVELOPMENT PLAN
VII. MANUFACTURING/OPERATIONS PLAN VIII.
MANAGEMENT TEAM
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Business Plan Table of Contents
IX. THE FINANCIAL PLAN Actual income
statements balance sheets Pro forma income
statements balance sheets Pro forma cash
flow analysis Breakeven chart and
calculations X. PROPOSED COMPANY OFFERING
Desired financing Offering
Capitalization Use of funds
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Financial Statements

• Income Statement
• Revenues Expenses accruing over a period of
  time
• Balance Sheet
• Assets Financing at a point in time
• Cash Budget
• A detailed look at actual cash inflows and
  outflows over a period of time

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Financial Statements

• Periods of Time
• Monthly for two years
• Quarterly for two to five years
• Annually for five years
• Often a Financial Summary is included in the
  Executive Summary
• Five years of annual Revenues and Profits

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Example WhiteGlove Wireless Hospitality
Housekeeping Management System

• Business Model
• Provide hotel and motel industry with wireless
  housekeeping management tools using handheld and
  tablet PCs
• Value proposition
• Improve guest satisfaction with better control
  over housekeeping services while increasing the
  efficiency of operations and lowering
  housekeeping costs

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WhiteGlove Wireless Hospitality Housekeeping
Management System

• Business Strategy
• Market WhiteGlove systems to hotels and motels
  with housekeeping staffs of 5 or more
• Include both hardware devices and software system
  that manages housekeeping staff and links to
  front desk and mgt. staff
• Sell and install system, provide training
• Charge annual service fee and for upgrades

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Hotel and Motel Industry

• Over 40,000 U.S. establishments (excluding
  casinos)
• 17,000 with hotels with rooms of 25 or more
• 22,000 motels
• Hotels and lodging places generated 106B in
  tourism-related sales in 2003
• Best Western with 4,100 hotels and 310,000 rooms
  world-wide is the worlds largest chain
• 2,355 hotels in the U.S.

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WhiteGlove Financial Summary A Hypothetical
Example
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What Investors Are Looking For

• A very large opportunity
• Company can become 1st, 2nd, or 3rd in market
• Market share, profitability, long term
  competitiveness
• 10x return on investment
• How much total financing will the company need
• How probable is liquidity and how long to get
  there
• When does BEP occur and on what revenues
• When does profitability occur
• Milestones and fundraising events
• Beta, MOU, LOI, invoice, prototype, patent filing

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Hidden in the Financials

• Does the business model scale well
• Revenue increases at greater rate than expenses
• Are sales projections realistic (another Cisco?)
• Is the total amount of financing needed realistic
• Have the costs of growth been factored in
• Marketing / Sales
• Legal / IP
• Employees and burden
• Executive management

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Its About Trust

• Remember at all times investors do not invest in
  technologythey invest in people
• Display partnering skills. Investors ponder what
  it would be like to marry you and the team for
  the next three to four years, or longer
• Know the investor you are talking to, let them
  know why you chose them as a potential partner
• Listen attentively and answer the questions being
  asked!
• Be secure, respond calmly and clearly during
  difficult questioning
• Tell investors where problem areas are, or areas
  where you are still unsure, get them involved
• You are interviewing them too. Ask "What can you
  do to help our company"

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Who Do You Know

• Get Referrals to Investors
• Participate in seminars
• Submit your Business Plan to Venture Showcase
  events
• When you meet someone influential who has an
  interest in your market space offer to take them
  to lunch to ask their advice
• Become affiliated with industry groups or
  standards bodies

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It They Believe in You,So Can We

• Attract senior level management as quickly as
  possible, and/or a strong Advisory Board
• Be honest with yourself, how far can you
  realistically take the business
• If you have mid-level management experience or
  strong technical skill but no upper management
  experience, create a transition plan
• Tell investors what kind of senior management you
  need to attract and what stage of growth, and
  build this into your financial projections
• If you cant attract full-time senior management
  right now, build a top notch Advisory Board, but
  not too thick quite yet

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Do You Have the Energy

• Be passionate about your business
• If you don't truly believe that launching this
  business is the most important thing in your
  life, it'll never fly, and investors know this
• In the beginning you are CEO, and the VP of Sales
  and Marketing (importance of industry and domain
  experience and expertise)
• Be excited and be confident that the strategy is
  sound, while being open to discussion. Remember
  that you hope to establish a partnership
• You know the business opportunity is a good one
  because you know your industry forwards and
  backwards

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Build your Story, Keep More of Your Company

• Raise non-VC money as long as you can
• Typically better terms, more lenient, relatively
  faster process
• Trade finance, customer upfront payments, SBA,
  Angel, F-n-F
• Establish a strong argument for professional
  investors by showing proof of concept, customer
  interest, and reduced development risk
• Get some of the product and team kinks worked out
  prior to going to professional investors

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If Your Accomplish Your GoalYou Will Have Enough

• Take the money being offered ... now
• "Eat while they're serving the hors doeuvres",
  because the main course may not make it out of
  the kitchen
• Be careful, a lot of things can happen in six
  months
• You may achieve your milestones, or you may
  falter
• New competitor may emerge
• You may not close a key strategic partnering deal
• The IP development project may hit a snag
• Customer acceptance may be slower than you
  expected
• An unexpected market or industry event may occur

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Finding Your Investment Partner
Don't interpret a "no" as a judgment against your
business vision "no" doesn't mean your business
is "uninvestable No Reason 1 Most of the
time an investor says "no" because the
opportunity is not right for THEM No Reason
2 The market opportunity doesnt appear big
enough No Reason 3 The team hasnt done a
good job of presenting a compelling opportunity
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Some Final Reminders

• Aggressively control your cash burn
• Establish clear cut and achievable milestones and
  tie them directly to your financial plan
• Solve customer problems, not investor problems
• Find as much non-venture money as you can
• Sell and evangelize, dont hype
• Integrity, honesty, dependability