Gorge OEN Boot Camp Funding Strategy Plan Money

Gorge OEN Boot Camp Funding Strategy & Plan

Money Gorge OEN Boot Camp You need it $ They’ve got it You need a funding plan!

Who Are They? Gorge OEN Boot Camp Bank$ Your Pocket$ Family/Friend $ “Crowd$” Your. Co Government$ $pending Customer$ Investor$ Supplier$ Infra$tructure Employee$ Facilitie$

Funding Plan Gorge OEN Boot Camp Define clear milestones Expansion Go-To-Market Pilot Development Concept

Potential Sources by Stage Roughly speaking… Gorge OEN Boot Camp Expansion Go-To-Market Pilot Development Concept Merger or IPO Founders$ Venture Fund$ Family, Friend$, Fan$ Strategic Investor$ Customer$ (Bootstrapping) Private Equity Angel$ Angel Group$ SBIR/STTR Grant$ Seed Fund$ Crowd. Funding Venture Bank$ Loan$/Bond$ Factoring Receivable$

Funding Plan Gorge OEN Boot Camp How much will you need when? Expansion Go-To-Market Pilot Development Concept

Funding Plan Align sources with stages Gorge OEN Boot Camp Expansion Go-To-Market Pilot Development Concept Your Pocket$ Family/Friend$ Grant$ Investor$ Loan$

Bootstrapping “A self-sustaining process that proceeds without external help” Gorge OEN Boot Camp • 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 Pros 100% ownership 100% control Cons Slower growth Competitive risk

Angels Just people who want to make money by investing… Gorge OEN Boot Camp … their own money

VC’s More people who want to make (lots of) money by investing… Gorge OEN Boot Camp … (lots of) other people’s money

Expectations Gorge OEN Boot Camp You Them Hard Work Low Pay Twice as long Twice as hard High Risk High Return Preferences Align expectations early; Check frequently

Valuation Gorge OEN Boot Camp • • 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?

Stock Gorge OEN Boot Camp Preferred Stock – Investors Common Stock – Everyone Else Series A Series B. . . Founders Employees Contractors Landlords Preferred Shareholders Get their money back first - more than 1 X Have additional rights – approval of major events

The So-Called “Exit” This is where shareholders get liquidity Gorge OEN Boot Camp Investors get their money back – several X While you may be “locked up” for a while Them You Common shares may get less than preferred You may need to keep working (beware earn-outs)

Summary Gorge OEN Boot Camp • 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 Exit Strategy 16

Exit Strategy Gorge OEN Boot Camp • Investors require return on investment • How will investors get between 10 x and 30 x return in 3 -5 years? • Convincing investors to put money in your company requires that you have thought this through 17

10 x to 30 x: Why so High? Gorge OEN Boot Camp • • • 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

Exit Example Gorge OEN Boot Camp Gadzoox Networks Cap Table Series A Jan-96 Pre-money $4. 6 Investment $2. 0 Post-money $6. 6 Series A % 30% Series B Sep-96 Series C May-97 Series D Sep-98 19

Exit Example Gorge OEN Boot Camp Gadzoox Networks Cap Table Series A Jan-96 Series B Sep-96 Series C May-97 Series D Sep-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% 20

Exit Strategy Gorge OEN Boot Camp • • • “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

How Much? Gorge OEN Boot Camp • 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 10 K reports for info on public company acquisitions 22 22

Investor Expectations Gorge OEN Boot Camp • 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 Financial Projections 24

Gorge OEN Boot Camp How much funding do you need - and when? 25 Copyright © 2012, Oregon Technology Business Center

What do we mean by “Projections”? Gorge OEN Boot Camp • 5 Year estimates of your • Balance sheet, • Income statement, & • Cash flow statement • And a list of key assumptions 26

A Summary Version: Gorge OEN Boot Camp Break Even Revenue Net Income 2012 2013 2014 2015 2016 Units 10 100 300 1000 2500 Head count 10 15 25 30 80 27

Cash Runway vs. Accounting Gorge OEN Boot Camp • 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 Cash Runway ≠ Financial Statement Forecast Managing Cash is critical! 29

Financial Statements Gorge OEN Boot Camp • Balance sheet • Income statement • Cash flow statement 30

Balance Sheet Gorge OEN Boot Camp • Assets • Short Term • Long Term • Liabilities & Shareholder Equity • Short Term liabilities • Long Term liabilities • Shareholder Equity • Stock • Retained Earnings 31

Income Statement Gorge OEN Boot Camp • • Revenue Cost of Goods Sold (COGS) Gross Profit Expenses • Admin/Sales & Marketing/R&D/Operations • Depreciation • Net Income 32

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 33

Projection Challenges Gorge OEN Boot Camp • 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? 34

Gorge OEN Boot Camp Yes, you do 35

Gorge OEN Boot Camp What if my projections are wrong? 36

Gorge OEN Boot Camp What if my projections are wrong? Not to worry - they will be wrong 37

Gorge OEN Boot Camp What if my projections are wrong? Not to worry - they will be wrong But they must be credible & defensible 38

Gorge OEN Boot Camp How to get started? 39

Think Bottoms Up: Revenue Gorge OEN Boot Camp • 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

Revenue: Things to Think About Gorge OEN Boot Camp • 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

Expenses: Think Bottoms Up Gorge OEN Boot Camp • • 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

Expenses Gorge OEN Boot Camp • • • 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

Predicting Expenses Gorge OEN Boot Camp • Remember: expenses tend to scale with revenue! 44

Iterate Gorge OEN Boot Camp Plan Assess Projections 45

Suggestion: Use a Forecasting Tool Gorge OEN Boot Camp • Templates help remind you of categories • OTBC Excel forecast spreadsheet • SCORE budget/forecast tool 46

OTBC Forecast Spreadsheet Gorge OEN Boot Camp • You fill in Blue text items • Black text items are calculated 47

OTBC Forecast Spreadsheet Gorge OEN Boot Camp 48

OTBC Forecast Spreadsheet Gorge OEN Boot Camp 49

OTBC Forecast Spreadsheet Gorge OEN Boot Camp • • Engineering Sales and Marketing Admin Operations 50

OTBC Forecast Spreadsheet Gorge OEN Boot Camp • Engineering • People • Sales and Marketing • Expenses • Admin • Capital purchases • Operations 51

OTBC Forecast Spreadsheet 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

Document your Assumptions Gorge OEN Boot Camp • Possible examples: • Length of sales process • Average sales price • Sales channel (& discount) • Changes in COGS 56

Your Mission: Gorge OEN Boot Camp • Document your forecast assumptions • Create a 12 month forecast • Prepare your Financial Forecast slide 57