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

Gorge OEN Boot Camp

16

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

17

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

18

Gorge OEN Boot Camp

19

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

Gorge OEN Boot Camp

20

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

21

21

Gorge OEN Boot Camp

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

22

22

Gorge OEN Boot Camp

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

23

Gorge OEN Boot Camp

24

Financial Projections

Gorge OEN Boot Camp

25

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

26

Gorge OEN Boot Camp

27

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

28

Gorge OEN Boot Camp

29

Financial StatementForecast

Cash Runway

Managing Cash is critical!

≠

Gorge OEN Boot Camp

Financial Statements

•Balance sheet

•Income statement

•Cash flow statement

30

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

31

Gorge OEN Boot Camp

Income Statement

• Revenue

• Cost of Goods Sold (COGS)

• Gross Profit

• Expenses

• Admin/Sales & Marketing/R&D/Operations

• Depreciation

• Net Income

32

Gorge OEN Boot Camp

33

Cash Flow Statement

• Beginning Cash

• + Net Income

• + Depreciation

• - Change in assets

• - Property/equipment purchases

• + Borrowings

• + Proceeds of stock sales

• = Ending cash

Gorge OEN Boot Camp

34

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?

Gorge OEN Boot Camp

35

Yes, you do

Gorge OEN Boot Camp

36

What if my projections are wrong?

Gorge OEN Boot Camp

37

What if my projections are wrong?

Not to worry - they will be wrong

Gorge OEN Boot Camp

38

What if my projections are wrong?

Not to worry - they will be wrong

But they must be credible & defensible

Gorge OEN Boot Camp

39

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!

40

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?

41

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!

42

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

43

Gorge OEN Boot Camp

44

Predicting Expenses

• Remember: expenses tend to scale with revenue!

Gorge OEN Boot Camp

45

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

46

Gorge OEN Boot Camp

OTBC Forecast Spreadsheet

• You fill in Blue text items• Black text items are calculated

47

Gorge OEN Boot Camp

48

OTBC Forecast Spreadsheet

Gorge OEN Boot Camp

49

OTBC Forecast Spreadsheet

Gorge OEN Boot Camp

OTBC Forecast Spreadsheet

• Engineering• Sales and Marketing• Admin• Operations

50

Gorge OEN Boot Camp

OTBC Forecast Spreadsheet

• Engineering

• Sales and Marketing

• Admin

• Operations

• People

• Expenses

• Capital purchases

51

Gorge OEN Boot Camp

52

OTBC Forecast Spreadsheet

Gorge OEN Boot Camp

53

OTBC Forecast Spreadsheet

Gorge OEN Boot Camp

54

OTBC Forecast Spreadsheet

Gorge OEN Boot Camp

55

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

56

Gorge OEN Boot Camp

Your Mission:

• Document your forecast assumptions

• Create a 12 month forecast

• Prepare your Financial Forecast slide

57