WEBVTT 00:00:00.000 --> 00:00:02.432 align:middle line:90% [SQUEAKING] 00:00:02.432 --> 00:00:04.364 align:middle line:90% [RUSTLING] 00:00:04.364 --> 00:00:06.296 align:middle line:90% [CLICKING] 00:00:06.296 --> 00:00:10.460 align:middle line:90% 00:00:10.460 --> 00:00:11.680 align:middle line:90% JOSEPH HADZIMA: OK. 00:00:11.680 --> 00:00:14.880 align:middle line:84% One of the things about having the financial sources panel 00:00:14.880 --> 00:00:17.800 align:middle line:84% is when it's over, the panel gets 00:00:17.800 --> 00:00:20.280 align:middle line:84% inundated with all sorts of great questions and people 00:00:20.280 --> 00:00:21.740 align:middle line:90% wanting to connect with them. 00:00:21.740 --> 00:00:26.600 align:middle line:84% So I'm sure they're amenable outside of class also. 00:00:26.600 --> 00:00:29.300 align:middle line:84% But now we're going to turn to financial projections, 00:00:29.300 --> 00:00:31.280 align:middle line:90% as I said. 00:00:31.280 --> 00:00:32.900 align:middle line:84% You've done all this stuff before. 00:00:32.900 --> 00:00:35.400 align:middle line:84% We've talked about who's your customer, what's 00:00:35.400 --> 00:00:37.560 align:middle line:84% your business model, how to assemble 00:00:37.560 --> 00:00:40.480 align:middle line:90% a team, a bunch of legal things. 00:00:40.480 --> 00:00:43.360 align:middle line:84% Now you're ready to maybe figure out 00:00:43.360 --> 00:00:46.240 align:middle line:84% the resources you need in order to make this venture 00:00:46.240 --> 00:00:48.400 align:middle line:90% idea possible. 00:00:48.400 --> 00:00:50.520 align:middle line:84% And so the core part of that is doing 00:00:50.520 --> 00:00:52.880 align:middle line:90% some of financial projections. 00:00:52.880 --> 00:00:55.560 align:middle line:84% And tonight, Steve Derezinski is going to lead us 00:00:55.560 --> 00:00:57.600 align:middle line:90% through financial projections. 00:00:57.600 --> 00:01:01.770 align:middle line:84% And even if you have done accounting and all that, 00:01:01.770 --> 00:01:03.130 align:middle line:90% you'll learn a lot from this. 00:01:03.130 --> 00:01:06.695 align:middle line:90% So Steve, will you take it over? 00:01:06.695 --> 00:01:08.070 align:middle line:84% STEVE DEREZINSKI: Thank you, Joe. 00:01:08.070 --> 00:01:09.112 align:middle line:90% Oh my gosh, look at that. 00:01:09.112 --> 00:01:10.950 align:middle line:90% It's on. 00:01:10.950 --> 00:01:11.970 align:middle line:90% How are you guys doing? 00:01:11.970 --> 00:01:16.390 align:middle line:84% Thank you for joining me for Financial Projections in 10-250 00:01:16.390 --> 00:01:18.710 align:middle line:90% on a cold January evening. 00:01:18.710 --> 00:01:20.190 align:middle line:90% I'm Steve Derezinski. 00:01:20.190 --> 00:01:22.810 align:middle line:84% I am a mechanical engineer by training. 00:01:22.810 --> 00:01:25.510 align:middle line:84% So I bet you thought I was going to be a CFO or an accountant 00:01:25.510 --> 00:01:26.550 align:middle line:90% or something. 00:01:26.550 --> 00:01:27.130 align:middle line:90% I'm not. 00:01:27.130 --> 00:01:29.230 align:middle line:84% I've done a whole bunch of startups. 00:01:29.230 --> 00:01:31.850 align:middle line:84% A lot of the stuff these guys were talking about on the panel, 00:01:31.850 --> 00:01:33.490 align:middle line:90% I've done a lot of that stuff. 00:01:33.490 --> 00:01:37.710 align:middle line:84% And I went down to Georgia Tech and I formed the first faculty 00:01:37.710 --> 00:01:41.030 align:middle line:84% venture studio, launching companies from university 00:01:41.030 --> 00:01:42.830 align:middle line:90% research down there. 00:01:42.830 --> 00:01:44.790 align:middle line:84% And then I came back up and went to Sloan 00:01:44.790 --> 00:01:46.210 align:middle line:90% and got a Sloan fellow degree. 00:01:46.210 --> 00:01:49.830 align:middle line:84% So if it sounds like a roboticist is 00:01:49.830 --> 00:01:53.930 align:middle line:84% describing financial projections to you, you're right. 00:01:53.930 --> 00:01:55.690 align:middle line:84% It is a roboticist explaining that to you. 00:01:55.690 --> 00:01:59.050 align:middle line:84% And if it also sounds like an MBA is explaining it to you, 00:01:59.050 --> 00:01:59.870 align:middle line:90% you're right. 00:01:59.870 --> 00:02:03.210 align:middle line:84% If it sounds like an accountant, that's not me. 00:02:03.210 --> 00:02:06.390 align:middle line:84% I'm parroting Charlie, then, that would be coming from. 00:02:06.390 --> 00:02:09.009 align:middle line:84% So today I'm running Kendall Square Cofoundry, 00:02:09.009 --> 00:02:11.910 align:middle line:84% which is forming a bunch of companies out of Kendall Square. 00:02:11.910 --> 00:02:14.310 align:middle line:84% And if you look up Georgia Tech Venture Lab, 00:02:14.310 --> 00:02:16.890 align:middle line:84% that's gone on to raise about $2 billion 00:02:16.890 --> 00:02:20.430 align:middle line:84% and launch a whole bunch of companies out of Georgia Tech 00:02:20.430 --> 00:02:23.290 align:middle line:90% University down in Atlanta. 00:02:23.290 --> 00:02:24.690 align:middle line:90% OK, let's get into it. 00:02:24.690 --> 00:02:28.110 align:middle line:84% And I think, does everybody know the slides 00:02:28.110 --> 00:02:31.448 align:middle line:84% are available on the website as well as the spreadsheets? 00:02:31.448 --> 00:02:32.990 align:middle line:84% And I'm sure you're all going to love 00:02:32.990 --> 00:02:35.710 align:middle line:90% to dive into the spreadsheets. 00:02:35.710 --> 00:02:37.950 align:middle line:84% Why do you want to have business plan financials? 00:02:37.950 --> 00:02:39.730 align:middle line:84% And what is it that VCs want to know? 00:02:39.730 --> 00:02:40.390 align:middle line:90% We're going to cover that. 00:02:40.390 --> 00:02:43.090 align:middle line:84% And the $100K judges I assume all of you guys are applied for. 00:02:43.090 --> 00:02:44.090 align:middle line:90% Or maybe it's already over. 00:02:44.090 --> 00:02:44.840 align:middle line:90% I don't even know. 00:02:44.840 --> 00:02:45.605 align:middle line:90% Is the $100K over? 00:02:45.605 --> 00:02:46.730 align:middle line:90% It's still about to happen? 00:02:46.730 --> 00:02:48.130 align:middle line:84% OK, you're going to make it happen. 00:02:48.130 --> 00:02:49.172 align:middle line:90% What is a business model? 00:02:49.172 --> 00:02:51.290 align:middle line:84% You'll get my answer of what is a business model. 00:02:51.290 --> 00:02:52.998 align:middle line:84% I kind of like that question because it's 00:02:52.998 --> 00:02:55.750 align:middle line:90% open for interpretation. 00:02:55.750 --> 00:02:57.960 align:middle line:84% And maybe Joe has a specific definition. 00:02:57.960 --> 00:02:59.460 align:middle line:84% Building your financial projections, 00:02:59.460 --> 00:03:00.880 align:middle line:84% and then finally sharing the pie, 00:03:00.880 --> 00:03:02.280 align:middle line:90% which is an equity discussion. 00:03:02.280 --> 00:03:04.320 align:middle line:84% So that's a very interesting conversation, 00:03:04.320 --> 00:03:06.380 align:middle line:84% especially as you guys are early in navigating 00:03:06.380 --> 00:03:08.422 align:middle line:84% kind of I'm the first founder and I'm 00:03:08.422 --> 00:03:10.380 align:middle line:84% bringing in a co-founder, and then I'm bringing 00:03:10.380 --> 00:03:12.200 align:middle line:90% in a third key employee. 00:03:12.200 --> 00:03:14.140 align:middle line:84% And how do we figure out how to share the pie 00:03:14.140 --> 00:03:16.300 align:middle line:90% and what's fair for everybody? 00:03:16.300 --> 00:03:18.920 align:middle line:84% A lot of scars by a lot of other founders on that. 00:03:18.920 --> 00:03:20.680 align:middle line:84% We'll talk about that at the last. 00:03:20.680 --> 00:03:25.020 align:middle line:84% That's the pie at the end, if you will. 00:03:25.020 --> 00:03:27.353 align:middle line:84% And of course, I was exactly feeling 00:03:27.353 --> 00:03:29.520 align:middle line:84% this way when I was first starting my first company. 00:03:29.520 --> 00:03:31.040 align:middle line:84% I'm too busy to do this financials. 00:03:31.040 --> 00:03:32.748 align:middle line:84% Can't we just get an accountant to do it? 00:03:32.748 --> 00:03:33.960 align:middle line:90% What's the point? 00:03:33.960 --> 00:03:34.960 align:middle line:90% It's going to be wrong. 00:03:34.960 --> 00:03:35.880 align:middle line:90% I don't need this. 00:03:35.880 --> 00:03:36.960 align:middle line:90% The VCs don't believe it anyway. 00:03:36.960 --> 00:03:38.240 align:middle line:84% It's like, yeah, yeah, it's up and to the right. 00:03:38.240 --> 00:03:38.782 align:middle line:90% We know that. 00:03:38.782 --> 00:03:40.865 align:middle line:84% Why are you boring me with all this stuff? 00:03:40.865 --> 00:03:43.240 align:middle line:84% I have more important things to do, like build a product, 00:03:43.240 --> 00:03:46.320 align:middle line:84% deal with the technology, find customers hire people. 00:03:46.320 --> 00:03:47.842 align:middle line:90% My team's all in disarray. 00:03:47.842 --> 00:03:49.300 align:middle line:84% I got to do all that kind of stuff. 00:03:49.300 --> 00:03:52.320 align:middle line:84% So here's why you need good financial projections. 00:03:52.320 --> 00:03:54.340 align:middle line:84% And I have to tell you that this absolutely 00:03:54.340 --> 00:03:55.970 align:middle line:90% was me as an engineer. 00:03:55.970 --> 00:03:58.030 align:middle line:84% I'm like, ah, that's just the finance stuff. 00:03:58.030 --> 00:04:02.290 align:middle line:84% But then I've grown to love it and understand it. 00:04:02.290 --> 00:04:04.310 align:middle line:84% Cash is the oxygen. We used to say 00:04:04.310 --> 00:04:06.750 align:middle line:84% cash was like the blood or the food of the venture. 00:04:06.750 --> 00:04:09.590 align:middle line:84% It's the oxygen. How long can you go without food? 00:04:09.590 --> 00:04:10.368 align:middle line:90% Pretty long time. 00:04:10.368 --> 00:04:11.910 align:middle line:84% How long could you go without oxygen? 00:04:11.910 --> 00:04:13.070 align:middle line:90% Not very long. 00:04:13.070 --> 00:04:16.130 align:middle line:84% So you really need to take care of your cash. 00:04:16.130 --> 00:04:19.089 align:middle line:84% And financials are the scorecard and the roadmap 00:04:19.089 --> 00:04:20.990 align:middle line:90% to determine your cash needs. 00:04:20.990 --> 00:04:22.830 align:middle line:84% And if you don't have a good plan for that, 00:04:22.830 --> 00:04:25.170 align:middle line:90% you're in real trouble. 00:04:25.170 --> 00:04:27.230 align:middle line:84% It's also the vehicle to obtain that cash. 00:04:27.230 --> 00:04:30.130 align:middle line:84% So if you're talking to any financial advisor 00:04:30.130 --> 00:04:31.890 align:middle line:84% or any investor, they're going to want 00:04:31.890 --> 00:04:34.610 align:middle line:84% to know that you understand the financials of your business 00:04:34.610 --> 00:04:38.110 align:middle line:84% and what it runs-- understanding your business, the assumptions, 00:04:38.110 --> 00:04:40.690 align:middle line:90% the drivers, the milestones. 00:04:40.690 --> 00:04:44.290 align:middle line:84% And then, of course, what every bank officer wants to know, 00:04:44.290 --> 00:04:46.310 align:middle line:84% which is what is your exposures or risks. 00:04:46.310 --> 00:04:48.370 align:middle line:84% So if any of you guys are financially trained, 00:04:48.370 --> 00:04:51.610 align:middle line:84% you know that that's how most people think, like, 00:04:51.610 --> 00:04:53.210 align:middle line:90% what's the downside? 00:04:53.210 --> 00:04:55.730 align:middle line:84% As entrepreneurs, you're always like, rah, rah, here's 00:04:55.730 --> 00:04:56.258 align:middle line:90% the upside. 00:04:56.258 --> 00:04:58.050 align:middle line:84% And then you go meet a banker and they talk 00:04:58.050 --> 00:05:00.303 align:middle line:90% about what's the downside risk. 00:05:00.303 --> 00:05:02.470 align:middle line:84% Actually, I was just having a meeting the other day. 00:05:02.470 --> 00:05:03.887 align:middle line:84% And I was like, you guys just talk 00:05:03.887 --> 00:05:06.390 align:middle line:84% nothing but depressing things, like where are all the risks? 00:05:06.390 --> 00:05:08.390 align:middle line:84% Sure there's risks, but man, look at the upside. 