Funding for innovative startups @ Inholland Unversity of Applied Sciences

FINANCIAL PLANNING & FUNDING
FOR INNOVATIVE STARTUPS
Benno Groosman MScBA – www.groosman.co – Delft 10/1/2019, for: Inholland University of Applied Sciences

THE SLIDES ARE ONLINE ALREADY!
www.slideshare.net/benno_groosman
www.groosman.coPLANNING & FUNDING

BENNO GROOSMAN
 MSc Entrepreneurship & New BusinessVenturing
 10 years medtech entrepreneur
 Award winning health care company with 3 international patents and
multiple products, €1.4M funding and 2 products on the market
 Involved in multiple startups and experience with multiple incubators and
accelerators worldwide (Brazil, Athens, Hungary, Germany, etc.)
Now:
 Founder Groosman.co Startups
 Co-founder & CEO Surge-on Medical: patented innovations for surgery
 CFO & shareholderVirtualMedSchool: online training for doctors and nurses

TODAY’S SCHEDULE
 Introduction to funding language + business planning;
 Determining funding need + milestone-based funding;
 Building your financial investment plan;
 Investor readiness (bonus).

DEFINITION: FUNDING
Providing financial resources
to finance a startup,
program, or project.

WHAT FUNDING IS NOT…
… a startup’s ultimate goal.

… a guarantee for success.

… replacing the need for customers
and revenues.

… only business angels and venture
capitalists.

DOYOU REALLYWANTTO RAISE MONEY?
First, get money from:
 Selling your test product;
 Make customers pay in advance (or sell MVP);
 Use government subsidies and grants;
 Consultancy (but don’t loose your focus!);
 (Ask to) pay your suppliers later.
...TO BE ABLETO MAKE A BETTER DEAL.

DOYOU REALLYWANTTO RAISE MONEY?
Think now about
your alternative
(financial) sources.

WHATYOU HAVETO PREPARE
Elevator pitch
Pitch deck
Business plan
Go to market strategy
Exit strategy
What do you want to give in return for the funding?

Start with the business plan and then make a pitch deck
out of that.
If the other party gets interested by your pitch deck, you
will have to send a business plan almost directly.
98% of the startups need a business plan to raise money.

Reserve time to finish
your business plan,
make it a priority!

WHENTO START SEARCHING
FOR FUNDING?
Best position to negotiate is when you don’t really need
the money yet. Investors (or you!) can delay the deal
making, so make sure you have a financial buffer.
Investment lead time:
Informal investors / business angels: 3 months.
VC funds: 6 to 12 months.
+ time you need to get to get them in your network!

MILESTONE FUNDING &
FUNDING NEED

INTHIS PART
Value-adding activities
Milestone-based funding
Your funding need and match with stages
What’s next?
PLANNING & FUNDING www.groosman.co

VALUE-ADDING ACTIVITIES/RESULTS
 Work on prototype (R&D)
 Direct customer acquisition
 Successful patent applications
 Strategic partnerships
 Improve product/market fit
 Clear go-to-market strategy
 Improve your team
 … and more

Not: beautiful logo, business cards and website
Not: a great CRM system without customers
Not: adding more and more features to product
Not: visiting events or exhibitions without a clear
goal and result
Not: Facebook likes or blog readers you didn’t
monetize

What shouldYOU
do to add value to
your startup?

FUNDING NEED AND STARTUP STAGE

FUNDING FROM EARLYTO LATER STAGE
 Friends, family and fools
 Governments, universities, larger companies
 Crowdfunding and crowd-investing
 Business angels (informal investors)
 Launching customers
 Banks
 Venture capital funds
 Private equity / IPO / exit
 … and more

FUNDING NEED AND STARTUP STAGE
Do you know what
source of money fits
your startup stage?

MY DEFINITION: MILESTONE
A milestone is the concrete
achievement of a significant step in
your venture planning, which adds
financial value to your venture.

MILESTONE-BASED FUNDING
Define the milestones in your startup plan
Determine the amount of money and time
you need to reach each milestone
Match milestones with available funding
sources
Can you combine the milestones for
funding?

MILESTONE-BASED FUNDING QUICK SHEET

Download at:
Excel: http://bit.ly/MBF-excel
Pdf: http://bit.ly/MBF-pdf
Example: http://bit.ly/MBF-example

MILESTONE-BASED FUNDING
It’s easier to get milestones funded than activities or the
total costs for years in the future
Milestones make you and your financers focus on the
big picture, instead of daily operations
It’s possible to secure the funding of different
milestones by combining the commitment of different
(types of) funding sources in advance: you could capture
these in one investment contract (with options)

FUNDING NEED
Ask the money that you really need,
not too little,
and about 10-20% extra for unforeseen expenses,
to achieve the milestone(s) you are aiming for.

