After providing details on management, you have hopefully given investors confidence in your team’s ability to deliver on the company’s vision. Now it is time to turn to the financial aspects of the company and investment opportunity.
In presenting your company’s financials, you want to give investors an idea of the company’s revenue/profit potential. The usual way to do this is to show a summarized income statement. You would want to show a projection of the company’s revenue and income for 3-5 years into the future. If your company has been in operation for prior years, you would also want to show the actual results for revenue/income for these years. As any future predictions of revenue/income are going to be very speculative for an early stage company, the methodology you have used in building up the projections will be more important than the actual numbers themselves.
In a previous article we spoke about market size and revenue potential. You would pull in your revenue numbers you came up with to show how the company’s revenue will grow as you build your company. Just as you did a bottom up exercise to determine your revenue numbers, you would want to do a similar exercise to determine expense items. Against revenue you would want to identify your variable and fixed costs. Variable costs are any costs that are directly proportional to a unit of your product that is sold (i.e. cost to manufacture the product, credit card processing costs, etc). Fixed costs are more tied to the overall growth and size of your company (i.e. management salaries, rent, legal fees, insurance, etc). In your investment presentation you will want to show your income statement on an annual basis with separate lines for each major revenue or expense items. Typically you would show your revenue minus operating expenses to come up with EBITDA. EBITDA provides a picture of the earning potential of a company based on operations.
Investors will look your financials to try understand things such as:
Revenue potential- How much revenue can the company make & how quickly does revenue grow. As an acquisition of the company may be benchmarked on a multiple of revenue, this can provide some insight into what the company may be worth upon exit.
Expense items – Have you accounted for all expense items? Have you allocated a reasonable amount for each item? How much contingency have you built in?
Cash requirements – Until a company can fund itself, any shortfall will need to be made up with cash from an equity investment or debt. Based on how much you are asking for in this round of investment, this will give a picture of how long it will last and what future requirements will be until the company can self fund itself.
Income potential – Once a company becomes profitable, it can potentially pay out dividends to shareholders. A company that throws off good cash flow may provide the investor’s return based on its dividend potential. Alternately, if the company were to be acquired its value may be benchmarked on a multiple of income.
In addition to the income statement, you will want to show a balance sheet if your company has any significant assets or debt.
After presenting an overview of your company’s financial picture, you will want to provide details on the investment you are seeking. How much, at what valuation, and through what type of investment vehicle. As these are important and detailed topics, I will cover them in future articles on valuation and term sheets.
Lastly you want to provide details on the exit strategy for investors. This is probably the most overlooked area that entrepreneurs forget in their presentations. As a founder, you are understandably focused on building and growing your company. However, remember to put yourself in investor’s shoes and see things from their viewpoint. They are writing you a cheque with the expectation that in the future they will get their money back with a significant return. Investors will want to know how they will realize an exit. This could happen through means such as a sale of the company, the company paying dividends, the company re-purchasing investors’ shares, or the company going public. Although going public is what you generally hear about in the news, its probably not going to be the most likely source of exit for an early stage startup company. Most likely an exit will be a result of the company being purchased by an established company looking to take out a source of competition, expand their product offering, gain technology, buy market share, etc. As such, when you speak about an exit you should identify established companies that may be in the market to acquire your company and how much the companies were sold for.