00:05:08.390 --> 00:05:10.810 align:middle line:90% Let's rock and roll here. 00:05:10.810 --> 00:05:13.197 align:middle line:84% And of course, the famous quote, failure to plan 00:05:13.197 --> 00:05:14.030 align:middle line:90% is planning to fail. 00:05:14.030 --> 00:05:17.370 align:middle line:84% So really what you're doing when you're driving into building 00:05:17.370 --> 00:05:19.570 align:middle line:84% a financial model is that you're developing 00:05:19.570 --> 00:05:23.490 align:middle line:84% this kind of visceral, direct understanding of exactly 00:05:23.490 --> 00:05:26.970 align:middle line:84% where your costs lie and what the revenue projections 00:05:26.970 --> 00:05:28.090 align:middle line:90% are going to look like. 00:05:28.090 --> 00:05:32.430 align:middle line:84% And you can't AI your way into figuring that out. 00:05:32.430 --> 00:05:34.290 align:middle line:84% You have to dive into the spreadsheets 00:05:34.290 --> 00:05:36.875 align:middle line:84% and really understand it and flesh it around. 00:05:36.875 --> 00:05:39.250 align:middle line:84% And this set of spreadsheets are probably one of the best 00:05:39.250 --> 00:05:41.410 align:middle line:84% out there in terms of setting things up 00:05:41.410 --> 00:05:47.330 align:middle line:84% to give you that low level depth of where you can tweak things 00:05:47.330 --> 00:05:50.510 align:middle line:84% and then how that bubbles up to the high level that you present. 00:05:50.510 --> 00:05:53.360 align:middle line:84% So, excited to show you guys this stuff. 00:05:53.360 --> 00:05:55.220 align:middle line:84% And of course, as the startup CEO, 00:05:55.220 --> 00:05:57.140 align:middle line:84% your job is to maintain the oxygen supply. 00:05:57.140 --> 00:05:58.920 align:middle line:84% So going back to all of that stuff 00:05:58.920 --> 00:06:01.212 align:middle line:84% about understanding your business, where your cash burn 00:06:01.212 --> 00:06:02.640 align:middle line:90% is, and everything else. 00:06:02.640 --> 00:06:05.920 align:middle line:84% You do need to understand stuff like average selling 00:06:05.920 --> 00:06:07.680 align:middle line:90% price, gross margins. 00:06:07.680 --> 00:06:10.178 align:middle line:84% Like, I've got a whole team of researchers. 00:06:10.178 --> 00:06:11.220 align:middle line:90% What are they costing me? 00:06:11.220 --> 00:06:12.660 align:middle line:90% What's the burn on that stuff? 00:06:12.660 --> 00:06:14.260 align:middle line:84% And then as soon as I start to sell, 00:06:14.260 --> 00:06:16.240 align:middle line:84% what are my what are my marketing and strategy 00:06:16.240 --> 00:06:17.180 align:middle line:90% expenses there? 00:06:17.180 --> 00:06:19.380 align:middle line:84% And then, of course, that all rolls up to, 00:06:19.380 --> 00:06:22.560 align:middle line:84% how much money do I need to raise? 00:06:22.560 --> 00:06:26.400 align:middle line:84% So you just heard a fantastic panel of VCs talk 00:06:26.400 --> 00:06:27.580 align:middle line:90% about what they want. 00:06:27.580 --> 00:06:29.220 align:middle line:84% But let's get into the numbers now. 00:06:29.220 --> 00:06:31.880 align:middle line:84% I think somebody over here asked, how much do you 00:06:31.880 --> 00:06:32.780 align:middle line:90% want to take from me? 00:06:32.780 --> 00:06:33.880 align:middle line:90% That was the question. 00:06:33.880 --> 00:06:35.380 align:middle line:84% What's the valuation of my startup? 00:06:35.380 --> 00:06:37.760 align:middle line:84% That's what you were getting at, I could tell. 00:06:37.760 --> 00:06:40.200 align:middle line:84% And this kind of gets into more detail around what they 00:06:40.200 --> 00:06:43.160 align:middle line:84% were referring to in terms of having LPs that expect 00:06:43.160 --> 00:06:44.620 align:middle line:90% kind of their fund to return. 00:06:44.620 --> 00:06:47.360 align:middle line:84% So I think Jon has, what did he say, a $30 million 00:06:47.360 --> 00:06:48.540 align:middle line:90% fund he's raising? 00:06:48.540 --> 00:06:52.790 align:middle line:84% So the LPs are going to expect, three to five times 00:06:52.790 --> 00:06:54.770 align:middle line:90% that at the fund level back. 00:06:54.770 --> 00:06:57.430 align:middle line:84% So when they look at your individual deal, 00:06:57.430 --> 00:06:59.590 align:middle line:84% you heard kind of how the power law works. 00:06:59.590 --> 00:07:03.792 align:middle line:84% They expect their 3 to 5x absolute return to blossom up 00:07:03.792 --> 00:07:05.750 align:middle line:84% into a gigantic return if they're going to make 00:07:05.750 --> 00:07:08.630 align:middle line:84% an investment across the board, given that they know-- 00:07:08.630 --> 00:07:09.350 align:middle line:90% they don't know. 00:07:09.350 --> 00:07:11.985 align:middle line:84% I mean, they expect a full return from every one of you, 00:07:11.985 --> 00:07:14.110 align:middle line:84% but they know that a bunch aren't going to work out 00:07:14.110 --> 00:07:16.190 align:middle line:90% because there's unknown risks. 00:07:16.190 --> 00:07:19.770 align:middle line:84% So it becomes tricky from the VC side of things 00:07:19.770 --> 00:07:21.790 align:middle line:84% how to manage that, and then what 00:07:21.790 --> 00:07:25.270 align:middle line:84% that means for you guys in terms of what they're expecting. 00:07:25.270 --> 00:07:28.230 align:middle line:84% Also I thought that was a great comment that Jon made about not 00:07:28.230 --> 00:07:30.090 align:middle line:90% every deal is VC fundable. 00:07:30.090 --> 00:07:32.550 align:middle line:84% So it's like, if you're only going 00:07:32.550 --> 00:07:37.350 align:middle line:84% to grow a million bucks a year, it could be a fantastic business 00:07:37.350 --> 00:07:38.870 align:middle line:84% for you to run, but it's not really 00:07:38.870 --> 00:07:41.570 align:middle line:84% VC investable because the slope isn't high enough. 00:07:41.570 --> 00:07:43.350 align:middle line:90% The IRR isn't high enough. 00:07:43.350 --> 00:07:46.930 align:middle line:84% So 4x in five years is an IRR of 32%. 00:07:46.930 --> 00:07:49.390 align:middle line:84% So that can just show you what the slope of the curve 00:07:49.390 --> 00:07:51.990 align:middle line:90% is on your financials. 00:07:51.990 --> 00:07:53.990 align:middle line:84% So they want to get a significant amount 00:07:53.990 --> 00:07:56.790 align:middle line:84% of the money they invest, at least $5 to $10 million, 00:07:56.790 --> 00:07:58.710 align:middle line:90% and own a significant ownership. 00:07:58.710 --> 00:08:01.490 align:middle line:84% The formula is simply, if you don't know this already, 00:08:01.490 --> 00:08:03.870 align:middle line:84% the dollars invested-- so if I raise $1 million 00:08:03.870 --> 00:08:08.550 align:middle line:84% and my pre-money valuation was $4 million, then they get 1/5-- 00:08:08.550 --> 00:08:11.550 align:middle line:90% 1 over 4 plus 5. 00:08:11.550 --> 00:08:14.510 align:middle line:84% That's the percentage that they own. 00:08:14.510 --> 00:08:16.150 align:middle line:84% And the argument in the discussion 00:08:16.150 --> 00:08:19.230 align:middle line:84% is the pre-money valuation that they were talking about 00:08:19.230 --> 00:08:21.690 align:middle line:84% and how you want to make sure you set that correctly. 00:08:21.690 --> 00:08:23.690 align:middle line:84% I thought that was a very interesting discussion 00:08:23.690 --> 00:08:27.530 align:middle line:84% about if you fly too close to the sun early on, 00:08:27.530 --> 00:08:29.090 align:middle line:84% then it's really hard to settle in. 00:08:29.090 --> 00:08:32.750 align:middle line:90% That was great insight. 00:08:32.750 --> 00:08:35.490 align:middle line:84% And obviously, after you raise $1 million, 00:08:35.490 --> 00:08:38.049 align:middle line:84% if your pre-money was 4, your post-money valuation is now 5. 00:08:38.049 --> 00:08:39.270 align:middle line:90% Simple, simple math. 00:08:39.270 --> 00:08:40.570 align:middle line:90% I really like simple math. 00:08:40.570 --> 00:08:42.130 align:middle line:90% It kind of makes it all set. 00:08:42.130 --> 00:08:44.910 align:middle line:84% OK, so let's run through an example. 00:08:44.910 --> 00:08:47.320 align:middle line:84% And this doesn't have pre-seed and seed on it. 00:08:47.320 --> 00:08:50.380 align:middle line:84% It just jumps right into series A. So $5 million on a $5 million 00:08:50.380 --> 00:08:54.140 align:middle line:84% pre, investor owns 50%. $10 million on a $15 million pre, 00:08:54.140 --> 00:08:58.960 align:middle line:84% investor owns 40% of the company at that point, 00:08:58.960 --> 00:09:01.820 align:middle line:84% in addition to the previous amount. 00:09:01.820 --> 00:09:05.185 align:middle line:84% But the original one is diluted by 40%. 00:09:05.185 --> 00:09:06.560 align:middle line:84% So you see how that works, right? 00:09:06.560 --> 00:09:09.185 align:middle line:84% Once I've got-- well, you'll see a full spreadsheet in a second 00:09:09.185 --> 00:09:10.100 align:middle line:90% here. 00:09:10.100 --> 00:09:13.220 align:middle line:84% So the VC has invested $15 million. 00:09:13.220 --> 00:09:16.160 align:middle line:84% They own 70% of the business at that point. 00:09:16.160 --> 00:09:19.240 align:middle line:84% And in order to target the 3 to 5x return, 00:09:19.240 --> 00:09:22.730 align:middle line:84% that $15 million has to either turn into $60 million or $90 00:09:22.730 --> 00:09:23.240 align:middle line:90% million. 00:09:23.240 --> 00:09:26.300 align:middle line:84% So that portion, that 70% they own, 00:09:26.300 --> 00:09:28.630 align:middle line:84% means that the company has to be sold for at least $85 00:09:28.630 --> 00:09:31.080 align:middle line:84% to $30 million, which also means, 00:09:31.080 --> 00:09:33.700 align:middle line:84% given that the type of company that it is, your revenues 00:09:33.700 --> 00:09:35.397 align:middle line:84% need to be between $40 and $60 million. 00:09:35.397 --> 00:09:36.980 align:middle line:84% So I just went through all that stuff. 00:09:36.980 --> 00:09:38.520 align:middle line:84% Hopefully you followed all along. 00:09:38.520 --> 00:09:41.380 align:middle line:84% But I think the most important point about this slide 00:09:41.380 --> 00:09:45.610 align:middle line:84% is that you've raised $15 million, 00:09:45.610 --> 00:09:49.200 align:middle line:84% but you need to make sure your revenues are at least $40 to $60 00:09:49.200 --> 00:09:51.370 align:middle line:84% million and growing from there in order for this 00:09:51.370 --> 00:09:52.710 align:middle line:90% to be a successful deal. 00:09:52.710 --> 00:09:57.270 align:middle line:84% So a lot of times people focus on the press release of, hey, 00:09:57.270 --> 00:09:58.430 align:middle line:90% we raised $5 million. 00:09:58.430 --> 00:09:59.490 align:middle line:90% Isn't that great? 00:09:59.490 --> 00:10:04.290 align:middle line:84% I always think, well, if you raise 0, the bar is here. 00:10:04.290 --> 00:10:06.630 align:middle line:84% If I raise $1 million, the bar is here. 00:10:06.630 --> 00:10:08.930 align:middle line:84% If I raise $5 million-- so the bar 00:10:08.930 --> 00:10:12.270 align:middle line:84% continues to go up rapidly the more money you raise. 00:10:12.270 --> 00:10:16.067 align:middle line:84% So when these guys have raised $15 million in this example, 00:10:16.067 --> 00:10:18.650 align:middle line:84% it's got to be at least $40 to $60 million in revenue in order 00:10:18.650 --> 00:10:20.610 align:middle line:90% for this to be worthwhile. 00:10:20.610 --> 00:10:23.210 align:middle line:84% So just keep that in mind as you look 00:10:23.210 --> 00:10:26.410 align:middle line:84% to figure out the financials of your business 00:10:26.410 --> 00:10:31.690 align:middle line:84% and what is the right amount of funding to take in. 00:10:31.690 --> 00:10:33.970 align:middle line:90% It's a tough balance. 00:10:33.970 --> 00:10:34.890 align:middle line:90% OK. 00:10:34.890 --> 00:10:36.850 align:middle line:84% So have you ever heard the phrase, 00:10:36.850 --> 00:10:38.532 align:middle line:84% prepare a standard set of financials? 00:10:38.532 --> 00:10:39.990 align:middle line:84% Do we have any accountants in here, 00:10:39.990 --> 00:10:43.530 align:middle line:84% anybody who's taking bookkeeping, CPA class, none 00:10:43.530 --> 00:10:44.030 align:middle line:90% of that? 00:10:44.030 --> 00:10:45.490 align:middle line:90% OK, all right. 00:10:45.490 --> 00:10:48.490 align:middle line:90% Good. 00:10:48.490 --> 00:10:51.610 align:middle line:84% A standard set of financials is a balance sheet, an income 00:10:51.610 --> 00:10:53.550 align:middle line:84% statement, and a statement of cash flows. 00:10:53.550 --> 00:10:55.842 align:middle line:84% And keep in mind you're learning this from an engineer. 00:10:55.842 --> 00:10:58.630 align:middle line:84% So an income statement is probably what you all know. 00:10:58.630 --> 00:11:00.350 align:middle line:84% It's also known as a profit and loss. 00:11:00.350 --> 00:11:02.650 align:middle line:84% You show your revenues, you take the cost of goods sold off, 00:11:02.650 --> 00:11:03.790 align:middle line:90% and you show your profit margin. 