Take 5 minutes to fill
in the sheet and 5
minutes to discuss
with your neighbor.PLANNING & FUNDING www.groosman.co

BUILDINGYOUR
FINANCIAL INVESTMENT PLAN

INTHIS PART
Scope
From milestones to investment table
How to make assumptions
Cash flow and liquidity
Revenue and profits
Valuation

SCOPE
 The financial plan is part of your business plan
 See for example http://www.slideshare.net/benno_groosman/funding-
for-innovative-startups-part-1-of-5
 In this presentation I focus on new ventures that need (high) initial
investments and deal with future uncertainty and risk
 Though, the basics work for other types of ventures too
 This is an introduction; your financial plan requires a lot of practice and
updating.
 There are many ways of presenting your numbers; I show how I did it in my
(funded) business plans and included these examples.

FROM MILESTONESTO INVESTMENTTABLE
The milestone planning gives you an
indication of the amount of money you need
and when you need this
In your business plan you don’t only present
the total costs of each milestone, but you
also split it to the category of costs (e.g.
R&D, salary, office, materials)

EXAMPLE INVESTMENTTABLE MEDTECH

EXAMPLE INVESTMENTTABLE MEDTECH
(TYPE OF COSTS)
Note: you can define your own categories, this is just an example

ASSUMPTIONS
 After the milestone planning and the investment table you have
an idea of the amount of money you need to raise
 In order to raise money you have to show financial projections
for the future
 For these projections you have to make estimates of costs and
revenues
 In new ventures these estimates are assumptions
 The number is not very important, how defendable the
assumptions are to get to this number is the most important!

HOWTO MAKE ASSUMPTIONS ON REVENUE
Percentage of the total market
Use only in rare cases. Investors don’t like the phrase
“we will capture only 0.1% of the market and still will
make millions”
A percentage of the total market can be feasible when
you only take the local market or a very specific niche
market
It’s good to know the market size, but to determine
your share it is better to use the next options

Revenues followed by a sound sales plan
Look at your operations now and after successful
funding and make a sales plan
For example: there are 200 big customers in my
country, we visit two of them every week and expect a
10% conversion, leading to 52*2*0.1 = ~10 customers
in year 1.

 Compare with substitute and complementary products or
competitors
 In case you sell “green roofs” for new houses, you need to
know how many new houses are being build. Additionally you
can compare with the size and growth of young competitors.
What can you do different to capture your part of the market?
 If you have a new product that will replace another type of
product, see the market of the substitute product and
determine the likelihood that somebody would switch to your
product.

Build an operational plan for first years, then add a
growth percentage after
Take the previous suggestions to make assumptions
and plan the first 3 years
For the other years you can add growth percentages
that are reasonable in your market, this can be any
number from 20% to 1000% in general (many
exceptions apply)

ASSUMPTIONS (EXAMPLE)
“For the cash flow prognosis a conservative, base scenario was chosen.
Only from 2018 we calculate revenues out of a sale of initially 3 to 20
products per month by end 2020 (target price €2000 start and €1500
end of this period). End 2017 we expect to have IP license income and
production deals with strategic partners (of which one already signed a
first right of refusal).
The costs for maintenance of our patents are included.The IP license
costs are also included.A 25% cost for production is taken of the
product sales.As it is a medical product, certification costs are taken
into account.The overhead costs consist of rent, office, administrative
and regular insurance costs. Paying back loans is included in the
prognosis.”

CASH FLOW AND LIQUIDITY
Cashflow is the moment that the money reaches or
leaves your bank account (this is timed differently than
revenue or costs).
Cashflow = SUM(cashflow in – cashflow out)
Liquidity = Start number bank account + cashflow

CASHFLOW STATEMENT
You can define your own cash
inflow and outflow categories,
but keep the number of
posts limited.

LIQUIDITY
The liquidity (money on your bank account and cash) is
crucial for a startup, this determines the survival of the
venture
If you don’t have money to pay obligations:
For this reason the prognosis per month is required
A negative liquidity gives the need for additional
funding (on top of the funding need that came from
your investment table)

LIQUIDITY
What is the extra funding
needed on the next slide?
(considering that the cashflow cannot be changed)

LIQUIDITY

LIQUIDITY
Although the liquidity at the end of the year is -47,7k, the lowest
number is -62,5k and therefor 62,5k is the minimal required extra
funding amount (on top of the 100k + 83,2k in the cashflow statement)

EXAMPLE 5-YEAR CASHFLOW AND
LIQUIDITY STATEMENT (QUARTERLY)

EXAMPLE 5-YEAR CASHFLOW AND
LIQUIDITY STATEMENT (QUARTERLY)
Download from: http://bit.ly/CF-example-xlsx and adjust it
to make your own statements
(or download clean version: http://bit.ly/CF-clean)

REVENUE AND PROFIT
If you agree on a sale or purchase today, the revenue or
cost occurs today
The cashflow in or out, occurs days to months later or
earlier though
Therefor is your cashflow and liquidity statement not
the same as your revenue, profit and loss statement

REVENUE AND PROFIT
For example: a product you deliver to a customer at
28-12-2018 with a 3 week payment term, does not show
up in your 2018 cashflow in (because the payment is in
2019), but does show up in the revenues that year
But: the costs for making that product (cashflow out and
cost) usually do both occur in 2018

INVESTOR READINESS
(BONUS FOR IF YOU REALLY START YOUR VENTURE)

