Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Rationalizing Your Financial Projections is an Important Step to Completing Your Business Plan

Most entrepreneurs focus on developing their financial projections at the same time they are trying to finalize their business plan.  This is done for many reasons, most likely of which is that they do not know much about financial statements and push off developing their financial projections until the last possible moment before they compete their business plan. Often in a rush to get in front of potential investors, these same entrepreneurs do not spend the necessary time to really understand and logically rationalize their financial projections.  Therefore, when they present to investors they may have a great technology, product or service offering that secures the initial attention of these same investors, but they have not spent the necessary time to properly rationalize their financial projections and as such will often immediately lose this same investor interest.  To keep your investors’ interest, you must rationalize your financial projections so that they are logically defendable in front of these same investors.  If you do not do so, this will eliminate any chance of receiving venture funding from seasoned angels or venture capitalists.

Rationalize Your Revenue Projections from the Bottom Up

Revenue projections need to reflect reality.  Often, entrepreneurs have very unrealistic revenue projections that cannot be rationalized by any logical means.  To develop revenue projections that are rational, it is important to start from the bottom up to build out these same revenue projections. This bottom up approach will allow you to logically estimate the necessary time it takes to engage customers and then secure revenue from these same customers. It will also allow you to build up reasonable product volume projections that are realistic and rational. In addition, as an entrepreneur you need to understand the basic fundamentals of your financial projections including, revenue sources, gross margins, operating costs, and net margins.  If you have not spent the time to understand the fundamentals of your start-up company’s business model and the rationalized your financial projections based on these fundamentals, your financial statements will not hold up to the scrutiny of seasoned investors.  Therefore, take the time to rationalize your revenue projections from the bottom up. By doing so, you have then developed a logical approach to building up your financial statements that will serve you well in front of your potential investors.

Rationalize Your Development Costs

Another step in developing defendable financial statements is to present development costs that also reflect reality.  Investors are always worried that it will take twice as long and cost twice as much money for an entrepreneur to develop and then introduce their technology, product or service offerings to the market.  As such, they are wary of overly optimistic development cost projections. Therefore, again, it is important to start from the bottom up and build out your development cost projections and staffing requirements.  Here, you need to take into consideration when your initial technology, product or service offering is to be introduced into the market and how many individuals will be required for this effort. You also need to take into consideration necessary ramp of staffing requirements. Too steep of a ramp, can delay development, and at the same time may leave many of these same individuals with nothing to do once their initial tasks are completed. Therefore, you need to add development staff at a rational and reasonable pace and level that not only reflects your near term development needs, but also reflects your long term staffing requirements as you introduce follow-on products into the market.   So, you need to be prudent and hire only the necessary development staff that fits your start-up company’s near term development needs and at the same time also reflects your long term product roadmap and its development staffing requirements.  Therefore, take the necessary time to rationalize you and development staff the costs associated with it.  Again, this will serve you well in front of your potential investors.

Identify and Delineate Significant Delivery Milestones

One of the biggest mistakes entrepreneurs make is to not identify their significant development and delivery milestones to potential investors.  That is, they do not delineate those significant milestones that will be delivered for the targeted amount of funding they are requesting.  Once you rationalize your revenue projections and development costs, as an entrepreneur, you need to identify and then delineate, in a rational manner, what the significant milestone deliverables are for this investment.  Accordingly, most start-up companies require multiple rounds of funding, so investors need to know what significant milestones will be delivered for each round of funding.  Do you have a beta product at the end of your first round of funding?  When can you begin to secure revenue from your customers?  In essence, you need to delineate to investors what you are delivering in terms of significant milestones to get your start-up company to the next level of funding or into the market.  Anything less is not acceptable.  Finally, by delineating your milestone deliverables, investors have something to measure you by to determine if you are performing according to your original pre-funding plan. So, as an entrepreneur take the time to properly identify and delineate the appropriate significant milestones as this will allow investors understand what they will be receiving for their investment. 

Before you get in front of any investors, you need to properly rationalize your financial projections.  To do this, you need to delineate your revenue projections, determine your development costs, and identify significant milestones.  By doing so, you will be developing a logical representation of your business model and its financial projections.  In addition, you will be determining the necessary staffing requirements that reflect your start-up company’s near term and long term development requirements. Finally, you will be delineating to your investors the necessary delivery milestones that will not only add value to your start-up company, but provide measureable tasks in which investors can determine your performance.  So, take the time to rationalize your financial projections as it will serve you well in front of your potential investors.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.  For more information on the book go to www.carlsbadpublishing.com.

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January 18, 2010 - Posted by | Venture Capital | , , , , , , , ,

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