00:11:03.790 --> 00:11:06.130 align:middle line:84% That's kind of what we all know about a business, right? 00:11:06.130 --> 00:11:07.233 align:middle line:90% You're selling stuff. 00:11:07.233 --> 00:11:09.150 align:middle line:84% It costs a certain amount of money to sell it. 00:11:09.150 --> 00:11:09.910 align:middle line:90% You make a profit. 00:11:09.910 --> 00:11:10.430 align:middle line:90% Done, right? 00:11:10.430 --> 00:11:10.930 align:middle line:90% That's it. 00:11:10.930 --> 00:11:11.448 align:middle line:90% We're done. 00:11:11.448 --> 00:11:12.990 align:middle line:84% No, that's only the income statement. 00:11:12.990 --> 00:11:15.650 align:middle line:84% The balance sheet shows the assets-- 00:11:15.650 --> 00:11:17.110 align:middle line:84% which cash is an asset, of course-- 00:11:17.110 --> 00:11:18.970 align:middle line:84% but all the rest of that, maybe you have some patents 00:11:18.970 --> 00:11:21.178 align:middle line:84% or maybe you own some piece of equipment or something 00:11:21.178 --> 00:11:22.845 align:middle line:84% that's going to go on the balance sheet. 00:11:22.845 --> 00:11:25.190 align:middle line:84% And then liabilities, if you have some debts or things. 00:11:25.190 --> 00:11:26.607 align:middle line:84% And then the cash flow is probably 00:11:26.607 --> 00:11:29.470 align:middle line:84% the least popular financial statement of all of them. 00:11:29.470 --> 00:11:30.910 align:middle line:90% Some accountants love them. 00:11:30.910 --> 00:11:33.220 align:middle line:90% But it's kind of like a-- 00:11:33.220 --> 00:11:36.110 align:middle line:84% I don't know if you guys are into LIFO or FIFO cashes. 00:11:36.110 --> 00:11:39.170 align:middle line:84% It's like, money comes in and then the level goes up and down 00:11:39.170 --> 00:11:40.550 align:middle line:90% and money goes out. 00:11:40.550 --> 00:11:42.150 align:middle line:84% I've got an image here in a second. 00:11:42.150 --> 00:11:43.900 align:middle line:84% It'll hopefully-- well, I think it's next. 00:11:43.900 --> 00:11:44.840 align:middle line:90% Oh, here you go. 00:11:44.840 --> 00:11:47.360 align:middle line:84% So since I'm a visual guy, you've 00:11:47.360 --> 00:11:49.128 align:middle line:84% got your profit and loss on the left, 00:11:49.128 --> 00:11:50.420 align:middle line:90% which is what you would expect. 00:11:50.420 --> 00:11:53.003 align:middle line:84% I think that's supposed to say revenue on the top, by the way. 00:11:53.003 --> 00:11:54.780 align:middle line:84% Revenue minus expenses, profit and loss. 00:11:54.780 --> 00:11:57.320 align:middle line:84% But then you bring your profit over 00:11:57.320 --> 00:11:59.360 align:middle line:84% into the balance sheet side of things. 00:11:59.360 --> 00:12:02.960 align:middle line:84% That changes one of the assets that's cash. 00:12:02.960 --> 00:12:05.680 align:middle line:84% And then you see on the cash flow statement 00:12:05.680 --> 00:12:08.360 align:middle line:84% the kind of deposits and payments 00:12:08.360 --> 00:12:11.220 align:middle line:84% that actually impact the assets as well on the balance sheet. 00:12:11.220 --> 00:12:13.560 align:middle line:84% So there's a lot more visualizations 00:12:13.560 --> 00:12:15.980 align:middle line:84% of financial sheets that I like to look at. 00:12:15.980 --> 00:12:18.280 align:middle line:84% But we'll go through them in more detail. 00:12:18.280 --> 00:12:20.240 align:middle line:90% Any questions so far? 00:12:20.240 --> 00:12:23.420 align:middle line:84% Clear as mud, as my grandfather used to say? 00:12:23.420 --> 00:12:23.920 align:middle line:90% No? 00:12:23.920 --> 00:12:25.800 align:middle line:90% OK. 00:12:25.800 --> 00:12:26.340 align:middle line:90% All right. 00:12:26.340 --> 00:12:30.080 align:middle line:84% So let's just look at a generic technology company, 00:12:30.080 --> 00:12:33.920 align:middle line:84% sales of $50 $50 what? $50 million? $50,000? 00:12:33.920 --> 00:12:35.320 align:middle line:90% Doesn't matter, it's $50. 00:12:35.320 --> 00:12:37.400 align:middle line:90% Cost of goods sold, $20. 00:12:37.400 --> 00:12:39.420 align:middle line:84% And you'll notice these percentages on the side. 00:12:39.420 --> 00:12:42.910 align:middle line:84% That's a really good way to compare different business 00:12:42.910 --> 00:12:46.570 align:middle line:84% models and compare how you're performing year over year. 00:12:46.570 --> 00:12:49.290 align:middle line:84% It's hard to remember absolute numbers sometimes, 00:12:49.290 --> 00:12:53.430 align:middle line:84% but a lot of boards and a lot of operating business units 00:12:53.430 --> 00:12:57.530 align:middle line:84% operate on measuring percentages of things as you go through. 00:12:57.530 --> 00:13:01.110 align:middle line:84% And it's typically percentages of revenue. 00:13:01.110 --> 00:13:05.550 align:middle line:84% Sales and marketing expenses, R&D expenses, 10% of revenue. 00:13:05.550 --> 00:13:08.370 align:middle line:84% So that tells you a little bit something about the business. 00:13:08.370 --> 00:13:09.930 align:middle line:90% And then G&A-- which I love-- 00:13:09.930 --> 00:13:13.550 align:middle line:84% G&A here is shown as rent, accounting, HR, and IT. 00:13:13.550 --> 00:13:16.510 align:middle line:84% I mean, let's be honest, it's management, OK? 00:13:16.510 --> 00:13:17.010 align:middle line:90% All right. 00:13:17.010 --> 00:13:18.530 align:middle line:84% Anyways, it's supposed to be a joke. 00:13:18.530 --> 00:13:20.390 align:middle line:90% All right. 00:13:20.390 --> 00:13:24.790 align:middle line:84% OK, so here's an example of a four-year income statement. 00:13:24.790 --> 00:13:27.290 align:middle line:84% And this is what investors will look at. 00:13:27.290 --> 00:13:31.070 align:middle line:84% They'll just say, OK, what's the top line revenue number? 00:13:31.070 --> 00:13:33.270 align:middle line:84% What's the percentage after four years now? 00:13:33.270 --> 00:13:34.730 align:middle line:90% This is not like immediately. 00:13:34.730 --> 00:13:37.050 align:middle line:84% This is like, what can the business turn into 00:13:37.050 --> 00:13:39.270 align:middle line:84% and how does that look percentage wise? 00:13:39.270 --> 00:13:40.870 align:middle line:84% And then what's your operating profit? 00:13:40.870 --> 00:13:42.412 align:middle line:84% How much money are you going to make? 00:13:42.412 --> 00:13:44.070 align:middle line:84% That's what investors will look at. 00:13:44.070 --> 00:13:49.650 align:middle line:84% After four years 23%, that seems like a reasonable business. 00:13:49.650 --> 00:13:53.990 align:middle line:84% And then how does the actual revenue ramp up? 00:13:53.990 --> 00:13:56.830 align:middle line:84% And then, of course, the overall gross margin 00:13:56.830 --> 00:13:59.430 align:middle line:84% is important too, because we all know 00:13:59.430 --> 00:14:03.098 align:middle line:84% that you can drive the expenses, the engineering 00:14:03.098 --> 00:14:04.890 align:middle line:84% expenses, the marketing expenses and sales. 00:14:04.890 --> 00:14:06.307 align:middle line:84% You can squeeze those a little bit 00:14:06.307 --> 00:14:10.670 align:middle line:84% if you want more profit margin in the business. 00:14:10.670 --> 00:14:13.550 align:middle line:84% But it's really hard to increase the gross margin, 00:14:13.550 --> 00:14:16.870 align:middle line:84% because that's usually baked into the product. 00:14:16.870 --> 00:14:19.950 align:middle line:84% OK, what you should look at, same thing-- revenue, 00:14:19.950 --> 00:14:22.190 align:middle line:90% percentages. 00:14:22.190 --> 00:14:26.130 align:middle line:84% But then year one-- because as a startup entrepreneur, 00:14:26.130 --> 00:14:28.850 align:middle line:84% you need to believe that you're going to be able to get going, 00:14:28.850 --> 00:14:29.050 align:middle line:90% right? 00:14:29.050 --> 00:14:30.870 align:middle line:84% You're going to be able to start selling 00:14:30.870 --> 00:14:32.590 align:middle line:90% from zero to one product. 00:14:32.590 --> 00:14:35.090 align:middle line:84% That's a big leap, getting that first customer, 00:14:35.090 --> 00:14:36.350 align:middle line:90% that second customer. 00:14:36.350 --> 00:14:38.863 align:middle line:84% And you want to know what your burn rate is. 00:14:38.863 --> 00:14:40.280 align:middle line:84% How much is that going to cost me? 00:14:40.280 --> 00:14:44.680 align:middle line:84% So in this example, we're making $1.27 million in the first year, 00:14:44.680 --> 00:14:49.140 align:middle line:90% but we spent $3.3 million. 00:14:49.140 --> 00:14:51.380 align:middle line:84% Some would say that's a terrible business. 00:14:51.380 --> 00:14:52.940 align:middle line:84% If you just have that one year, it 00:14:52.940 --> 00:14:54.398 align:middle line:84% does look like a terrible business. 00:14:54.398 --> 00:14:56.180 align:middle line:84% But because you're showing this projection 00:14:56.180 --> 00:14:57.888 align:middle line:84% and you're showing the growth and there's 00:14:57.888 --> 00:15:01.060 align:middle line:84% an investment in a growth curve, then you 00:15:01.060 --> 00:15:03.640 align:middle line:84% can show what a promising business it could be. 00:15:03.640 --> 00:15:06.340 align:middle line:90% 00:15:06.340 --> 00:15:09.700 align:middle line:84% So the reason why you look at year one and year two 00:15:09.700 --> 00:15:14.378 align:middle line:84% is because in this example, I've burned $3.3 million in cash, 00:15:14.378 --> 00:15:16.420 align:middle line:84% and then I've burned another $2.6 million in cash 00:15:16.420 --> 00:15:17.540 align:middle line:90% after the second year. 00:15:17.540 --> 00:15:20.093 align:middle line:84% So that means I better have about $6 million in the bank 00:15:20.093 --> 00:15:21.760 align:middle line:84% before I even get started on this thing. 00:15:21.760 --> 00:15:25.860 align:middle line:84% Otherwise, I'm going to be down to 0 very soon. 00:15:25.860 --> 00:15:27.420 align:middle line:84% And then I see I get to break even, 00:15:27.420 --> 00:15:29.560 align:middle line:84% and then I can grow the business from there on. 00:15:29.560 --> 00:15:32.820 align:middle line:90% 00:15:32.820 --> 00:15:35.878 align:middle line:84% I usually like to graph the revenues and the profit 00:15:35.878 --> 00:15:37.670 align:middle line:84% so you can visually see what it looks like. 00:15:37.670 --> 00:15:41.530 align:middle line:84% And I think I have a chart here in a second that shows that. 00:15:41.530 --> 00:15:44.810 align:middle line:84% Lots of businesses have key performance indicators. 00:15:44.810 --> 00:15:48.930 align:middle line:84% They're typically things that are measured by the operating 00:15:48.930 --> 00:15:51.810 align:middle line:84% team or the business units, not necessarily posted 00:15:51.810 --> 00:15:53.130 align:middle line:90% in the financials. 00:15:53.130 --> 00:15:57.410 align:middle line:84% But they can be really good metrics, like churn rate. 00:15:57.410 --> 00:16:00.610 align:middle line:84% Especially for a SaaS business, like are you 00:16:00.610 --> 00:16:01.830 align:middle line:90% retaining a lot of customers? 00:16:01.830 --> 00:16:03.450 align:middle line:90% Are they leaving? 00:16:03.450 --> 00:16:04.430 align:middle line:90% You've brought them in. 00:16:04.430 --> 00:16:07.030 align:middle line:84% Are they going to leave after a month? 00:16:07.030 --> 00:16:10.770 align:middle line:84% They're going to try the trial and then be gone. 00:16:10.770 --> 00:16:13.410 align:middle line:84% And that kind comes into the committed monthly recurring 00:16:13.410 --> 00:16:15.130 align:middle line:84% revenue and the customer acquisition 00:16:15.130 --> 00:16:17.030 align:middle line:84% cost and the customer lifetime value. 00:16:17.030 --> 00:16:20.460 align:middle line:84% And then there's others that do customer lifetime value 00:16:20.460 --> 00:16:21.710 align:middle line:90% to customer acquisition costs. 00:16:21.710 --> 00:16:24.255 align:middle line:84% You can think about that as an investment vehicle. 00:16:24.255 --> 00:16:26.130 align:middle line:84% Like if it costs me a certain amount of money 00:16:26.130 --> 00:16:29.063 align:middle line:84% to acquire a new customer and then they have a lifetime value, 00:16:29.063 --> 00:16:30.730 align:middle line:84% you can really start to play with ratios 00:16:30.730 --> 00:16:33.557 align:middle line:84% to figure out how you can inject more capital into that. 00:16:33.557 --> 00:16:35.890 align:middle line:84% And a lot of investors like to see those kind of metrics 00:16:35.890 --> 00:16:38.233 align:middle line:84% because they can say, oh, OK, you get to this point. 