SCOPE
This is not a presentation on negotiation tactics, but:
Preparation and understanding of the process will help
you in the deal making and negotiation
You can only start negotiations if you meet the
minimum requirements (the investor has to be
interested, you have to be prepared)
The better you present your case, the better the deal
you can get

PREPARATION (1/2)
Business plan with financial plan
 http://www.slideshare.net/benno_groosman/funding-for-innovative-startups-part-1-of-5
Know your funding need
Presentation / pitch deck

PREPARATION (2/2)
Lawyer and accountant
 Build your relation before you have to review your contracts or guide the negotiations: this
will save time and improve quality
Other experienced entrepreneur
 Before and during the investment process, find somebody with experience that can help you
Timeline
 When do you need the money? How do you want to go through the process?Take control!
Contact multiple investors
 Don’t bet on one horse
 More investors can share the risk and increase the funding
 Make sure they all have the same information and know the timeline

VALUATION
Science, art
or random?

VALUATION
Valuation of startups is not just a numbers game. It’s
more about expectations, feelings, investment limits etc.
But, start to quantify your value by:
Discounted cash flow;
Real option pricing;
Comparing to other startups.

VALUATION
DISCOUNTED CASHFLOW
 Take the total cashflow for each year
 In the 5 year prognosis at http://bit.ly/CF-
example-xlsx this is €18.800; € 153.500; € 87.615;
-€ 14.963 € 113.460 in year 1, 2, 3, 4 and 5
 The discount rate is 0,15 (15 percent)
 =18800/1,15+153500/(1,15^2)+87615/(1,15^3)+(-
14963)/(1,15^4)+113460/(1,15^5)
 So, the DCF is €237.878 in 5 years
 In this example, the number is not totally fair, as
it also includes the funding in these 5 years

VALUATION
REAL OPTION PRICING
NPV = -1000 + 0.7*0.3*100 + 0.7*0.5*3000 + 0.7*0.2*6000 + 0.3*0 = 1471
investment
1000
succes
low
1000
medium
3000
high
10000
failure
0
0.7
0.3
0.5
0.2
0.3

VALUATION
COMPARINGTO OTHER STARTUPS
 Find comparable startups (stage and market) and look for
(public) data on the investments they made, talk with them
or people in their circle.
 Check websites like www.crunchbase.com for this too
 Valuation also depends on the investor’s previous
investments, if you find that an investor takes 20-30%
equity for €250k-350k this investor might look for valuations
from €833k to €1.75M
 Serial entrepreneur: look at your previous comparable
startups (stage and market) and add a premium valuation
for experience and network

VALUATION
OTHER
Investor policy, e.g. “the maximum post-money
valuation for seed money is $2M”
Investor divides the numbers the entrepreneur
provides by 10
… entrepreneur knows, so multiplies by 10, etc.
Profit times 5, revenue times 2 (or any number),
industry multipliers, β
Tens of other methods

THE INVESTMENT PROCESS
GO / NO GO decision after every stage in the deal making process:
 First contact, pitch
 Personal connection
 Business plan and/or presentation
 Term sheet
 Negotiations
 Signing term sheet (exclusivity phase investor)
 Due diligence
 Participation contract
 Deposit of money and changes of legal structure

AFTERTHE INVESTMENT
• Keep working on the relationship with your investor
• Get used to an extra decision maker in your team
• Prepare for more financial and strategic reporting
• Use the network and time of the investor wisely
• Keep looking for additional funding and investors: your
investor will help with contacts and negotiating with
them or provide even an additional round of funding

WHAT INVESTORS ASSESS ON
 Team (experience, expertise, complementarity)
 Product/market fit
 Intellectual Property
 Traction
 Revenues
 Match with fund
 Manageable risks
 Stage

NEGOTIATION
www.groosman.co
www.linkedin.com/pulse/negotiation-
frank-chenPLANNING & FUNDING

NEGOTIATION
First, you negotiate for your company! Some
personal goals can conflict with what’s best for
your venture.
The best result is getting a balanced and fair deal
that you understand, while maintaining a good
relationship with the investor.

NEGOTIATION
Prepare the necessary documentation (business
plan and more), the right support (experienced
people), and know what you want to achieve.
Have a plan B. Many (if not most) deals never
happen.
Realize that in a new round, you’ll negotiate new
terms (triggered by the new investor).

OTHER RESOURCES ON FUNDING
Online:
www.crunchbase.com
www.askthevc.com
www.groosman.co / www.slideshare.net/benno_groosman
Books:
 Venture deals (be smarter than your lawyer and venture capitalist), Brad
Feld & Jason Mendelson
 The Art of Startup Fundraising: Pitching Investors, Negotiating the Deal,
and Everything Else Entrepreneurs Need to Know, Alejandro Cremades

QUESTIONS?
& FOLLOW ME →
Benno Groosman MScBA
Serial medtech entrepreneur
www.groosman.co | www.surge-on.eu | www.virtualmedschool.com
www.linkedin.com/in/groosman
www.twitter.com/benno_groosman
www.facebook.com/Groosman.co

Funding for innovative startups @ Inholland Unversity of Applied Sciences

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Funding for innovative startups @ Inholland Unversity of Applied Sciences