How to get your financial models, realistic goals, and believable projections right.
It seems that the work of an entrepreneur is never done. You’ve got your idea (the next big thing since sliced bread, of course) and you’ve put in the hours. You’ve pulled all-nighters, you’ve traveled around the clock, and you’ve talked and talked and shared and talked some more. You’ve sent uncountable emails and now you are finally ready… to meet with your investors.
This is where it really gets tricky because there is a lot of outdated advice out there, and there are a lot of entrepreneurs who fumble their way through pitches because they weren’t sure what to prepare or what to expect. Ahh the pitch… it’s nerve-wrecking, intimidating, and has the potential to make or break the future of your ‘next best thing.’
It’s Good to Know the Experts
Self-proclaimed financial geek, John Shumate, founder and CEO of Venture First, helps entrepreneurs figure out the pitfalls and help avoid disaster. John started Venture First in 2009 after working extensively with early and growth-stage companies as an investor, advisor, and operator. During this time, John identified a need for high-end valuation and analytics services at reasonable prices. With the belief that small companies operating on a shoestring budget deserve the same sophisticated financial services as their larger counterparts, John set out to develop a superior technology platform and analytical bench that could deliver Wall Street quality services at Midwest prices. The result is a specialty financial services firm that caters to high-growth venture-backed companies from Silicon Valley to Research Triangle Park.
Build It from the Bottom Up
Investors hear the same pitch all too often, “…this is a (insert crazy-big number) billion dollar industry. If I can just capture 1% of that industry, I’ll be worth at least $100 million…” and they hate every second of these pitches. As John puts it, investors prefer a more bottoms up approach, meaning you’ve started at the very bottom and you have taken a deep-dive into the nuts and bolts. Bottoms up modeling means you’ve considered the details that have the possibility of wrecking your business model. For instance:
· What are reasonable unit sales goals?
· How many web ads and/or sales people will it take to reach those goals?
· How many days inventory will you have on hand?
· What’s the cost associated with this and what will cash flow look like?
· How much is it going to cost to keep the lights on? Warehousing?
Your investors want to know that you have thought about every last detail. Investors love this, because even if your initial projections are wrong (they probably will be) you will be able to easily adjust that as you grow. The understanding is already there of what will or won’t work and why, which is invaluable experience that you can apply to your business.
The point is that you should take the time to think about every last piece of detail, from the bottom, all the way up, on a very granular level. As an inventor, you will benefit so much from the knowledge of modeling this way because, as you go along, you will develop a deeper understanding of the process, how much money you actually need, and how to show potential investors projections that are believable.
“The Worst Thing We See”
Venture First is helping start-ups understand these ‘rules’ by assisting with everything from portfolio and stock option valuations to curating deals, and even helping entrepreneurs make connections in the field. When the question came up of “Where do you see most companies go wrong and fail?” the answer was not surprising.
More than anything, on physical product, John and his team at Venture First, see companies cripple their businesses because they have underestimated the cash flow needed to stock enough inventory to support their growth trajectory. Underestimation is just as dangerous and a high trajectory of growth might tank a company as easily as under-capitalization.
Plan. Plan. Plan Some More.
As I mentioned earlier, the work of an entrepreneur is never done and sometimes the work can be grueling. Just know that it will pay off if you have the determination and mental fortitude to really dig into the details of your start-up to eliminate the pitfalls and save yourself from catastrophe.
Read the original INC article on published August 11, 2016.