00:16:38.233 --> 00:16:39.650 align:middle line:84% I can see how raising more capital 00:16:39.650 --> 00:16:41.692 align:middle line:84% is just going to make this business more valuable 00:16:41.692 --> 00:16:44.110 align:middle line:84% by pumping it into marketing, basically. 00:16:44.110 --> 00:16:47.970 align:middle line:84% The customer acquisition cost is a marketing expense. 00:16:47.970 --> 00:16:49.930 align:middle line:90% And then nonprofits-- 00:16:49.930 --> 00:16:52.290 align:middle line:90% I guess that's for Charlie. 00:16:52.290 --> 00:16:54.890 align:middle line:90% Thanks, Charlie. 00:16:54.890 --> 00:16:55.550 align:middle line:90% Business model. 00:16:55.550 --> 00:17:00.170 align:middle line:84% Any questions so far, while I take a drink of caffeine? 00:17:00.170 --> 00:17:01.610 align:middle line:90% All right. 00:17:01.610 --> 00:17:05.450 align:middle line:84% So my favorite thing about the word business model 00:17:05.450 --> 00:17:08.450 align:middle line:84% is a lot of times if you're talking to investors-- 00:17:08.450 --> 00:17:10.050 align:middle line:84% and maybe if you're a technologist 00:17:10.050 --> 00:17:13.569 align:middle line:84% and you're talking about your technology, and the investor, 00:17:13.569 --> 00:17:15.990 align:middle line:84% you're explaining to them how the technology works. 00:17:15.990 --> 00:17:18.755 align:middle line:84% And you can see the glaze over their eyes. 00:17:18.755 --> 00:17:20.130 align:middle line:84% And they finally wake up and they 00:17:20.130 --> 00:17:22.569 align:middle line:90% go, what's your business model? 00:17:22.569 --> 00:17:26.010 align:middle line:84% It's kind of like a fantastic generic question 00:17:26.010 --> 00:17:28.130 align:middle line:90% to ask that's always relevant. 00:17:28.130 --> 00:17:30.850 align:middle line:84% And you can always go into more detail on it. 00:17:30.850 --> 00:17:34.067 align:middle line:84% I mean, this is going off topic of financials, but usually 00:17:34.067 --> 00:17:36.400 align:middle line:84% to me, that indicates that they don't know what the heck 00:17:36.400 --> 00:17:37.810 align:middle line:84% I'm talking about and they really 00:17:37.810 --> 00:17:39.060 align:middle line:90% just want to cut to the chase. 00:17:39.060 --> 00:17:40.023 align:middle line:90% Who are your customers? 00:17:40.023 --> 00:17:41.440 align:middle line:84% What's the product you're selling? 00:17:41.440 --> 00:17:42.540 align:middle line:84% And how much are you selling it for? 00:17:42.540 --> 00:17:44.123 align:middle line:84% And are you going to make money on it? 00:17:44.123 --> 00:17:46.160 align:middle line:84% That's kind of the guts of what they're 00:17:46.160 --> 00:17:48.852 align:middle line:90% trying to ask in that question. 00:17:48.852 --> 00:17:50.560 align:middle line:84% And the other question that you get often 00:17:50.560 --> 00:17:52.080 align:middle line:90% is like, who's your customer? 00:17:52.080 --> 00:17:54.902 align:middle line:84% I understand you're going on about this technology thing, 00:17:54.902 --> 00:17:56.360 align:middle line:84% and that it's this new robot that's 00:17:56.360 --> 00:17:57.500 align:middle line:90% going to take over the world. 00:17:57.500 --> 00:17:58.500 align:middle line:90% But who's your customer? 00:17:58.500 --> 00:17:59.840 align:middle line:90% Who are you to sell this to? 00:17:59.840 --> 00:18:01.880 align:middle line:84% Great questions, but a lot of times 00:18:01.880 --> 00:18:04.440 align:middle line:90% it comes at interesting times. 00:18:04.440 --> 00:18:07.080 align:middle line:84% Provides a superstructure of the financial plan and a blueprint 00:18:07.080 --> 00:18:09.360 align:middle line:84% of how your business will make money documented by the income 00:18:09.360 --> 00:18:09.860 align:middle line:90% statement. 00:18:09.860 --> 00:18:11.900 align:middle line:84% OK, so we went through the income statement, 00:18:11.900 --> 00:18:14.267 align:middle line:84% also known as profit and loss statement. 00:18:14.267 --> 00:18:15.100 align:middle line:90% Pretty simple stuff. 00:18:15.100 --> 00:18:16.420 align:middle line:90% But let's look at a two-- 00:18:16.420 --> 00:18:19.000 align:middle line:84% I want to just do two quick examples. 00:18:19.000 --> 00:18:23.360 align:middle line:84% And I love these slides, because they're old school networking 00:18:23.360 --> 00:18:27.640 align:middle line:84% equipment company and Dell, like salt of the earth businesses-- 00:18:27.640 --> 00:18:30.680 align:middle line:84% actually tech hardware companies. 00:18:30.680 --> 00:18:33.590 align:middle line:84% Everything is normalized to the revenue, 00:18:33.590 --> 00:18:36.430 align:middle line:84% and you have the cost of goods sold, gross margin, 00:18:36.430 --> 00:18:38.610 align:middle line:90% R&D as a percentage of revenue. 00:18:38.610 --> 00:18:40.110 align:middle line:84% So if you look here, you'll see Dell 00:18:40.110 --> 00:18:44.877 align:middle line:84% has a 1% R&D, which kind of tells me that they don't really 00:18:44.877 --> 00:18:46.710 align:middle line:84% invest a lot in R&D, and they're really just 00:18:46.710 --> 00:18:50.870 align:middle line:84% about pumping out the machines, as opposed 00:18:50.870 --> 00:18:52.995 align:middle line:84% to Cisco that has 13% R&D. So they really 00:18:52.995 --> 00:18:54.870 align:middle line:84% want to make sure they're on the cutting edge 00:18:54.870 --> 00:18:58.410 align:middle line:84% and they're investing more into their technology business. 00:18:58.410 --> 00:19:01.830 align:middle line:84% And they're trying to innovate ahead of the rest of the world. 00:19:01.830 --> 00:19:04.430 align:middle line:84% And you can also see that from the operating profit. 00:19:04.430 --> 00:19:06.050 align:middle line:84% Dell has a very low operating profit. 00:19:06.050 --> 00:19:10.130 align:middle line:84% But in terms of annual revenue and revenue per employee, 00:19:10.130 --> 00:19:12.010 align:middle line:84% Dell is a lot higher than the other guys. 00:19:12.010 --> 00:19:14.870 align:middle line:84% So just different businesses, both in the technology hardware 00:19:14.870 --> 00:19:15.370 align:middle line:90% space. 00:19:15.370 --> 00:19:17.910 align:middle line:84% But it's a good way to compare them. 00:19:17.910 --> 00:19:19.730 align:middle line:84% I'm not comparing the absolute values. 00:19:19.730 --> 00:19:23.910 align:middle line:84% I'm just comparing the percentage numbers. 00:19:23.910 --> 00:19:26.790 align:middle line:90% So let's look at software. 00:19:26.790 --> 00:19:29.190 align:middle line:84% And of course, Microsoft, Oracle and SAP 00:19:29.190 --> 00:19:31.990 align:middle line:90% are the software entities. 00:19:31.990 --> 00:19:34.390 align:middle line:84% And you can almost look at the software business 00:19:34.390 --> 00:19:36.610 align:middle line:84% model versus the hardware business model, 00:19:36.610 --> 00:19:40.790 align:middle line:84% because all of these guys have a lot higher R&D and a lot higher 00:19:40.790 --> 00:19:42.110 align:middle line:90% sales and G&A. 00:19:42.110 --> 00:19:45.390 align:middle line:84% I guess these guys have pretty high sales 00:19:45.390 --> 00:19:46.690 align:middle line:90% and general administration-- 00:19:46.690 --> 00:19:49.670 align:middle line:90% SG&A expenses. 00:19:49.670 --> 00:19:51.670 align:middle line:84% Just shows you that there's more investment 00:19:51.670 --> 00:19:53.750 align:middle line:90% in R&D on a lot of these guys. 00:19:53.750 --> 00:19:57.610 align:middle line:84% And then the overall margins are higher, 00:19:57.610 --> 00:20:01.990 align:middle line:84% which you would expect from a software business. 00:20:01.990 --> 00:20:02.850 align:middle line:90% Questions on that? 00:20:02.850 --> 00:20:03.350 align:middle line:90% No? 00:20:03.350 --> 00:20:03.910 align:middle line:90% All good? 00:20:03.910 --> 00:20:05.030 align:middle line:90% Everyone gets it? 00:20:05.030 --> 00:20:09.790 align:middle line:84% So if you're building your own financial model, 00:20:09.790 --> 00:20:11.670 align:middle line:90% what is your product or service? 00:20:11.670 --> 00:20:13.990 align:middle line:84% You want to figure out what the price is 00:20:13.990 --> 00:20:15.510 align:middle line:90% that it's going to be paid. 00:20:15.510 --> 00:20:16.810 align:middle line:90% How do you manufacture it? 00:20:16.810 --> 00:20:18.670 align:middle line:84% What is the unit cost of manufacture? 00:20:18.670 --> 00:20:21.670 align:middle line:90% And overhead to support that. 00:20:21.670 --> 00:20:24.270 align:middle line:84% Distribution or sales strategy-- how are you-- 00:20:24.270 --> 00:20:26.348 align:middle line:84% are you going to sell it through partners? 00:20:26.348 --> 00:20:27.890 align:middle line:84% Are you going to sell it on your own? 00:20:27.890 --> 00:20:30.860 align:middle line:84% Are you going to hire salespeople to sell? 00:20:30.860 --> 00:20:32.880 align:middle line:84% And of course, just general guidelines, 00:20:32.880 --> 00:20:35.100 align:middle line:84% R&D should end up around 10% to 20% 00:20:35.100 --> 00:20:37.720 align:middle line:84% and G&A should end up around 5% to 15%. 00:20:37.720 --> 00:20:39.140 align:middle line:90% But that's after four years. 00:20:39.140 --> 00:20:41.360 align:middle line:84% So you saw how in the early days, 00:20:41.360 --> 00:20:44.520 align:middle line:84% it was kind of weird with all of those losses. 00:20:44.520 --> 00:20:46.580 align:middle line:84% It's really hard to do percentages in those days 00:20:46.580 --> 00:20:48.580 align:middle line:84% when you're scaling up and you're spending money 00:20:48.580 --> 00:20:50.900 align:middle line:90% on a lot of things. 00:20:50.900 --> 00:20:55.180 align:middle line:84% And then a targeted operating profit of 15% to 20%. 00:20:55.180 --> 00:20:59.740 align:middle line:84% So this is kind of focused on a product business. 00:20:59.740 --> 00:21:01.280 align:middle line:90% How do you sell your business? 00:21:01.280 --> 00:21:03.380 align:middle line:84% Are you using direct sales force or are 00:21:03.380 --> 00:21:05.180 align:middle line:90% you going through a distributor? 00:21:05.180 --> 00:21:08.920 align:middle line:84% So if you look at the way that the financials are built here 00:21:08.920 --> 00:21:11.560 align:middle line:84% if you're going direct, it's $100, 00:21:11.560 --> 00:21:17.180 align:middle line:84% but then you pay a commission to a sales agent. 00:21:17.180 --> 00:21:19.460 align:middle line:84% Or you go to a distributor and they already 00:21:19.460 --> 00:21:20.960 align:middle line:90% take $20 off the top. 00:21:20.960 --> 00:21:23.272 align:middle line:84% So you end up booking revenue of $80 00:21:23.272 --> 00:21:24.980 align:middle line:84% and then your sales and marketing expense 00:21:24.980 --> 00:21:26.370 align:middle line:90% is that much reduced. 00:21:26.370 --> 00:21:30.550 align:middle line:84% So you can see how the financials change a little bit 00:21:30.550 --> 00:21:31.582 align:middle line:90% one to the other. 00:21:31.582 --> 00:21:33.290 align:middle line:84% And it's kind of that high-level decision 00:21:33.290 --> 00:21:35.455 align:middle line:84% that you've made about how am I going to sell this. 00:21:35.455 --> 00:21:37.330 align:middle line:84% And typically it's a function of the business 00:21:37.330 --> 00:21:39.470 align:middle line:84% that you're in, like everybody sells it through distributors, 00:21:39.470 --> 00:21:40.690 align:middle line:84% so I'm just going to sell through distributors 00:21:40.690 --> 00:21:41.550 align:middle line:90% like everybody else. 00:21:41.550 --> 00:21:43.850 align:middle line:84% Or do I have something that's so special 00:21:43.850 --> 00:21:46.330 align:middle line:84% that I need to have an individual explain 00:21:46.330 --> 00:21:49.290 align:middle line:84% to every one of the customers early on how it all works? 00:21:49.290 --> 00:21:51.510 align:middle line:84% And newsflash, that's probably you, 00:21:51.510 --> 00:21:54.290 align:middle line:84% the founders who are going to be the first salespeople. 00:21:54.290 --> 00:21:57.010 align:middle line:90% OK. 00:21:57.010 --> 00:21:58.750 align:middle line:84% Yeah, so the distributor receives it. 00:21:58.750 --> 00:21:59.875 align:middle line:90% Yeah, you got that already. 00:21:59.875 --> 00:22:02.050 align:middle line:90% OK. 00:22:02.050 --> 00:22:06.010 align:middle line:84% I have never used any business planning software 00:22:06.010 --> 00:22:07.570 align:middle line:90% because I think-- 00:22:07.570 --> 00:22:09.930 align:middle line:84% and I don't recommend anyone use it. 00:22:09.930 --> 00:22:11.850 align:middle line:84% What I said early on stands, which 00:22:11.850 --> 00:22:13.930 align:middle line:84% is that you really need to understand 00:22:13.930 --> 00:22:17.050 align:middle line:84% from a visceral perspective how all those numbers bubble up 00:22:17.050 --> 00:22:18.298 align:middle line:90% into the financials. 