Funding for innovative startups - Part 3 of 5

SESSION THREE: BUILDING THE
FINANCIAL INVESTMENT PLAN
Benno Groosman MScBA – www.groosman.info –Athens, February 24 –

MASTERCLASS FUNDING FOR
INNOVATIVE STARTUPS
Benno Groosman MScBA – www.groosman.info –Athens, February 16 – OrangeGrove

MASTERCLASS SCHEDULE
 Session 1: Introduction to funding language + business
planning;
 Session 2: Determining funding need + milestone-based
funding;
 Session 3: Building your financial investment plan;
 Session 4: Investor readiness;
 Session 5: Advanced funding and wrap-up.
www.groosman.infoFUNDING MASTERCLASS

INTHIS PRESENTATION
Scope
From milestones to investment table
How to make assumptions
Cash flow and liquidity
Revenue and profits
Valuation

SCOPE
 The financial plan is part of your business plan
 See for example http://www.slideshare.net/benno_groosman/funding-
for-innovative-startups-part-1-of-5
 In this presentation I focus on new ventures that need (high) initial
investments and deal with future uncertainty and risk
 Though, the basics work for other types of ventures too
 This is an introduction; your financial plan requires a lot of practice and
updating.
 There are many ways of presenting your numbers; I show how I did it in my
(funded) business plans and included these examples.

VALUE-ADDING ACTIVITIES
(PREVIOUS PRESENTATION)
Investors don’t like to pay for marketing, big
office space and high salaries.
Use all funding to increase the valuation of
your venture by investing in prototypes,
production, sales, patents, strategic positions
etc.

MY DEFINITION: MILESTONE
A milestone is the concrete
achievement of a significant step in
your venture planning, which adds
financial value to your venture.

MILESTONE-BASED FUNDING
Define the milestones in your startup plan
Determine the amount of money and time
you need to reach each milestone
Match milestones with available funding
sources
Can you combine the milestones for
funding?

MILESTONE-BASED FUNDING QUICK SHEET
Download at:
www.groosman.info/#!funding/cbvu

EXAMPLE

FUNDING NEED
Ask the money that you really need,
not too little,
and about 10-20% extra for unforeseen expenses,
to achieve the milestone(s) you are aiming for.

FROM MILESTONESTO INVESTMENTTABLE
The milestone planning gives you an
indication of the amount of money you need
and when you need this
In your business plan you don’t only present
the total costs of each milestone, but you
also split it to the category of costs (e.g.
R&D, salary, office, materials)

EXAMPLE INVESTMENTTABLE MEDTECH

EXAMPLE INVESTMENTTABLE MEDTECH
(TYPE OF COSTS)
Note: you can define your own categories, this is just an example

ASSUMPTIONS
 After the milestone planning and the investment table you have
an idea of the amount of money you need to raise
 In order to raise money you have to show financial projections
for the future
 For these projections you have to make estimates of costs and
revenues
 In new ventures these estimates are assumptions
 The number is not very important, how defendable the
assumptions are to get to this number is the most important!

HOWTO MAKE ASSUMPTIONS ON REVENUE
Percentage of the total market
Only in rare cases. Investors don’t like the phrase “we
will capture only 0.1% of the market and still will make
millions”
A percentage of the total market can be feasible when
you only take the local market or a very specific niche
market
It’s good to know the market size, but to determine
your share it is better to use the next options

Revenues followed by a sound sales plan
Look at your operations now and after successful
funding and make a sales plan
For example: there are 200 big customers in my
country, we visit two of them every week and expect a
10% conversion, leading to 52*2*0.1 = ~10 customers
in year 1.

 Compare with substitute and complementary products or
competitors
 In case you sell “green roofs” for new houses, you need to
know how many new houses are being build. Additionally you
can compare with the size and growth of young competitors.
What can you do different to capture your part of the market?
 If you have a new product that will replace another type of
product, see the market of the substitute product and
determine the likelihood that somebody would switch to your
product.

