Entrepreneurship - Lecture - Business Plan - Students, Lecture notes of Economics

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Building Financial Projections

Agenda

• (^) Part 1
  • (^) The Business Model
• (^) Part 2
  • (^) Building Your Financial Projections

Dividing Equity

Among Founders & Investors

Initial Initial Name Title # (^) Shares % Shares % Shares % Shares % Shares % Shares % Founders Susan CEO (^) 2,000,000 50.0% 2,000,000 42.6% 2,000,000 29.8% 2,000,000 26.8% 2,000,000 13.4% 2,000,000 8.9% Joe CTO 1,000,000 25.0% 1,000,000 21.3% 1,000,000 14.9% 1,000,000 13.4% 1,000,000 6.7% 1,000,000 4.5% Rakesh VP Sales 1,000,000 25.0% 1,000,000 21.3% 1,000,000 14.9% 1,000,000 13.4% 1,000,000 6.7% 1,000,000 4.5% Total (^) 4,000,000 100.0% 4,000,000 85.1% 4,000,000 59.7% 4,000,000 53.7% 4,000,000 26.8% 4,000,000 17.9% Key Early Employees Jack VP R&D 500,000 10.6% 500,000 7.5% 500,000 6.7% 500,000 3.4% 500,000 2.2% Sam Manager 1 100,000 2.1% 100,000 1.5% 100,000 1.3% 100,000 0.7% 100,000 0.4% Julie Manager 2 (^) 100,000 2.1% 100,000 1.5% 100,000 1.3% 100,000 0.7% 100,000 0.4% Total - 0.0% 700,000 14.9% 700,000 10.4% 700,000 9.4% 700,000 4.7% 700,000 3.1% Advisors Per Person # PP Board Members 50,000 2 100,000 1.5% 100,000 1.3% 100,000 0.7% 100,000 0.4% 0.22% Advisory Board 25,000 3 75,000 1.1% 75,000 1.0% 75,000 0.5% 75,000 0.3% 0.11% Total - 0.0% - 0.0% 175,000 2.6% 175,000 2.3% 175,000 1.2% 175,000 0.8% Option Plan Per Person # (^) PP VP Sales & CFO 300,000 2 600,000 8.9% 600,000 8.1% 600,000 4.0% 600,000 2.7% 1.34% Director 50,000 (^5) 250,000 3.7% 250,000 3.4% 250,000 1.7% 250,000 1.1% 0.22% Sr. Eng 30,000 15 450,000 6.7% 450,000 6.0% 450,000 3.0% 450,000 2.0% 0.13% Jr. Eng 20,000 10 200,000 3.0% 200,000 2.7% 200,000 1.3% 200,000 0.9% 0.09% Mktg/sales/Finance 25,000 10 250,000 3.7% 250,000 3.4% 250,000 1.7% 250,000 1.1% 0.11% Admin 2,000 (^5) 80,000 1.2% 80,000 1.1% 80,000 0.5% 80,000 0.4% Total - 0.0% - 0.0% 1,830,000 27.3% 1,830,000 24.6% 1,830,000 12.3% 1,830,000 8.2% Investors Angels ($500K at $4.5MM) 745,000 10.0% 745,000 5.0% 745,000 3.3% VC Round ($10MM at $10MM) 7,450,000 50.0% 7,450,000 33.3% VC Round ($10MM at $20MM) 0.0% 7,450,000 33.3% Total (^) - 0.0% - 0.0% - 0.0% 745,000 10.0% 8,195,000 55.0% 15,645,000 70.0% Grand Total 4,000,000 100.0% 4,700,000 100.0% 6,705,000 100.0% 7,450,000 90.0% 14,900,000 45.0% 22,350,000 30.0%

Disclaimer - Charlie’s Rules-of-Thumb

• (^) Focused on making attractive to investors
• (^) Most relevant for technology-based companies
• (^) May not apply to your industry or business model
• (^) Most Common Business Plan Errors:
  • (^) Revenue too high in year 4
  • (^) Profit too high in year 4

The Business Model

• (^) A Profit & Loss Statement that details your financial performance in percentage terms
• (^) Assumes you reach critical mass
• (^) Explains WHY your business will MAKE MONEY
• (^) The complete business plan shows HOW!