00:22:18.298 --> 00:22:20.090 align:middle line:84% So digging into the spreadsheets and really 00:22:20.090 --> 00:22:24.170 align:middle line:84% working with them to show exactly what your business can 00:22:24.170 --> 00:22:27.270 align:middle line:84% do and being able to defend them is really, really important. 00:22:27.270 --> 00:22:30.330 align:middle line:84% And you can't get that from a business plan software. 00:22:30.330 --> 00:22:34.610 align:middle line:84% Has anyone used any AIs to solve any financials? 00:22:34.610 --> 00:22:35.450 align:middle line:90% Has anyone? 00:22:35.450 --> 00:22:36.110 align:middle line:90% Have you? 00:22:36.110 --> 00:22:36.970 align:middle line:90% AUDIENCE: Yeah. 00:22:36.970 --> 00:22:39.290 align:middle line:90% STEVE DEREZINSKI: Which one? 00:22:39.290 --> 00:22:41.033 align:middle line:90% Just ChatGPT?. 00:22:41.033 --> 00:22:42.450 align:middle line:84% AUDIENCE: Yeah mostly, now that it 00:22:42.450 --> 00:22:46.600 align:middle line:84% has a feature to read an input into an Excel sheet. 00:22:46.600 --> 00:22:47.770 align:middle line:90% STEVE DEREZINSKI: Ah. 00:22:47.770 --> 00:22:50.590 align:middle line:84% So early on, ChatGPT was terrible. 00:22:50.590 --> 00:22:51.470 align:middle line:90% It was hallucinating. 00:22:51.470 --> 00:22:52.250 align:middle line:90% I mean, I knew-- 00:22:52.250 --> 00:22:53.190 align:middle line:90% thank you for admitting it. 00:22:53.190 --> 00:22:54.898 align:middle line:84% I'm sure everyone else has or they're all 00:22:54.898 --> 00:22:57.370 align:middle line:90% going to now that you said it. 00:22:57.370 --> 00:23:00.570 align:middle line:84% I'm sure like early on, ChatGPT was terrible at numbers. 00:23:00.570 --> 00:23:03.110 align:middle line:84% It was like, how many R's are in strawberry? 00:23:03.110 --> 00:23:03.670 align:middle line:90% Two. 00:23:03.670 --> 00:23:05.730 align:middle line:90% It was just terrible. 00:23:05.730 --> 00:23:10.010 align:middle line:84% But now I think as it evolves more and quickly evolves, 00:23:10.010 --> 00:23:13.230 align:middle line:84% I think there's some legitimate things you can ask like, 00:23:13.230 --> 00:23:14.770 align:middle line:90% here's my business. 00:23:14.770 --> 00:23:17.290 align:middle line:84% What key performance indicators should I 00:23:17.290 --> 00:23:18.590 align:middle line:90% use to measure this business? 00:23:18.590 --> 00:23:20.970 align:middle line:84% Stuff like that you could interact with an AI 00:23:20.970 --> 00:23:22.910 align:middle line:90% on and get some ideas from. 00:23:22.910 --> 00:23:26.160 align:middle line:84% I'm not so sure you can have it actually build out 00:23:26.160 --> 00:23:27.140 align:middle line:90% a spreadsheet for you. 00:23:27.140 --> 00:23:27.807 align:middle line:90% Did you do that? 00:23:27.807 --> 00:23:29.640 align:middle line:90% Did you try and have it-- 00:23:29.640 --> 00:23:31.480 align:middle line:84% AUDIENCE: I more just gave it to the sheet 00:23:31.480 --> 00:23:35.800 align:middle line:84% and asked it some questions and then asked it to modify things. 00:23:35.800 --> 00:23:37.960 align:middle line:90% STEVE DEREZINSKI: Did it work? 00:23:37.960 --> 00:23:41.560 align:middle line:90% OK, all right. 00:23:41.560 --> 00:23:43.440 align:middle line:84% I like the text interaction where 00:23:43.440 --> 00:23:44.980 align:middle line:90% you're talking about strategy. 00:23:44.980 --> 00:23:46.380 align:middle line:90% Like, here's my business. 00:23:46.380 --> 00:23:47.620 align:middle line:90% I want to sell products. 00:23:47.620 --> 00:23:49.720 align:middle line:84% What should my key performance indicators be? 00:23:49.720 --> 00:23:52.340 align:middle line:84% And have it give you the arguments for a lot of things. 00:23:52.340 --> 00:23:55.620 align:middle line:84% And then manually go-- sorry, maybe I'm old school. 00:23:55.620 --> 00:23:59.473 align:middle line:84% I want to actually enter stuff in the cells. 00:23:59.473 --> 00:24:01.640 align:middle line:84% Does everybody have a copy of the spreadsheet that's 00:24:01.640 --> 00:24:02.890 align:middle line:90% on the Nuts and Bolts website? 00:24:02.890 --> 00:24:05.200 align:middle line:84% I mean, if you don't, you can download it right now. 00:24:05.200 --> 00:24:05.700 align:middle line:90% Great. 00:24:05.700 --> 00:24:10.160 align:middle line:84% We're going to go into the details on those in a second. 00:24:10.160 --> 00:24:13.300 align:middle line:84% So you have to build the sales projections from the bottom up, 00:24:13.300 --> 00:24:15.960 align:middle line:84% like selling to one person, selling to two people, 00:24:15.960 --> 00:24:17.400 align:middle line:90% and then build it up from there. 00:24:17.400 --> 00:24:20.660 align:middle line:84% Not the like, well, there's 6 billion people on the planet 00:24:20.660 --> 00:24:23.350 align:middle line:84% and we're going to get 1% of them. 00:24:23.350 --> 00:24:27.110 align:middle line:84% That being said, it's important to know your market. 00:24:27.110 --> 00:24:30.120 align:middle line:84% So it's important to know that you're not projecting-- 00:24:30.120 --> 00:24:32.370 align:middle line:84% if you build it from the bottom up and all of a sudden 00:24:32.370 --> 00:24:34.930 align:middle line:84% you're at 300% of the global market, 00:24:34.930 --> 00:24:37.010 align:middle line:84% there is some reality check on that. 00:24:37.010 --> 00:24:39.910 align:middle line:84% So you want to understand and build your financial projections 00:24:39.910 --> 00:24:40.970 align:middle line:90% from the bottom up. 00:24:40.970 --> 00:24:43.510 align:middle line:84% But you also want to know what percentage 00:24:43.510 --> 00:24:46.830 align:middle line:84% market you are projecting to own at some point. 00:24:46.830 --> 00:24:49.830 align:middle line:84% So I just want to put that in there. 00:24:49.830 --> 00:24:50.990 align:middle line:90% How will you sell? 00:24:50.990 --> 00:24:53.430 align:middle line:84% That's usually the hardest question for any early stage 00:24:53.430 --> 00:24:55.013 align:middle line:84% startup, because you guys are thinking 00:24:55.013 --> 00:24:56.982 align:middle line:84% about product and technology and cool stuff, 00:24:56.982 --> 00:24:59.190 align:middle line:84% like how are you actually going to get to the market? 00:24:59.190 --> 00:25:01.150 align:middle line:90% Talk to salespeople. 00:25:01.150 --> 00:25:02.090 align:middle line:90% Talk to customers. 00:25:02.090 --> 00:25:02.730 align:middle line:90% That's crazy. 00:25:02.730 --> 00:25:05.430 align:middle line:90% And how long does it take? 00:25:05.430 --> 00:25:06.970 align:middle line:84% And how much can you sell per month? 00:25:06.970 --> 00:25:08.790 align:middle line:84% And then, of course, what are all 00:25:08.790 --> 00:25:13.350 align:middle line:84% your costs associated with doing all the selling? 00:25:13.350 --> 00:25:19.110 align:middle line:84% Some people like to put in the financial growth projection what 00:25:19.110 --> 00:25:22.830 align:middle line:84% the best-case scenario and what the worst-case scenario is. 00:25:22.830 --> 00:25:26.670 align:middle line:84% The point of these financials is to explain to the investors what 00:25:26.670 --> 00:25:28.510 align:middle line:90% your business can do. 00:25:28.510 --> 00:25:30.610 align:middle line:84% And I think you heard from some of these guys, 00:25:30.610 --> 00:25:33.750 align:middle line:84% like, what we want to hear from founders is conviction. 00:25:33.750 --> 00:25:36.170 align:middle line:84% So if you have, like, this is what our business can do 00:25:36.170 --> 00:25:38.630 align:middle line:84% and it's one value, that's kind of showing, 00:25:38.630 --> 00:25:40.598 align:middle line:90% this is what we're going to do. 00:25:40.598 --> 00:25:42.890 align:middle line:84% If you show, well, the best case it's going to be this. 00:25:42.890 --> 00:25:44.598 align:middle line:84% In the worst case, it's going to be that. 00:25:44.598 --> 00:25:45.830 align:middle line:90% That's what they do. 00:25:45.830 --> 00:25:47.870 align:middle line:84% They take your conviction and they say, well, 00:25:47.870 --> 00:25:49.370 align:middle line:84% OK, let's talk about it internally. 00:25:49.370 --> 00:25:51.328 align:middle line:84% And maybe it could be better than that or maybe 00:25:51.328 --> 00:25:52.363 align:middle line:90% it can worse than that. 00:25:52.363 --> 00:25:53.530 align:middle line:90% What do we think about that? 00:25:53.530 --> 00:25:56.270 align:middle line:84% So we don't recommend putting in best case, worst case 00:25:56.270 --> 00:25:58.110 align:middle line:90% into a pitch deck. 00:25:58.110 --> 00:26:02.350 align:middle line:84% These are Charlie's rules of thumb, which I like. 00:26:02.350 --> 00:26:04.670 align:middle line:84% It's focused on making it attractive to investors, 00:26:04.670 --> 00:26:07.050 align:middle line:84% but it's important not to push it too far. 00:26:07.050 --> 00:26:10.710 align:middle line:84% So if you have projections and they just 00:26:10.710 --> 00:26:12.410 align:middle line:84% don't look attractive to investors, 00:26:12.410 --> 00:26:16.427 align:middle line:84% don't try and force fit them, because you're just going 00:26:16.427 --> 00:26:17.510 align:middle line:90% to waste everybody's time. 00:26:17.510 --> 00:26:19.280 align:middle line:84% Eventually they're going to figure it out and be like, well, 00:26:19.280 --> 00:26:20.680 align:middle line:84% this is not a very good business, 00:26:20.680 --> 00:26:23.200 align:middle line:90% even though it looks like it. 00:26:23.200 --> 00:26:25.580 align:middle line:84% All this stuff is that it's more relevant for technology 00:26:25.580 --> 00:26:28.893 align:middle line:84% companies, which is why we're here. 00:26:28.893 --> 00:26:31.060 align:middle line:84% And some of the numbers that we're going to show you 00:26:31.060 --> 00:26:33.780 align:middle line:90% may not apply to your industry. 00:26:33.780 --> 00:26:35.480 align:middle line:84% I mentioned the revenue too high. 00:26:35.480 --> 00:26:38.180 align:middle line:84% Like, as long as you measure it relative to the overall market 00:26:38.180 --> 00:26:41.020 align:middle line:84% size, you can correct that, and that the profit margin is 00:26:41.020 --> 00:26:42.740 align:middle line:90% too high in year four. 00:26:42.740 --> 00:26:44.380 align:middle line:84% Typically, that comes because you just 00:26:44.380 --> 00:26:46.920 align:middle line:84% keep assuming that your expenses aren't going to grow, 00:26:46.920 --> 00:26:48.680 align:middle line:84% but your sales are going to grow. 00:26:48.680 --> 00:26:51.980 align:middle line:84% And you forget to realize that there are probably 00:26:51.980 --> 00:26:53.900 align:middle line:84% legal expenses and other things that pop up 00:26:53.900 --> 00:26:55.480 align:middle line:90% as your business gets bigger. 00:26:55.480 --> 00:26:58.020 align:middle line:90% 00:26:58.020 --> 00:27:00.060 align:middle line:90% OK. 00:27:00.060 --> 00:27:02.920 align:middle line:84% Staffing typically drives departmental expenses. 00:27:02.920 --> 00:27:04.620 align:middle line:84% That's usually your biggest expense 00:27:04.620 --> 00:27:07.100 align:middle line:90% in any kind of organization. 00:27:07.100 --> 00:27:08.405 align:middle line:90% So this is a little bit old. 00:27:08.405 --> 00:27:10.780 align:middle line:84% I think your average employee salary is a little bit over 00:27:10.780 --> 00:27:13.340 align:middle line:90% $90,000 these days. 00:27:13.340 --> 00:27:17.590 align:middle line:84% Employee benefits, rule of thumb is to just use 15%. 00:27:17.590 --> 00:27:20.130 align:middle line:84% Earlier today, I was talking about fringe benefits 00:27:20.130 --> 00:27:20.870 align:middle line:90% and other things. 00:27:20.870 --> 00:27:23.673 align:middle line:84% You can get more precise if you need to. 00:27:23.673 --> 00:27:25.090 align:middle line:84% But if you're at early stages, you 00:27:25.090 --> 00:27:28.290 align:middle line:84% can just use these kind of numbers. 00:27:28.290 --> 00:27:30.410 align:middle line:90% Excuse me. 00:27:30.410 --> 00:27:34.888 align:middle line:84% It'll be roughly 67% of your total expenses. 00:27:34.888 --> 00:27:36.930 align:middle line:84% All these things, you can just read these things. 00:27:36.930 --> 00:27:38.830 align:middle line:90% Sales staff, good stuff. 00:27:38.830 --> 00:27:39.330 align:middle line:90% OK. 00:27:39.330 --> 00:27:43.050 align:middle line:90% 00:27:43.050 --> 00:27:46.570 align:middle line:84% Sales projections of $50 to $100 million in year five. 00:27:46.570 --> 00:27:51.330 align:middle line:84% Revenue per employee of $150,000 to $300,000 and per salesperson 00:27:51.330 --> 00:27:53.050 align:middle line:90% of $1 million to $3 million. 