You only get one chance at the perfect investor so you need to be ready. This is the fifth in a series of workshop sessions that get you ready.

1. © Copyright 2003,
Success FormulasSuccess Formulas
®
Financing StrategiesFinancing Strategies

2. © Copyright 2003,
Topics
• Three Fundamental Approaches
• Financial Planning
• Financial Assumptions
• Spreadsheet Components
• Executive Summary

3. © Copyright 2003,
Why Have a Financial Strategy?
• Provides Structure and Funds to Achieve Overall
Objectives.
• Examines Implications of Options.
• Identifies the Best Financial Course of Action.

4. © Copyright 2003,
Three Financing Approaches
• Bootstrap
• Raise Private Money
• Raise Professional Money

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Bootstrap Approach
• Mortgage Your House
• Run Up Credit Cards
• Friends and Family Financing
• Customer Financing
• Vendor Financing
• Partner Financing

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Strategies
• Factoring
• Reduce the Growth Rate
• Control Expenses
• Control Salaries
• Control Inventory
Too Much Control = No Room for Innovating

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Raise Private Money (Angels)
Sources Who Know People and Invest Themselves…
• Attorneys
• Accountants
• Bankers
• Business Colleagues
• You

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Investor’s Expectations
• 40% Per Year Return.
• Expect 5+ Times Their Investment, Within Five Years.
• Desire Low Risk.
Caution: Watch Out For Security Laws.

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Professional Money
• Venture Capital Firms
• Banks

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Venture Capitalist’s Goals
• 40% Internal Rate of Return on Investment, as
minimum yield.
• 5-100 Times Their Investment, Within Five Years.
• Anticipated Revenues Must Grow to Exceed $50
Million/Year.
• Managed Risk

11. © Copyright 2003,
Bank’s Expectations
• You Have Assets (Collateral) -- To Secure Return
of Bank’s Money
• Income (Earnings) Within The Company
• You Personally Guarantee Pay-Back (Personal
Assets).
• Very Low Risk.

12. © Copyright 2003,
Which Financial Approach is Right…
For You?

13. © Copyright 2003,
Marketing vs. Finance
Marketing:
An
Aggressive
Approach
Finance:
A
Conservative
Approach

14. © Copyright 2003,
About Presenting to Investors
• Grab the Investors’ Attention Immediately
• Focus on Validity of the Business/Investment
Opportunity, Not the Technology or Service
• Justify Your Assumptions
• Test Your Presentation on each a CPA & a Marketing
Person.
• Make Presentations Somewhere Between Aggressive
and Conservative.

15. © Copyright 2003,
The Financial Plan
• 5-Year Profit and Loss (P&L) Pro Forma
• 5-Year Balance Sheet Pro Forma
• 5-Year Cash Flow Pro Forma
• Underlying Assumptions
• Use of Proceeds
• Prior Investments Received
Know, but don’t present, all of the underlying detailsKnow, but don’t present, all of the underlying details

16. © Copyright 2003,
5-Year Profit and Loss (P&L)
Pro Forma
Determines Value of Business

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5-Year Balance Sheet
Pro Forma
Shows Early on, What Is Happening
Within The Business

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5-Year Cash Flow
Pro Forma
• Identifies Investment Requirements.
• Rapid Growth Can Consume All Cash Flow
within First 1-3 Years.
• Most Investors Expect to See Red Ink from 12-24
Months in The Enterprise.
• Usually Have Increasing Cash Flow Demands
During Growth.

19. © Copyright 2003,
Underlying AssumptionsUnderlying Assumptions
• Has to Make Sense!
• Must Be Error-Free.
• Investors Will Do an Independent Study as Part
of Their Due Diligence Process.
• Venture Capitalists Will Identify and Critique All
Key Assumptions.
• Do Your Homework!

20. © Copyright 2003,
Uses of ProceedsUses of Proceeds
• Relates to Cash Flow Projection
• Do Not Ask for Money That Isn’t Supported By
Cash Flow Projections (One of Most Common
Problems).
• Easier to Convince Investors If There Is Some
Operating History.
• If You Aren’t Prepared, or Your Enterprise Isn’t
Ready, Do Not Waste a Venture Capitalist’s Time.

21. © Copyright 2003,
Prior InvestmentPrior Investment
• How Much Have You Invested in the Business?
• Are You Investing More into the Business?
• Venture Capitalists Are Increasingly Willing to
Invest If You Also Invest.

22. © Copyright 2003,
The Financial AssumptionsThe Financial Assumptions
• Revenues
• Cost of Goods
• Expenses
• Inventory
• Accounts Receivable
• Headcount/Salaries
These can be the most important details!These can be the most important details!

23. © Copyright 2003,
OrganizationalOrganizational Learning Curve
• Experience Leads to Cost Reduction.
• Worker Learning Effects Can Occur Quickly.
• Total Learning Effect = Competitive Advantage.
• Learning Rate Tends to Level Off.

24. © Copyright 2003,

25. © Copyright 2003,
Spreadsheet ComponentsSpreadsheet Components
• Revenue Projection Charts
• Cost of Goods Sold
• Head Count
• Salaries
• Expenses
6.4%3.5%1.9%0.9%0.1%OUR SHARE OF TOTAL MARKET
32.0%25.1%19.0%13.8%4.4%
141,650,00063,900,00028,350,00011,250,0001,325,000OUR TOTAL CHANNELS
443,066,912254,218,720148,840,00081,740,00030,000,000TOTAL OT CHANNELS
20.0%14.0%10.0%6.7%3.0%OUR TECHNOLOGY % OF TOTAL
2,215,334,5601,815,848,0001,488,400,0001,220,000,0001,000,000,000TOTAL CHANNELS
20062005200420032002

26. © Copyright 2003,
InventoryInventory
• Raw Materials
• Work in Process
• Finished Goods
• Rework
• Sales Samples

27. © Copyright 2003,
Accounts ReceivableAccounts Receivable
• Assume Industry Average Is 45 Days
• For Small Businesses It Is 60++ Days
• Non-Collectable Receivable Can Be 20% of All
Sales.

28. © Copyright 2003,
Key PointsKey Points
• Plan to Spend Money on Marketing and Inventory.
• Pay Attention to Accounts Receivable.
• Don’t Oversell -- Charge What Market Will Bear.
• Don’t Hold Back Any Information From Venture
Capitalists.
• Begin to Think About What You Will Do With
Profits.

29. © Copyright 2003,
Executive SummaryExecutive Summary
In 2-or-3 Pages, Briefly Describe:
• Elevator Pitch (2-3 sentonces!!!)
• Your Industry/Sector
• Company Vision
• Company Mission
• Corporate Legal Description
• Product/Service - What it does, how much it sells for, proprietary
position
• Market - Who’s going to buy, what is the sales channel.
• Operations
• Management Team
• Investment Required
• Financial Proforma
• Note: Develop each topic for five years