Profit & Loss (P&L) Statement Also called Income Statement

• (^) Revenue (after discounts)
• (^) Cost of Goods Sold (COGS)
  • Direct product cost
  • Mfg but NOT R&D
• (^) Gross Margin or Gross Profit
• (^) Departmental Expenses
• (^) Operating Profit – Operating Loss
  • (^) Profit before taxes (PBT)
  • (^) EBITDA (Earnings before interest,

taxes, depreciation,

amortization)

Revenue $ 50.0 100%

Cost of Goods Sold $ 20.0 40%

Gross Margin $ 30.0 60%

Sales & Marketing $ 15.0 30%

R&D $ 5.0 10%

G&A $ 2.5 5%

Total Expenses $ 22.5 45%

Operating Profit $ 7.5 15%

Sample

Actual Business Models Q3 ’98 and Q3 ’

Cisco Cisco Sun Sun IBM IBM

Q3 '98 Q3 '00 Q3 '98 Q3 '00 Q3 '98 Q3 '

Revenue 100% 100% 100% 100% 100% 100%

Cost of Goods Sold 35% 36% 50% 52% 60% 64%

Gross Margin 65% 64% 50% 48% 40% 36%

Sales & Marketing 19% 21% 22% 20% 17% 14%

R&D 12% 14% 10% 10% 7% 6%

G&A 3% 3% 6% 4% 4% 3%

Total Expenses 34% 38% 38% 34% 28% 23%

Operating Profit 31% 26% 12% 14% 12% 13%

Annual Revenue/Emp. $ 600,000 $ 675,000 $ 520,000 $315,

Actual Business Models Q3 ’98 and Q3 ’ Tech Data Tech Data Yahoo Yahoo Amazon Amazon Q3 '98 Q3 '00 Q3 '98 Q3 '00 Q3 '98 Q3 ' Revenue 100% 100% 100% 100% 100% 100% Cost of Goods Sold 93% 95% 11% 13% 78% 74% Gross Margin 7% 5% 89% 87% 22% 26% Sales & Marketing 4% 3% 53% 36% 23% 22% R&D 0% 0% 15% 9% 8% 11% G&A 1% 1% 7% 6% 3% 4% Total Expenses 5% 4% 75% 51% 34% 37% Operating Profit 2% 1% 14% 36% -12% -11% Annual Revenue/Emp. $ 2,000,000 $ 250,000 $ 400,000 $ 400,000 $300,

Building YOUR Model

• Start with what you “know”

• Your Cost of Goods Sold

• R&D should end up at 10% to 20%

• G&A should end up at 5% to 15%

• Target an operating profit of 15% to 20%

• Only remaining variable is Sales & Marketing

Building YOUR Model

• Verify your assumptions by looking at

competitors or comparable companies

• You must be able to justify that:

• You can meet a sales target of $X

• With a Sales/Marketing budget of Y% of $X

Case Study – Storage Networks Sept '02 - Actual Charlie's Proposed Model Revenue $ 22.0 100% 100% COGS $ 14.5 66% 66% Gross Margin $ 7.5 34% 34% R&D $ 4.0 18% S, G, & A $ 8.0 36% Total Expenses $ 12.0 55% Op Profit $ (4.5) -20%

Case Study – Storage Networks Sept '02 - Actual Charlie's Proposed Model Revenue $ 22.0 100% 100% COGS $ 14.5 66% 66% Gross Margin $ 7.5 34% 34% R&D $ 4.0 18% $ 4. S, G, & A $ 8.0 36% Total Expenses $ 12.0 55% Op Profit $ (4.5) -20%

Case Study – Storage Networks R&D plus S&M = 19% Revenue If we assume R&D = $4MM then Revenue = ($4 + S&M) /. S&M Revenue $ 6 $ 53 $ 8 $ 63 $ 10 $ 74 $ 12 $ 84 $ 14 $ 95 $ 16 $ 105

Case Study – Storage Networks Sept '02 Charlie's Proposed Model Revenue $ 22.0 100% $ 63.0 100% COGS $ 14.5 66% $ 41.6 66% Gross Margin $ 7.5 34% $ 21.4 34% R&D $ 4.0 18% $ 4.0 6% S, G, & A $ 8.0 36% $ 8.0 13% Total Exp. $ 12.0 55% $ 12.0 19% Op Profit $ (4.5) -20% $ 9.4 15%