00:27:53.050 --> 00:27:54.870 align:middle line:84% Good rules of thumb to keep in mind. 00:27:54.870 --> 00:28:00.010 align:middle line:84% And you should have these from the slides. 00:28:00.010 --> 00:28:03.370 align:middle line:84% Happiness is positive cash flow, or at least knowing 00:28:03.370 --> 00:28:06.130 align:middle line:90% that you're managing your cash. 00:28:06.130 --> 00:28:08.030 align:middle line:84% It's always good to have positive cash flow. 00:28:08.030 --> 00:28:10.170 align:middle line:84% But knowing when you're going to run out of cash 00:28:10.170 --> 00:28:13.310 align:middle line:84% and how you're going to raise more cash at the right time, 00:28:13.310 --> 00:28:14.550 align:middle line:90% that's really the best thing. 00:28:14.550 --> 00:28:15.258 align:middle line:90% Yes, sir. 00:28:15.258 --> 00:28:16.550 align:middle line:90% AUDIENCE: Yeah, quick question. 00:28:16.550 --> 00:28:18.290 align:middle line:84% So how do we usually, as a company, 00:28:18.290 --> 00:28:19.832 align:middle line:84% determine all the values [INAUDIBLE]? 00:28:19.832 --> 00:28:21.290 align:middle line:84% For example, how much are you going 00:28:21.290 --> 00:28:22.790 align:middle line:84% to pay for each engineer per year, 00:28:22.790 --> 00:28:25.170 align:middle line:84% and then how much you're going to sell for every single target 00:28:25.170 --> 00:28:25.730 align:middle line:90% year? 00:28:25.730 --> 00:28:27.130 align:middle line:84% AUDIENCE: Can you repeat the question? 00:28:27.130 --> 00:28:28.170 align:middle line:84% STEVE DEREZINSKI: Yeah, so the question 00:28:28.170 --> 00:28:29.837 align:middle line:84% is, how do you figure out how much we're 00:28:29.837 --> 00:28:31.102 align:middle line:90% going to pay our engineers? 00:28:31.102 --> 00:28:32.810 align:middle line:84% AUDIENCE: How do we determine that value? 00:28:32.810 --> 00:28:35.330 align:middle line:90% How we determine that. 00:28:35.330 --> 00:28:36.580 align:middle line:90% How do you decide that salary? 00:28:36.580 --> 00:28:38.538 align:middle line:84% STEVE DEREZINSKI: How do you decide the salary? 00:28:38.538 --> 00:28:40.890 align:middle line:84% Oh, well, I mean, I'm sure you've seen the ad that it's 00:28:40.890 --> 00:28:42.330 align:middle line:90% competitive, right? 00:28:42.330 --> 00:28:43.950 align:middle line:84% I mean, it's up to the marketplace. 00:28:43.950 --> 00:28:47.550 align:middle line:84% So depending on what you're trying to hire for, 00:28:47.550 --> 00:28:49.090 align:middle line:90% you publish a lot of that stuff. 00:28:49.090 --> 00:28:51.890 align:middle line:84% And you can just go out and look and find other job positions 00:28:51.890 --> 00:28:55.630 align:middle line:84% with a similar title or similar position and similar seniority. 00:28:55.630 --> 00:28:57.910 align:middle line:84% And you can find a whole series of salaries there. 00:28:57.910 --> 00:29:01.350 align:middle line:84% I think there's a lot of salary-- salary.com 00:29:01.350 --> 00:29:04.690 align:middle line:84% I think is one of the websites that publish a lot of stuff. 00:29:04.690 --> 00:29:05.630 align:middle line:90% Is that your company? 00:29:05.630 --> 00:29:07.660 align:middle line:90% Was I just promoting it? 00:29:07.660 --> 00:29:08.868 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:29:08.868 --> 00:29:09.910 align:middle line:90% STEVE DEREZINSKI: Got it. 00:29:09.910 --> 00:29:12.850 align:middle line:84% So you want to understand your burn rate-- 00:29:12.850 --> 00:29:14.760 align:middle line:84% which is obviously monthly operating 00:29:14.760 --> 00:29:18.580 align:middle line:84% loss plus capital expenditures-- and do your cash flow projection 00:29:18.580 --> 00:29:24.280 align:middle line:84% so you understand when that's going to happen. 00:29:24.280 --> 00:29:27.180 align:middle line:84% There is another factor called depreciation, 00:29:27.180 --> 00:29:29.007 align:middle line:84% which is an accounting function, which 00:29:29.007 --> 00:29:30.840 align:middle line:84% is if you have a piece of capital equipment, 00:29:30.840 --> 00:29:32.600 align:middle line:84% there's an amount that it goes down 00:29:32.600 --> 00:29:35.300 align:middle line:84% in value, which is totally a tax thing. 00:29:35.300 --> 00:29:37.120 align:middle line:84% And it doesn't impact cash, so you 00:29:37.120 --> 00:29:39.640 align:middle line:84% don't have to worry about it for purposes of this stuff. 00:29:39.640 --> 00:29:42.020 align:middle line:84% But your tax accountant will have to worry about it. 00:29:42.020 --> 00:29:45.320 align:middle line:90% 00:29:45.320 --> 00:29:47.640 align:middle line:84% And this is how you pull it all together in order 00:29:47.640 --> 00:29:51.520 align:middle line:84% to figure out your total cash required in order to maintain 00:29:51.520 --> 00:29:54.140 align:middle line:84% your cash flow balance and maintain 00:29:54.140 --> 00:29:56.840 align:middle line:90% positive cash at all times. 00:29:56.840 --> 00:29:59.100 align:middle line:84% So one of the biggest questions we get is, 00:29:59.100 --> 00:30:01.260 align:middle line:84% how do you know how much to pay yourself? 00:30:01.260 --> 00:30:02.660 align:middle line:90% I'm a founder of this company. 00:30:02.660 --> 00:30:03.920 align:middle line:90% I've raised capital. 00:30:03.920 --> 00:30:04.420 align:middle line:90% Hey, great. 00:30:04.420 --> 00:30:05.340 align:middle line:90% I raised $5 million. 00:30:05.340 --> 00:30:06.673 align:middle line:90% I want $1 million a year, right? 00:30:06.673 --> 00:30:08.080 align:middle line:90% Like I want $5 million a year. 00:30:08.080 --> 00:30:09.480 align:middle line:90% After a year, I'm out. 00:30:09.480 --> 00:30:11.200 align:middle line:90% That's not going to work. 00:30:11.200 --> 00:30:14.890 align:middle line:84% But I really like this phrase of they don't want you to starve, 00:30:14.890 --> 00:30:16.590 align:middle line:90% but they want you to be hungry. 00:30:16.590 --> 00:30:19.510 align:middle line:84% And I think the best way to do it, 00:30:19.510 --> 00:30:22.730 align:middle line:84% minimum viable salary is really the right phrasing. 00:30:22.730 --> 00:30:26.130 align:middle line:84% Like, enough so you're not distracted by your bills, 00:30:26.130 --> 00:30:28.110 align:middle line:84% and so maybe your significant other 00:30:28.110 --> 00:30:30.750 align:middle line:84% is happy with what you're doing every day, 00:30:30.750 --> 00:30:33.170 align:middle line:84% like everything's taken care of at home. 00:30:33.170 --> 00:30:34.980 align:middle line:90% Everybody's happy at home. 00:30:34.980 --> 00:30:36.730 align:middle line:84% But the equity is where the big payoff is. 00:30:36.730 --> 00:30:40.030 align:middle line:84% So if you do a comparison, if you go out into industry 00:30:40.030 --> 00:30:43.300 align:middle line:84% and you have a big salary and a teeny little slice of equity, 00:30:43.300 --> 00:30:45.550 align:middle line:84% and then this opportunity to work at a startup company 00:30:45.550 --> 00:30:47.610 align:middle line:84% where your salary comes down a certain amount, 00:30:47.610 --> 00:30:50.270 align:middle line:84% but your equity goes up a tremendous amount, 00:30:50.270 --> 00:30:51.930 align:middle line:90% the salary should come down. 00:30:51.930 --> 00:30:54.290 align:middle line:84% But it shouldn't come down to a ridiculous amount. 00:30:54.290 --> 00:30:56.670 align:middle line:84% There's a lot of founders I know who just-- 00:30:56.670 --> 00:30:58.208 align:middle line:90% maybe they just enjoy starving. 00:30:58.208 --> 00:30:58.750 align:middle line:90% I don't know. 00:30:58.750 --> 00:31:01.630 align:middle line:84% Maybe they just find an extra adrenaline rush or something 00:31:01.630 --> 00:31:02.450 align:middle line:90% by doing that. 00:31:02.450 --> 00:31:05.270 align:middle line:84% But when you're talking to VCs, I 00:31:05.270 --> 00:31:08.430 align:middle line:84% think this is a really important piece. 00:31:08.430 --> 00:31:10.547 align:middle line:84% Don't be greedy, but also make sure 00:31:10.547 --> 00:31:13.130 align:middle line:84% that you're comfortable so that you can focus on the business. 00:31:13.130 --> 00:31:15.350 align:middle line:84% Because that's really the whole point of all this. 00:31:15.350 --> 00:31:16.650 align:middle line:90% OK, questions at this time? 00:31:16.650 --> 00:31:20.390 align:middle line:90% 00:31:20.390 --> 00:31:22.530 align:middle line:90% Yes. 00:31:22.530 --> 00:31:24.030 align:middle line:84% AUDIENCE: One of the slides that you 00:31:24.030 --> 00:31:26.590 align:middle line:84% showed are examples that you use for bigger 00:31:26.590 --> 00:31:29.190 align:middle line:90% companies, [INAUDIBLE] VCs. 00:31:29.190 --> 00:31:31.970 align:middle line:84% But for startups, let's say, under $1 million 00:31:31.970 --> 00:31:35.570 align:middle line:84% or under $5 million, how do you allocate? 00:31:35.570 --> 00:31:41.910 align:middle line:84% So here we saw the 10% for R&D, 10% to 20% for marketing. 00:31:41.910 --> 00:31:44.590 align:middle line:84% But in reality, when it's a smaller company, 00:31:44.590 --> 00:31:48.292 align:middle line:84% what kind of metrics or numbers should be considered? 00:31:48.292 --> 00:31:49.750 align:middle line:84% STEVE DEREZINSKI: So the reason why 00:31:49.750 --> 00:31:52.390 align:middle line:84% I wanted to show you those bigger companies is to just show 00:31:52.390 --> 00:31:59.150 align:middle line:84% you the percentages as how it compares to your projections 00:31:59.150 --> 00:32:00.410 align:middle line:90% after four years. 00:32:00.410 --> 00:32:03.170 align:middle line:84% So presumably, your small company, after four years, 00:32:03.170 --> 00:32:06.630 align:middle line:84% after raising $15 million, is not that small anymore. 00:32:06.630 --> 00:32:09.030 align:middle line:84% So it shouldn't necessarily be as gigantic 00:32:09.030 --> 00:32:12.160 align:middle line:84% as some of those big ones, but the ratios should be comparable. 00:32:12.160 --> 00:32:15.340 align:middle line:84% So that was the point of showing a tech hardware company 00:32:15.340 --> 00:32:17.300 align:middle line:90% versus a software company. 00:32:17.300 --> 00:32:19.500 align:middle line:90% Other questions? 00:32:19.500 --> 00:32:22.220 align:middle line:90% Joe has a question? 00:32:22.220 --> 00:32:24.060 align:middle line:90% Oh, I'm in trouble now. 00:32:24.060 --> 00:32:25.660 align:middle line:90% JOSEPH HADZIMA: Just a comment. 00:32:25.660 --> 00:32:29.100 align:middle line:84% The point is, if you have a business model 00:32:29.100 --> 00:32:30.900 align:middle line:84% and you're saying you're going to do this, 00:32:30.900 --> 00:32:34.180 align:middle line:84% and your numbers are totally different than other companies 00:32:34.180 --> 00:32:35.580 align:middle line:84% that have been successful, people 00:32:35.580 --> 00:32:37.997 align:middle line:84% are going to say you don't know what you're talking about. 00:32:37.997 --> 00:32:41.540 align:middle line:84% Unless you have an innovative business model that explains, 00:32:41.540 --> 00:32:45.460 align:middle line:84% we're not going to buy cars and run a taxi thing. 00:32:45.460 --> 00:32:50.420 align:middle line:84% We're going to orchestrate people using their cars. 00:32:50.420 --> 00:32:51.600 align:middle line:90% And that's Uber. 00:32:51.600 --> 00:32:55.340 align:middle line:84% So totally different economics than a taxicab company. 00:32:55.340 --> 00:32:58.860 align:middle line:84% So if your numbers are different, then understand why 00:32:58.860 --> 00:33:01.025 align:middle line:90% and be able to explain it. 00:33:01.025 --> 00:33:02.400 align:middle line:84% STEVE DEREZINSKI: Thank you, Joe. 00:33:02.400 --> 00:33:03.740 align:middle line:90% Excellent point. 00:33:03.740 --> 00:33:05.860 align:middle line:84% Other questions or excellent comments? 00:33:05.860 --> 00:33:08.770 align:middle line:90% Yes, sir. 00:33:08.770 --> 00:33:11.530 align:middle line:84% AUDIENCE: The details are very, very interesting. 00:33:11.530 --> 00:33:16.130 align:middle line:84% But to back off and look at the big picture, when you're 00:33:16.130 --> 00:33:20.250 align:middle line:84% talking about models, how do you like the model-- at biggest 00:33:20.250 --> 00:33:22.130 align:middle line:90% level, a black box. 00:33:22.130 --> 00:33:23.730 align:middle line:90% Input, you put a dollar. 