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Lecture 12 Financial Modeling of a Start-up Business

Lecture 12 Financial Modeling of a Start-up Business . Feb 23, 2012. HW for Feb 28. Write an expense plan for the first 3 years. How much money will you need to start the company? 50% Latest marketing results primary and secondary 30%

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Lecture 12 Financial Modeling of a Start-up Business

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  1. Lecture 12 Financial Modeling of a Start-up Business Feb 23, 2012

  2. HW for Feb 28 • Write an expense plan for the first 3 years. How much money will you need to start the company? 50% • Latest marketing results primary and secondary 30% • How will your company be managed? Show org chart including hires 20%

  3. Financial Modeling • How do you model a future set of events of which you know little? • Why would you model such events? • Who would believe it if you did?

  4. Why do it? • Plans for the future • Have you forgotten anything? • Creates debate • No one right answer • Isolates assumptions for testing • Self-Consistency • Look for inconsistencies • Sensitivity Analysis • What’s important?/what’s not? • Informs management focus • Drives funding events

  5. Hockey Stick Revenue $$ Time Now What’s wrong with this picture?

  6. What’s wrong with this picture?

  7. What’s wrong with this picture? • requires lots of money • earlier revenue is much more desirable • low credibility • Hard to value • How long will the flat section last • Bored with seeing it. Very common • Leave out how high it is going to go

  8. Can I improve it? Hard • If Biotech or some other product that requires government certification • If product is still in the lab requiring development • If the market is not ready for the product • If the product requires enormous investment • Breaking into an established market • Spike in the cost of inputs • Macroeconomic Factors • Other?

  9. Sharpen your pencil • Consider every line item of expense with the question • How can I eliminate it? • How can I reduce it? • How can I delay paying it? • Consider the times to bring money into the enterprise with the question • How can I reduce them? • Consider the revenues that are earned with the question • How can I increase them?

  10. Can I improve it? How to improve • Think of some short term product that can earn money quickly • License • Get DARPA or other government funding • Mixed Consulting/Product development model • Technology so incredibly compelling that can get “patient money”* • Get larger investment to speed up

  11. $M 20 10 0 1 0 2 3 4 5 T years Assume Angel/VC Funding of $5M Is this a viable investment?

  12. $M 20 10 0 1 0 2 3 4 5 T years Assume Angel/VC Funding of $5M Is this a viable investment? More likely a “lifestyle business - not an Angel candidate

  13. $M 100 50 0 1 0 2 3 4 5 T years Assume Angel/VC Funding of $5M Is this a viable investment?

  14. $M 100 50 0 1 0 2 3 4 5 T years So let’s say that this is a good investment. . . Is this not a good place to start?

  15. $M 100 50 0 1 0 2 3 4 5 T years So we have the “answer”Can we make it real? Consider number of products Consider number of markets

  16. So we have the “answer”Can we make it real? $M 100 Product 3 50 Product 2 Product 1 0 1 0 2 3 4 5 T years Assume n=3

  17. Let’s assume that this “answer” is not too ridiculous • What assumptions can we make? (keep track!) • What must we consider now in our model? • What are the risks? (and how would you abate them)

  18. Consider revenue side first • Start with time • What is the sales cycle? • Amount of time to make sale • How can you accelerate? Consider distribution modes • What is the price of your product? • How many can you sell? In what period of time? • Can you increase the number of business models to earn revenue? • How do you phase your product introduction?

  19. accelerate • Publications • Third party validation • Competition • Refer to waldo • Advertising • Free trials • Partner with complementary companies

  20. Consider now costs SGA • People • Marketing • Sales • Technology • Accounting • Equipment • Office Rent and expenses • Materials for product • Legal • Incorporate or partnerships • Patent • Capital • Employment • Contracts

  21. What is COGS? • Cost of Goods Sold is the direct cost to make and sell product. • Direct labor (hours X rate) • Purchased materials used in product

  22. Selling General and Administrative Expenses (SGA) • Payroll costs (salaries, commissions, and travel expenses of executives, sales people and employees) • Advertising expenses • Other

  23. SG&A

  24. Capital costs • Equipment • Computers - Lease as much as you can! Add to monthly expenses

  25. R&D • Costs of developing new products • Salaries • Equipment • Licenses • Consulting • Etc • Many businesses are all R&D in the beginning

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