Kailas Narendran's presentation on reverse engineering a financial model from the 2017 Moonshot Prototype Challenge.

1. Financial Models

2. Contents
• About Me / Disclaimer
• Why?
• Accounting Basics (sorta)
• Example

3. Me
• Serial Entrepreneur
• Myomo (NYSE: MYO) – Founder/Inventor, numerous rounds of seed, F&F,
some institutional and IPO June 16, 2017
• Xitome – Robots and Robot accessories
• Kiinde LLC – Bootstrapped consumer products
• Gyan LLC – Asset management software

4. Why?
• The point of a business is to create and (ideally) capture value.
• Highlight and test the assumptions that are the basis of your
business
• Create high level visual representations that help tell the story
• The financial model DOES NOT make or break your business!

5. First things first
1. How are you creating value?
• Product/service?
2. How are you capturing value?
• Revenue plan and some idea of structure – product sales, subscription, loss
leader, freemium, etc.
3. How exactly do you do it?
• Cost and operating – head count, COGS, facility, etc.
4. Finally, Make the financial model

6. Finance for Entrepreneurs
I have no training or education in finance.
My education is entirely based on experience fundraising, launching and
operating new businesses.

7. What are the parts (3 sheets)
• Profit and Loss (P&L) – (aka – Income Statement)
• Cash Flow (CF)
• Balance Sheet (BS)
• Profit = Income – Expense
• Equity = Assets – Liability
• Free Cash – Income that ends up in your bank account, rather than
your receivables or inventory (very important!)

8. P&L
• Questions answered
• What are you selling and for how much
• What does it cost to sell?
• What does it cost to operate?
• At the end of the day, how much value do you capture? (bottom line, profit)
• Profit = Income - Expense

9. P&L - Terms
• Gross – How much money do you make/invoice?
• COGS (Cost of Goods Sold) - How much does it actually cost you for your
product/service.
• Gross Profit – How much money is left once you pay for the COGS?
• OpEx – Operating Expenses
• SG&A – Sales, General and Administrative (“Overhead” required for
operations)
• Development/R&D – Costs related to things that go back into furthering
the product or service
• EBITDA – Earnings before interest, tax, depreciation and amortization. Not
quite your bottom line, but good enough for wall street

10. Balance Sheet
• Questions Answered
• How much is your business worth (“Equity”)
• How much do you have (“Assets”)
• How much do you owe (“Liabilities”)
• I find this to be the most confusing
• Assets (simple) – Cash in bank accounts, Accounts Receivable, Inventory
• Liabilities (simple) – Accounts Payable, Credit Card Balances, Loans, Taxes, etc.
• Equity (simple) – Retained earnings, track initial contributions to business, etc.
• Equity = Assets - Liability

11. Cash Flow (CF)
• You don’t get paid when you sell, nor do you pay when you are billed
• Cash appears when you have a positive income AND it goes into your
bank account, rather than your inventory or accounts recievable

12. How?
• Excel
• Presentation matters
• Useful Functions

13. Useful Excel Functions
• Absolute & Relative References
• A1 vs $A1 vs A$1 vs $A$1
• SheetName!$A:$Z
• Vlookup
• Simple match for first column of range, and pulls value from the n’th column
• Index & Match
• Much more flexible than vlookup and enables changing parameters over time
• Named cells
• Offset
• Things that happen at relative, parameterized, times

14. Acme Co.
Widget and an app that goes with it that has a subscription revenue model

15. What do we do?
• Acme Co has a hardware widget that interfaces with an app and
creates value for our target customer

16. Who is our customer?
• 30-40 Year old Men and Women
• Own a smart phone
• Average HHI of 50-90k
• (more details the better!)

17. How do we create value?
• We make our widget for $5
• Our widget will retail for $19.99 ($20)
• Our service will cost $1-5/mo

18. How do we reach the customer?
• Sell directly through our website (initial launch and low volume)
• Specialty retailers (to get started)
• Mass chain retailers (at scale)

19. Growth and Execution Plan
• Start with single founder and contract developers to create v1
product
• Make an awesome video and Kickstarter to pre-sell
• Once we’ve proved v1 and market, raise A-round and hire an in
house dev team for v2. founder CEO
• Take v2 to specialty retail after second kickstarter
• Grow market, raise B-round for expansion to mass retail, experienced
executive team, new products, etc.

20. Other questions
• Conversion rates
• Growth rates
• Ratios for your industry
• Look at public companies to get an idea of what is realistic
• Headcounts
• Compensation
• Etc…