00:33:23.730 --> 00:33:25.970 align:middle line:90% Output, what do you want? 00:33:25.970 --> 00:33:30.490 align:middle line:84% How about a $5, $10, or $20 bill? 00:33:30.490 --> 00:33:36.210 align:middle line:84% Does that set the stage for-- at any year of operation, 00:33:36.210 --> 00:33:38.410 align:middle line:84% the big picture, you want whatever 00:33:38.410 --> 00:33:41.670 align:middle line:84% money goes in you'd like-- in the ideal world, 00:33:41.670 --> 00:33:44.210 align:middle line:84% wouldn't you like it to be generating in the black 00:33:44.210 --> 00:33:46.650 align:middle line:90% from day one, if you could? 00:33:46.650 --> 00:33:50.290 align:middle line:84% It's hard to get to, but if you could, wouldn't that be nice? 00:33:50.290 --> 00:33:53.890 align:middle line:84% And so again, it's a simple model, black box, 00:33:53.890 --> 00:33:57.370 align:middle line:84% input for every dollar in, what's the output? 00:33:57.370 --> 00:34:00.170 align:middle line:84% And pick a number and use currency. 00:34:00.170 --> 00:34:04.210 align:middle line:84% A $1 bill, a $2 bill, $5, $10, or $20. 00:34:04.210 --> 00:34:08.730 align:middle line:84% If you can go for a goal of $20 and you make $10, 00:34:08.730 --> 00:34:10.230 align:middle line:84% well, that's 10 times on your money. 00:34:10.230 --> 00:34:11.670 align:middle line:90% What's bad about that? 00:34:11.670 --> 00:34:13.949 align:middle line:84% STEVE DEREZINSKI: So I think there's two things there. 00:34:13.949 --> 00:34:16.469 align:middle line:84% One is thinking about it as an investor. 00:34:16.469 --> 00:34:19.710 align:middle line:84% So you're putting money in as an equity, in the black box, 00:34:19.710 --> 00:34:22.389 align:middle line:84% and you expect $1 coming in and $20 coming out. 00:34:22.389 --> 00:34:23.870 align:middle line:84% But there's the other aspect of it, 00:34:23.870 --> 00:34:25.590 align:middle line:84% which is just the operating business. 00:34:25.590 --> 00:34:28.630 align:middle line:84% I might put a dollar into marketing and I might expect, 00:34:28.630 --> 00:34:31.530 align:middle line:84% like $1.10 to come out kind of thing-- 00:34:31.530 --> 00:34:33.110 align:middle line:90% $1.10 of profit margin. 00:34:33.110 --> 00:34:36.330 align:middle line:84% And if I can figure that out, then I 00:34:36.330 --> 00:34:38.370 align:middle line:84% know that I can just keep adding more money in 00:34:38.370 --> 00:34:39.429 align:middle line:90% and continue to grow it. 00:34:39.429 --> 00:34:43.210 align:middle line:84% And then that operating business makes the overall equity portion 00:34:43.210 --> 00:34:44.270 align:middle line:90% a lot more valuable. 00:34:44.270 --> 00:34:46.469 align:middle line:84% So I think it's kind of two boxes there. 00:34:46.469 --> 00:34:50.070 align:middle line:84% But one is operating and one is investment. 00:34:50.070 --> 00:34:50.969 align:middle line:90% Yeah. 00:34:50.969 --> 00:34:52.409 align:middle line:90% Other questions? 00:34:52.409 --> 00:34:53.290 align:middle line:90% Yes. 00:34:53.290 --> 00:34:54.170 align:middle line:90% AUDIENCE: Yeah. 00:34:54.170 --> 00:34:58.450 align:middle line:84% We talked about-- I asked the question of what kind of return 00:34:58.450 --> 00:35:01.050 align:middle line:84% was expected from venture capitalists or investors 00:35:01.050 --> 00:35:01.550 align:middle line:90% in general. 00:35:01.550 --> 00:35:05.120 align:middle line:90% What is the timeline for that? 00:35:05.120 --> 00:35:07.680 align:middle line:90% Could you talk about that? 00:35:07.680 --> 00:35:11.840 align:middle line:84% STEVE DEREZINSKI: If you look at a 10-year fund life cycle, 00:35:11.840 --> 00:35:14.660 align:middle line:84% at first there's a J-curve return. 00:35:14.660 --> 00:35:18.200 align:middle line:84% So the first three to five years they make investments. 00:35:18.200 --> 00:35:20.740 align:middle line:84% And they exit a lot of investments. 00:35:20.740 --> 00:35:22.520 align:middle line:90% So they show a big loss. 00:35:22.520 --> 00:35:25.420 align:middle line:84% And then after about five years is when the returns come in. 00:35:25.420 --> 00:35:27.440 align:middle line:84% So if you're one of the successful ones, 00:35:27.440 --> 00:35:29.345 align:middle line:84% they'll put money in the early phase. 00:35:29.345 --> 00:35:30.720 align:middle line:84% So it's about three to five years 00:35:30.720 --> 00:35:33.640 align:middle line:84% that they would expect some kind of return on your investment. 00:35:33.640 --> 00:35:36.580 align:middle line:84% I saw a very interesting data that I'd love to share with you, 00:35:36.580 --> 00:35:39.520 align:middle line:84% because everybody's focused on pre-money valuation 00:35:39.520 --> 00:35:41.460 align:middle line:90% as absolute numbers. 00:35:41.460 --> 00:35:45.580 align:middle line:84% But the guys from Carta posted some numbers that said, 00:35:45.580 --> 00:35:49.760 align:middle line:84% basically every round of capital, you give up 20%. 00:35:49.760 --> 00:35:51.980 align:middle line:84% Like, in good years, it might be 17%. 00:35:51.980 --> 00:35:53.820 align:middle line:84% In bad years, it might be like 30%. 00:35:53.820 --> 00:35:56.840 align:middle line:84% But roughly it's 20% every single time. 00:35:56.840 --> 00:35:59.960 align:middle line:84% Which is kind of weird, because you think about, 00:35:59.960 --> 00:36:01.860 align:middle line:84% well, if I want my company to be worth more, 00:36:01.860 --> 00:36:04.470 align:middle line:84% does that mean I just raise more cash? 00:36:04.470 --> 00:36:06.290 align:middle line:84% And the answer is, yes, if you can. 00:36:06.290 --> 00:36:08.123 align:middle line:84% I mean, if people will put more money in it, 00:36:08.123 --> 00:36:09.390 align:middle line:90% it should be worth more. 00:36:09.390 --> 00:36:13.450 align:middle line:84% Which, it doesn't make a lot of sense from the current math. 00:36:13.450 --> 00:36:17.850 align:middle line:84% But if you think about it more, it's like, if I can reduce risk, 00:36:17.850 --> 00:36:19.450 align:middle line:90% I can add value. 00:36:19.450 --> 00:36:22.870 align:middle line:84% And one easy way to reduce risk is to just have more cash. 00:36:22.870 --> 00:36:25.432 align:middle line:84% So it almost should be worth more. 00:36:25.432 --> 00:36:27.390 align:middle line:84% I like to talk about these things with you guys 00:36:27.390 --> 00:36:29.210 align:middle line:84% because it really makes your head scratch. 00:36:29.210 --> 00:36:29.750 align:middle line:90% What do you mean? 00:36:29.750 --> 00:36:31.370 align:middle line:84% There's pre-money valuation and post-money valuation. 00:36:31.370 --> 00:36:32.495 align:middle line:90% That's all there is, Steve. 00:36:32.495 --> 00:36:34.162 align:middle line:84% You can't talk about these crazy things. 00:36:34.162 --> 00:36:36.703 align:middle line:84% Does that answer your question or does that confuse you more? 00:36:36.703 --> 00:36:37.430 align:middle line:90% Sorry. 00:36:37.430 --> 00:36:37.930 align:middle line:90% OK. 00:36:37.930 --> 00:36:39.013 align:middle line:90% AUDIENCE: Yeah, thank you. 00:36:39.013 --> 00:36:40.260 align:middle line:90% STEVE DEREZINSKI: Yeah, sure. 00:36:40.260 --> 00:36:41.010 align:middle line:90% One more question. 00:36:41.010 --> 00:36:41.610 align:middle line:90% Yes, sir. 00:36:41.610 --> 00:36:43.110 align:middle line:84% AUDIENCE: Thanks so much for showing 00:36:43.110 --> 00:36:44.485 align:middle line:84% all the different business models 00:36:44.485 --> 00:36:46.250 align:middle line:84% and all the ratios of this business. 00:36:46.250 --> 00:36:47.490 align:middle line:90% So I've learned a lot. 00:36:47.490 --> 00:36:50.430 align:middle line:84% And then my first question is, can I see some suggestions 00:36:50.430 --> 00:36:53.950 align:middle line:84% on how do we determine or how do we figure out what is the best 00:36:53.950 --> 00:36:55.490 align:middle line:90% ratio for our own company? 00:36:55.490 --> 00:36:57.190 align:middle line:84% And the second question is, it's always 00:36:57.190 --> 00:36:59.370 align:middle line:84% good to keep the maximum quantity of income. 00:36:59.370 --> 00:37:02.230 align:middle line:84% So if you have that money, you can also spend it 00:37:02.230 --> 00:37:04.170 align:middle line:90% for some other or future funds. 00:37:04.170 --> 00:37:07.790 align:middle line:84% So the second question would be around, what amount of the cash 00:37:07.790 --> 00:37:09.830 align:middle line:84% will be good enough to keep it positive? 00:37:09.830 --> 00:37:11.670 align:middle line:84% If you exceed that threshold, you 00:37:11.670 --> 00:37:15.190 align:middle line:84% can split it out if you need, to either R&D or some other thing 00:37:15.190 --> 00:37:16.690 align:middle line:90% to make the business grow. 00:37:16.690 --> 00:37:18.130 align:middle line:90% So what would be a good balance? 00:37:18.130 --> 00:37:20.550 align:middle line:84% How do you determine [INAUDIBLE] as well? 00:37:20.550 --> 00:37:22.870 align:middle line:84% STEVE DEREZINSKI: So there's two questions there. 00:37:22.870 --> 00:37:24.810 align:middle line:84% Maybe I'll answer the second question first. 00:37:24.810 --> 00:37:26.722 align:middle line:84% How do you do budgets and how do you 00:37:26.722 --> 00:37:28.930 align:middle line:84% figure out where to spend your money the most wisely? 00:37:28.930 --> 00:37:30.638 align:middle line:84% Is that basically what you're getting at? 00:37:30.638 --> 00:37:34.510 align:middle line:84% So these financial projections will help you figure that out. 00:37:34.510 --> 00:37:36.850 align:middle line:84% So as you get into the financial projections, 00:37:36.850 --> 00:37:38.962 align:middle line:84% you'll see where the biggest bang for your-- you 00:37:38.962 --> 00:37:39.670 align:middle line:90% should see where. 00:37:39.670 --> 00:37:41.285 align:middle line:84% You may not see it tonight, but you 00:37:41.285 --> 00:37:43.410 align:middle line:84% should see where the biggest bang for your buck is. 00:37:43.410 --> 00:37:46.570 align:middle line:84% So a lot of times in SaaS businesses-- 00:37:46.570 --> 00:37:48.430 align:middle line:84% Software as a Service business-- it's 00:37:48.430 --> 00:37:51.710 align:middle line:84% in injecting money into customer acquisition costs. 00:37:51.710 --> 00:37:53.585 align:middle line:84% That is often-- not always, but that is often 00:37:53.585 --> 00:37:55.960 align:middle line:84% the place where you'll see the biggest bang for your buck 00:37:55.960 --> 00:37:58.610 align:middle line:84% and where you should spend any excess capital you have, 00:37:58.610 --> 00:38:01.035 align:middle line:84% because that will make the business grow more. 00:38:01.035 --> 00:38:02.660 align:middle line:84% It sounded to me like you were thinking 00:38:02.660 --> 00:38:04.060 align:middle line:84% that you could have a party or something 00:38:04.060 --> 00:38:05.080 align:middle line:90% with your excess money. 00:38:05.080 --> 00:38:07.420 align:middle line:90% I'm not sure. 00:38:07.420 --> 00:38:11.260 align:middle line:84% I mean, certainly, employee morale is an important aspect 00:38:11.260 --> 00:38:11.980 align:middle line:90% of startups. 00:38:11.980 --> 00:38:15.060 align:middle line:84% I mean, there's elements of that too. 00:38:15.060 --> 00:38:17.660 align:middle line:84% I should also say, I mean, early in my career 00:38:17.660 --> 00:38:19.720 align:middle line:84% when I had some venture capital financing, 00:38:19.720 --> 00:38:21.460 align:middle line:90% we had monthly board meetings. 00:38:21.460 --> 00:38:24.120 align:middle line:84% And there was a limit on what the CEO-- like, 00:38:24.120 --> 00:38:27.820 align:middle line:84% there's a $5,000 limit on what I could spend. 00:38:27.820 --> 00:38:30.320 align:middle line:84% If I had to buy a $10,000 piece of equipment, 00:38:30.320 --> 00:38:32.200 align:middle line:84% I to go to the board and get approval for it. 00:38:32.200 --> 00:38:35.520 align:middle line:84% So it's not like, here's a check for $4 million. 00:38:35.520 --> 00:38:36.480 align:middle line:90% Go have fun, right? 00:38:36.480 --> 00:38:39.200 align:middle line:84% I mean, there are controls on all this stuff that happen. 00:38:39.200 --> 00:38:41.740 align:middle line:84% But I mean, hopefully you have decent financial projections 00:38:41.740 --> 00:38:43.960 align:middle line:84% and you know exactly what your spend is going to be. 00:38:43.960 --> 00:38:47.060 align:middle line:84% Especially with that negative $3.3 million 00:38:47.060 --> 00:38:49.620 align:middle line:84% in the first year, negative $2.6 million in the second year, 00:38:49.620 --> 00:38:51.940 align:middle line:84% you kind of know where the money is going to go. 00:38:51.940 --> 00:38:55.420 align:middle line:84% It's going to go into people's salary mostly. 00:38:55.420 --> 00:38:57.140 align:middle line:90% All right? 