Build an operational plan for first years, then add a
growth percentage after
Take the previous suggestions to make assumptions
and plan the first 3 years
For the other years you can add growth percentages
that are reasonable in your market, this can be any
number from 20% to 1000% in general (many
exceptions apply)

ASSUMPTIONS (EXAMPLE)
“For the cash flow prognosis a conservative, base scenario was chosen.
Only from 2018 we calculate revenues out of a sale of initially 3 to 20
products per month by end 2020 (target price €2000 start and €1500
end of this period). End 2017 we expect to have IP license income and
production deals with strategic partners (of which one already signed a
first right of refusal).
The costs for maintenance of our patents are included.The IP license
costs are also included. A 25% cost for production is taken of the
product sales.As it is a medical product, certification costs are taken
into account.The overhead costs consist of rent, office, administrative
and regular insurance costs. Paying back loans is included in the
prognosis.”

CASH FLOW AND LIQUIDITY
Cashflow is the moment that the money reaches or
leaves your bank account (this is timed differently than
revenue or costs).
Cashflow = SUM(cashflow in – cashflow out)
Liquidity = Start number bank account + cashflow

CASHFLOW STATEMENT
You can define your own cash
inflow and outflow categories,
but keep the number of
posts limited.

LIQUIDITY
The liquidity (money on your bank account and cash) is
crucial for a startup, this determines the survival of the
venture
If you don’t have money to pay obligations:
For this reason the prognosis per month is required
A negative liquidity gives the need for additional
funding (on top of the funding need that came from
your investment table)

LIQUIDITY
What is the extra funding
needed on the next slide?
(considering that the cashflow cannot be changed)

LIQUIDITY

LIQUIDITY
Although the liquidity at the end of the year is -47,7k, the lowest
number is -62,5k and therefor 62,5k is the minimal required extra
funding amount (on top of the 100k + 83,2k in the cashflow statement)

EXAMPLE 5-YEAR CASHFLOW AND
LIQUIDITY STATEMENT (QUARTERLY)

EXAMPLE 5-YEAR CASHFLOW AND
LIQUIDITY STATEMENT (QUARTERLY)
Download from: http://www.groosman.info/#!funding/cbvu
and adjust it to make your own statements

REVENUE AND PROFIT
If you agree on a sale or purchase today, the revenue or
cost occurs today
The cashflow in or out, occurs days to months later or
earlier though
Therefor is your cashflow and liquidity statement not
the same as your revenue, profit and loss statement

REVENUE AND PROFIT
For example: a product you deliver to a customer at
28-12-2016 with a 3 week payment term, does not show
up in your 2016 cashflow in, but does show up in the
revenues that year
But: the costs for making that product (cashflow out and
cost) usually do both occur in 2016

VALUATION (MORE INTHE NEXT SESSION)
Your financial prognoses can give an indication on
valuation
For this you can also refer to
http://www.slideshare.net/benno_groosman/how-to-
close-an-investment-deal-2015 from sheet 26 or wait for
the next 2 sessions of this master class
On the next slides we will focus on the discounted
cashflow method

DISCOUNTED CASHFLOW
 Take the total cashflow for each year
 In the 5 year prognosis at
http://www.groosman.info/#!funding/cbvu this is
€18.800; € 153.500; € 87.615; -€ 14.963 € 113.460
in year 1, 2, 3, 4 and 5
 The discount rate is 0,15 (15 percent)
 =18800/1,15+153500/(1,15^2)+87615/(1,15^3)+(-
14963)/(1,15^4)+113460/(1,15^5)
 So, the DCF is €237.878 in 5 years
 This number is not totally fair, as it also includes
the funding in these 5 years

SNEAK PREVIEW NEXT SESSION:
INVESTOR READINESS
GO / NO GO decision after every stage in the deal making process:
 First contact, pitch
 Personal connection
 Business plan and/or presentation
 Term sheet
 Negotiations
 Signing term sheet (exclusivity phase investor)
 Due diligence
 Participation contract
 Deposit of money and changes of legal structure

SNEAK PREVIEW NEXT SESSION:
INVESTOR READINESS
Valuation of startups is not just a numbers game. It’s more about expectations,
feelings, investment limits etc.
But, start to quantify your value by:
 Real option pricing;
 Discounted cash flow;
 Comparing to other startups.
Science, art or random?

FOLLOW ME
Benno Groosman MScBA
Experienced startup entrepreneur
www.groosman.info

Funding for innovative startups - Part 3 of 5

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