Financials for an Elevator Pitch

1. Financials for an Elevator Pitch

2. A key point to remember You are writing fiction—we know that! Your job is to convince investors that this fiction deserves a Pulitzer prize! Your job is to convince an investor that these are reasonable and achievable numbers But they are still fiction!

3. A second key point to consider Writing a business plan will sharply refine these numbers What you are providing for now is a “back of the napkin” sketch of numbers The more refined they are, the better. But if you can convince investors that these are reasonable, you’ll be fine.

4. Returns to investor In an elevator pitch you should provide Firm valuation Projected Sales Projected Gross Profit Margins Projected Net Profit Margins Projected RoA Cash Flow positive (in time) Let’s consider each

5. 1. Firm valuation When you ask for an investment, you ask for a dollar amount in return for a percent of the equity Example: We ask for $25k for a 25% equity stake If we divide $25k by 25% we get a firm value of $100k “We are asking for $25k for a 25% investment, to build inventory. This values the firm at $100k

6. 2. Projected Sales: back of the Napkin for the elevator pitch Figure out the size of your target market, and how much it should grow in three years Identify market share for the top 4 firms in your target market Compare yourself on four attributes to those four firms Peg yourself at 70% of the nearest competitor So you might get 70% of their market size in 3-5 years Figure it takes you 3-5 years to ramp up to that 70% mark 25% year one 45-50% year two, 70% year three

7. 2. A quick example Suppose you find that your target market grows 10%, and is currently $1 million Should be 1.21 million in year three You compare yourself to four top competitors, and find yourself equal to one with a 20% market share You are then looking at 14% (20% x 70%) of the year three market, or $169.4k Year one: $50,000 (20% of 20% of $1 million) Year two: $ 99,000 (45% of 20% of 1.1 million) Year three: $169,400 (70% of 20% of 1.21 Million) So, your year 3 sales ought to be about $170k (notice I rounded up a bit)

8. So now you have a reasonable and defendable sales estimate In the elevator pitch you don’t tell them how you arrived at the numbers, you tell them what you estimate sales and market share to be “We anticipate year three sales to be $170k, about a 14% market share”

9. 3&4: Profit margins as a Percent of Sales Gross Profit margins are (sales-COGS)/sales Net Profit Margins are Net Income/Sales Report both as pct of sales

10. Using your sales forecast You estimate sales at $170k Maybe your COGS is $85k Your Gross Profit margin is $85k, or 50% Suppose all other costs equal $68k Your net income is $17k (85-68=17) Your Net profit Margin is $17k or 10%

11. What you would then say “We anticipate year three sales to be $170k, about a 14% market share”. That generates 50% Gross margins. Net margins would be about 10%” (Unless net margins are significantly higher than industry average, you’re probably safe not stating them in an elevator pitch)

12. 5. Getting RoA Concept one: ALE is A=L+E An asset is something of value within your business. Question: how did you acquire it? Pay cash, swapped another asset, borrowed money Each time you add an asset, you account for how you acquired it, by increasing debt, equity, or both.

13. How are returns figured: RoA Return on Assets is Net Income/Total Assets Re-write as Net Income/(Liabilities+Equity) Return on Equity is Net Income/Shareholder Equity Re-write as Net Income/(Equity)

14. The “X” factor—condensed to multiples One way to consider RoA is to think of it in terms of “multiples” for the investor Suppose: Investor pledges $10,000, for 25% of profits In year five, you predict the firm will sell for $100k Investor gets 25%, or $25k Investors ROA is 2.5X ($25k/$10k)

15. Why use “X” in an elevator pitch? Investors do this mental math anyway, so provide it for them It’s also very quick, saving time “Given our profit margins investors should earn a 2.5x return by year five”

16. Returning to our example You forecast a net income of $17k: Similar firms sell for about 20 times net income (PE ratio is 20). The investor invested $25k in return for 25% of the firm’s sale price 25% of $340k ≈ $85k $85k/$25k ≈ 3.4X

17. 6. The tough one—when are you cash flow positive No easy rule here: here are rules of thumb Ought to be between 1-3 years How much inventory do you plan to have? Compare to firms in an industry Look up inventory turn ratio for competitors How many turns does it take for your Gross Profit Margin to exceed inventory value? Add to one year

18. Continuing our example Suppose your average inventory is $20k Suppose inventory Turns is 6 (every two months) Suppose Gross Profit margins are 50% It takes two turns to pay for inventory out of Gross Profit Margins (4 months) Cash Flow positive in 16 months

19. What to say about cash flow “We anticipate year three sales to be $170k, about a 14% market share”. That generates 50% Gross margins. We should be cash-flow positive in 16 Months.”

20. Overall: What would you say? “We anticipate year three sales to be $170k, about a 14% market share. That generates 50% Gross margin, and we should be cash flow positive in 16 months. This provides investors a 3.5X Return.” Here is your returns to investors portion of the elevator pitch

21. Did you realize this took less than 15 seconds? The judges are not dumb—they do the math in their heads—stating it as such makes it easier on them and you.