Subject: VCEF

Textbook Chapter 7

Summary

Financial Plan: Forecasting

• Importance of financial planning to entrepreneur
  • Help assess how much and when cash is needed for business
  • Help determine pursuing venture, change biz model or pivot → Examine viability
  • Conduct scenario and sensitivity analysis
    • Worst case and best cast (super growth) scenario
  • Help determine key underlying assumptions
  • Marketing tool to convince investors
• Most important part of the financial plan is cash forecast or pro-forma cash flow statement
  • However, P&L or Income statement needs to be forecasted first
• Financial plan should go as a minimum, until next investment round
• Steps for forecasting
  1. Revenue Forecast
     • Level of attainable sales given market demand and resources
     • Price * Quantity
       • Quantity can be determined top-down or bottom up
         • Top-Down: Start with Total Available Market (TAM) and forecast market capture
         • Bottom-Up: Start with serviceable available market (SAM), then find Serviceable Obtainable Market (SOM), then assess time to revenue gen
           • Take into account: Sales funnel, selling capacity of channels, speed of operation scaling, CAC, CLV
  2. P&L: EBIT
     1. COGS
     2. Other Op Expenses
        1. R&D
        2. S&M
        3. G&A
  3. Cash Flow: FCF
     • Based on EBIT and working capital policy + CAPEX
     1. Cash from Op
     2. Cash from Invest
  4. Ending Cash before financing activities
     1. Beginning Cash
     2. Cash Balance
• Uses of Financial Plan
  • Assess viability of business
  • Assess burn rate
  • Setting Price on shares → Valuation
  • Develop Fundraising Strategy
    • 6-9 months before
    • With some cushion for safety
    • Relationship with investors should be built ongoing
    • Requires intense time and energy during fundraising time
• Dealing with uncertainty
  • Sensitivity Analysis - impact to model by change of one assumption
  • Scenario Analysis - different options in biz model and expansion strategy

Notes

• Cash consumption rate = Cash Burn Rate
• Cash usage determines "runway" of time before running out of cash
  • Runway should be higher than 6 months at all times
• Valley of death = time taken until positive cash flow generation
• Wise to anticipate safety cushion in fundraising (above forecasted)