Professional Documents
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For the second, reviewed financials, the accountant expresses limited assurance; the accountant
might or might not have been aware of all significant matters.
The third, compiled statements, are managements representation presented in the form of
financial statements; the accountant has not undertaken any efforts to express assurance on the
statements.
Pro forma financials are simply projected financials. The exercise for completing your pro forma
financials should not be about demonstrating Excel spreadsheet skills. Your pro formas should
accurately support the storyline you are creating in your business plan. Practice on building
financials from the ground up, using the market potential and feedback from lead users and key
customers, to describe your upside.
Many times financials are done through a CFO mindset, using an artificial linear model to make
projections. These tend to result in the infamous hockey stick, where the revenues are flat for a
period of time, then launch in a perfectly straight line at a 45-degree angle. In reality the start-up
process is very lumpy, not linear. It is not that the CFO or CPA doing the numbers is wrong; whats
wrong are the thought process and assumptions underlying the numbers.
Below we discuss the financials that investors need to see in a business plan, and we have provided
additional guidance in other resources here. Be careful with your financials and keep them limited to
supporting only your storyline. As Johann Wolfgang von Goethe once said, The first sign we dont
know what we are doing is an obsession with numbers.
Pro Forma Income Statement
We repeat what John Nesheim wrote in his book, High-Tech Start-Up: Remember that cash flow
and ROI (return on investment) are the measure of success for the venture capitalist. Your pro
forma income statement is based on your cash budget table, integrated with your sales forecast and
your growth strategy. For most VCs, you will need five-year projections and a very detailed
(sometimes week-by-week) cash budget table for the first year.
Be advised that getting your gross margin nailed down is most important. It demonstrates and
presents the true value of your product to the customer. The investors do not just expect to see some
huge top line sales numbers, but they do want to see how you determined the revenue model and
how you discuss the soundness of your assumptions behind the gross margins.
We want to briefly discuss the break-even analysis, which is a financial exercise to determine
some point in the future when your volume of sales neither makes a profit nor incurs a loss. It is that
point in time when the next unit to be sold will contribute to profitability. This analysis originated in
the academic world, mostly based on the research in consumer products, such as Procter & Gamble
selling bars of soap from established production lines, through established sales channels, to an
identifiable base of consumers.
In other words, the break-even analysis works great on linear assumptions where the financial
models are sound and the research supporting the sales forecasts is solid. We repeat, for all early
stage ventures, that the cash flow will move in lumps, and quite often the financial modeling will be
adjusted on the go. Sorry, but your financials cannot be formed and compressed into one nice, neat
algebraic formula at this time.
http://blog.gcase.org/2011/04/04/what-financials-do-we-need-for-investors/
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Building Production Facilities. Investments for scaling to meet the future needs with the
http://blog.gcase.org/2011/04/04/what-financials-do-we-need-for-investors/
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Building Production Facilities. Investments for scaling to meet the future needs with the
majority of the market. The big orders are not only coming in, but they are getting even bigger!
Cultivating strategic partnerships around the world, and leading/nurturing the ecosystem.
Getting Key Branded-Executives. Completing out the venture team and completing the
transition from entrepreneurial management practices to professional management practices. Here,
shifting the fulcrum from development to execution.
3. Acquisitions and Buyout Financing
Buying-Up Capacity. For buying up competitors, facilitating quick expansion, scooping up
executive management teams at weakened competitors. Also used for buying-up partners for
national expansion plans, and/or establishing beachheads in global markets.
4. Restarts and Subsequent Rounds
Extending The Runway. Sometimes even moving the runway, or creating a temporary runway
on a new location utilizing a new business model, new products/new technology platform.
Sometimes to salvage operations in order to sell-out. More often, for resetting and recharging the
executives option pool too, when the venture is in a down round and exposed to cram downs in
valuations.
Assumptions and Notes
Finally, know that investors expect to see financials that are supported by thoroughly documented
assumptions and detailed notes. Because there are many decisions that management makes with
respect to operating an early stage venture, your assumptions and notes not only give potential
investors the data they need to evaluate your deal, but more importantly they speak volumes about
how you arrived at your assumptions. They can be listed separately on a page as endnotes to the
financials or included as footnotes to the financial statements and budgets.
gcaseorg
http://blog.gcase.org/2011/04/04/what-financials-do-we-need-for-investors/
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