00:38:57.140 --> 00:38:59.010 align:middle line:90% Good? 00:38:59.010 --> 00:39:03.490 align:middle line:90% OK, so now is the fun time. 00:39:03.490 --> 00:39:05.670 align:middle line:84% So I realize that it's getting late, 00:39:05.670 --> 00:39:07.170 align:middle line:84% but this is the time that you really 00:39:07.170 --> 00:39:08.450 align:middle line:84% want to open up your spreadsheets 00:39:08.450 --> 00:39:09.408 align:middle line:90% and get into it, right? 00:39:09.408 --> 00:39:13.610 align:middle line:84% It's not time to crack a beer open and watch football. 00:39:13.610 --> 00:39:16.590 align:middle line:84% This is from the spreadsheets that are available. 00:39:16.590 --> 00:39:21.650 align:middle line:84% And the way that they're set up is very handy and helpful. 00:39:21.650 --> 00:39:23.650 align:middle line:84% And I like to start with the end in mind, which 00:39:23.650 --> 00:39:25.410 align:middle line:84% this is the four-year profit and loss 00:39:25.410 --> 00:39:27.227 align:middle line:84% statement that comes as a result of what 00:39:27.227 --> 00:39:28.310 align:middle line:90% we're about to go through. 00:39:28.310 --> 00:39:30.610 align:middle line:84% So I'm showing you the end result. This is 00:39:30.610 --> 00:39:32.210 align:middle line:90% what you show investors. 00:39:32.210 --> 00:39:35.810 align:middle line:84% And this shows you the negative $4 million, negative $2 million 00:39:35.810 --> 00:39:37.930 align:middle line:84% in the first and second year, and then the growth 00:39:37.930 --> 00:39:40.170 align:middle line:90% after the third year. 00:39:40.170 --> 00:39:42.330 align:middle line:84% But I want you to pay attention to the instructions 00:39:42.330 --> 00:39:43.370 align:middle line:90% on the bottom. 00:39:43.370 --> 00:39:45.155 align:middle line:90% A red cell is input. 00:39:45.155 --> 00:39:46.530 align:middle line:84% So that's something that you have 00:39:46.530 --> 00:39:48.590 align:middle line:90% to enter into the spreadsheet. 00:39:48.590 --> 00:39:51.330 align:middle line:84% Magenta is sent off to another spreadsheet, 00:39:51.330 --> 00:39:53.183 align:middle line:84% black is calculated, and blue is brought 00:39:53.183 --> 00:39:54.350 align:middle line:90% in from another spreadsheet. 00:39:54.350 --> 00:39:57.890 align:middle line:84% So what should be shown on here is all blue. 00:39:57.890 --> 00:40:00.570 align:middle line:84% So this is the roll up of all of the other tabs that 00:40:00.570 --> 00:40:02.250 align:middle line:90% are in that spreadsheet. 00:40:02.250 --> 00:40:04.450 align:middle line:84% So you don't have to do anything to this spreadsheet 00:40:04.450 --> 00:40:08.210 align:middle line:84% because it's from this particular tab. 00:40:08.210 --> 00:40:11.530 align:middle line:84% And as I mentioned, I like visuals a lot better, 00:40:11.530 --> 00:40:15.470 align:middle line:84% because this shows me that, OK, well, after the second year, 00:40:15.470 --> 00:40:17.330 align:middle line:90% this company turns a profit. 00:40:17.330 --> 00:40:18.970 align:middle line:90% You can tell just visually. 00:40:18.970 --> 00:40:22.510 align:middle line:84% And if I add the two numbers underneath the curve 00:40:22.510 --> 00:40:24.470 align:middle line:84% or if I want to do an integral under the curve, 00:40:24.470 --> 00:40:26.053 align:middle line:84% I can tell exactly how much it's going 00:40:26.053 --> 00:40:29.050 align:middle line:84% to need before I turn a profit, which 00:40:29.050 --> 00:40:31.870 align:middle line:84% I think we know from the first one is about $6 million. 00:40:31.870 --> 00:40:33.550 align:middle line:84% But you better raise about $10 million, 00:40:33.550 --> 00:40:35.770 align:middle line:84% so have some oops money in there. 00:40:35.770 --> 00:40:38.650 align:middle line:84% And then I can see the slope of the red line, which 00:40:38.650 --> 00:40:41.340 align:middle line:84% is kind of a rough estimate of what the IRR is going to be 00:40:41.340 --> 00:40:42.590 align:middle line:90% on the revenue side of things. 00:40:42.590 --> 00:40:47.170 align:middle line:84% So it gives me an idea of the growth rate of the company. 00:40:47.170 --> 00:40:48.770 align:middle line:84% AUDIENCE: So this is what you suggest, 00:40:48.770 --> 00:40:50.370 align:middle line:90% to put up this statement? 00:40:50.370 --> 00:40:53.450 align:middle line:84% STEVE DEREZINSKI: I like it, but I'm an engineer. 00:40:53.450 --> 00:40:55.620 align:middle line:90% So it's a visual-- 00:40:55.620 --> 00:40:57.320 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:40:57.320 --> 00:40:58.620 align:middle line:90% STEVE DEREZINSKI: I like this. 00:40:58.620 --> 00:41:00.220 align:middle line:90% I think VCs like it too. 00:41:00.220 --> 00:41:03.880 align:middle line:84% It's just a quick and easy way to see what you're doing. 00:41:03.880 --> 00:41:09.200 align:middle line:84% So the real challenge is, just about every single pitch 00:41:09.200 --> 00:41:09.940 align:middle line:90% deck has this. 00:41:09.940 --> 00:41:11.580 align:middle line:90% That's the downside of this. 00:41:11.580 --> 00:41:13.800 align:middle line:84% Because when you show it, it's like OK, up 00:41:13.800 --> 00:41:17.120 align:middle line:84% and to the right, that's what all of the pitches have. 00:41:17.120 --> 00:41:18.680 align:middle line:90% How is yours different? 00:41:18.680 --> 00:41:22.200 align:middle line:84% It's in the explaining and the describing 00:41:22.200 --> 00:41:24.000 align:middle line:84% of the actual business details is 00:41:24.000 --> 00:41:26.400 align:middle line:84% where you establish credibility with your investors 00:41:26.400 --> 00:41:28.440 align:middle line:84% and where you really start to develop 00:41:28.440 --> 00:41:30.680 align:middle line:84% a true understanding of how your business is 00:41:30.680 --> 00:41:32.080 align:middle line:90% going to grow and run. 00:41:32.080 --> 00:41:34.160 align:middle line:90% So this is it in the quarterly. 00:41:34.160 --> 00:41:35.100 align:middle line:90% But it's still blue. 00:41:35.100 --> 00:41:38.760 align:middle line:84% So we don't have to touch anything on this tab. 00:41:38.760 --> 00:41:40.640 align:middle line:84% And now we go into the sales plan, which 00:41:40.640 --> 00:41:42.140 align:middle line:90% is a separate tab in there. 00:41:42.140 --> 00:41:45.860 align:middle line:84% You have to decide how your selling is going to grow. 00:41:45.860 --> 00:41:48.880 align:middle line:84% So you see up there we've got 20 in model 1 of whatever 00:41:48.880 --> 00:41:50.300 align:middle line:90% the product is we're selling. 00:41:50.300 --> 00:41:52.217 align:middle line:84% And this is stuff that you're just projecting. 00:41:52.217 --> 00:41:54.383 align:middle line:84% You're saying, this is how many we're going to sell. 00:41:54.383 --> 00:41:55.540 align:middle line:90% And then what is the cost? 00:41:55.540 --> 00:41:56.740 align:middle line:90% What is the sales price? 00:41:56.740 --> 00:41:58.940 align:middle line:84% So all those red cells you have to enter in. 00:41:58.940 --> 00:42:02.180 align:middle line:84% But then it automatically rolls up into the product revenue. 00:42:02.180 --> 00:42:05.640 align:middle line:84% And then down further below, you see the supported base 00:42:05.640 --> 00:42:06.760 align:middle line:90% retention. 00:42:06.760 --> 00:42:12.320 align:middle line:84% That is how many people are buying support contracts from us 00:42:12.320 --> 00:42:14.740 align:middle line:84% and then how many are retaining them year over year. 00:42:14.740 --> 00:42:17.700 align:middle line:84% So you'll see a support revenue basis. 00:42:17.700 --> 00:42:20.760 align:middle line:84% And then some of that falls off after a year 00:42:20.760 --> 00:42:22.860 align:middle line:84% because people don't renew their support contract. 00:42:22.860 --> 00:42:25.068 align:middle line:84% So those are the only things you have to put on here. 00:42:25.068 --> 00:42:28.700 align:middle line:84% So you can use this to do your own sales projections. 00:42:28.700 --> 00:42:30.668 align:middle line:84% But I want you to keep in mind the-- 00:42:30.668 --> 00:42:32.460 align:middle line:84% and everybody does this super aggressively. 00:42:32.460 --> 00:42:33.500 align:middle line:90% Oh, we'll sell 100. 00:42:33.500 --> 00:42:35.320 align:middle line:90% We'll sell 10,000. 00:42:35.320 --> 00:42:37.880 align:middle line:84% The next one is, how are you going 00:42:37.880 --> 00:42:39.477 align:middle line:90% to hire salespeople to do that? 00:42:39.477 --> 00:42:41.060 align:middle line:84% And how are you going to hire-- sorry, 00:42:41.060 --> 00:42:42.260 align:middle line:90% this is the manufacturing. 00:42:42.260 --> 00:42:43.640 align:middle line:84% How are you going to hire the manufacturing 00:42:43.640 --> 00:42:44.968 align:middle line:90% to actually make the stuff? 00:42:44.968 --> 00:42:46.260 align:middle line:90% You need a VP of manufacturing. 00:42:46.260 --> 00:42:47.380 align:middle line:90% You need a supervisor. 00:42:47.380 --> 00:42:50.960 align:middle line:84% So all of these people in red are hires that you have to make. 00:42:50.960 --> 00:42:53.090 align:middle line:84% And this goes into the financial model. 00:42:53.090 --> 00:42:54.910 align:middle line:84% What also goes into this is, if you 00:42:54.910 --> 00:42:57.090 align:middle line:84% have a hiring plan of all of these people, 00:42:57.090 --> 00:42:58.810 align:middle line:84% you need to have a pipeline of resumes, 00:42:58.810 --> 00:43:00.070 align:middle line:84% and you need to have an interviewing process 00:43:00.070 --> 00:43:02.910 align:middle line:84% and everything else, which goes into an overhead category 00:43:02.910 --> 00:43:05.870 align:middle line:84% that I think is coming up later into another one. 00:43:05.870 --> 00:43:08.290 align:middle line:84% And then you have variable cost of goods sold. 00:43:08.290 --> 00:43:11.535 align:middle line:84% So early on in another spreadsheet you said, OK, 00:43:11.535 --> 00:43:13.910 align:middle line:84% we're going to sell this model for $10,000 and it's going 00:43:13.910 --> 00:43:15.630 align:middle line:90% to cost us $1,500 to make. 00:43:15.630 --> 00:43:17.330 align:middle line:84% So somehow you had to figure that out 00:43:17.330 --> 00:43:19.130 align:middle line:90% and it has to go into the model. 00:43:19.130 --> 00:43:23.670 align:middle line:84% But then the rest of it rolls up into the overall production 00:43:23.670 --> 00:43:25.042 align:middle line:90% COGS. 00:43:25.042 --> 00:43:26.250 align:middle line:90% And then you have a facility. 00:43:26.250 --> 00:43:29.050 align:middle line:84% So you have a $15,000 per quarter facility, 00:43:29.050 --> 00:43:30.550 align:middle line:90% which is pretty cheap. 00:43:30.550 --> 00:43:34.850 align:middle line:84% And then I guess in the second year, we buy a second facility, 00:43:34.850 --> 00:43:38.095 align:middle line:90% so it's $30,000. 00:43:38.095 --> 00:43:39.470 align:middle line:84% And then all of the magenta stuff 00:43:39.470 --> 00:43:42.670 align:middle line:84% goes on to another sheet that rolls up. 00:43:42.670 --> 00:43:45.388 align:middle line:84% And then other than the sales hiring plan, 00:43:45.388 --> 00:43:47.430 align:middle line:84% you have a staffing plan, where you have your CTO 00:43:47.430 --> 00:43:49.070 align:middle line:90% and your engineering team. 00:43:49.070 --> 00:43:50.720 align:middle line:90% And then this is the growth. 00:43:50.720 --> 00:43:53.380 align:middle line:84% And this is obviously a very heavy programmer business 00:43:53.380 --> 00:43:57.580 align:middle line:84% because you can see how many programmers we have in here. 00:43:57.580 --> 00:44:01.500 align:middle line:84% And so all the red there is input. 00:44:01.500 --> 00:44:07.018 align:middle line:84% And then we have a rough annual salary. 00:44:07.018 --> 00:44:09.060 align:middle line:84% And then I wanted to point out the benefits slash 00:44:09.060 --> 00:44:12.360 align:middle line:84% cost of living adjustment percentage on there. 00:44:12.360 --> 00:44:14.300 align:middle line:84% So that's all baked into the model. 00:44:14.300 --> 00:44:18.090 align:middle line:84% So as I'm describing this all to you-- 00:44:18.090 --> 00:44:20.203 align:middle line:84% when you go through this-- and I don't think 00:44:20.203 --> 00:44:21.120 align:middle line:90% there's any shortcuts. 00:44:21.120 --> 00:44:23.740 align:middle line:84% I mean, I think ChatGPT can help, but there's no shortcuts. 00:44:23.740 --> 00:44:26.147 align:middle line:84% When you go through this and you understand-- 00:44:26.147 --> 00:44:28.480 align:middle line:84% I need to hire this person, I need to hire these people, 00:44:28.480 --> 00:44:30.000 align:middle line:84% this is what their salary is going to be, 00:44:30.000 --> 00:44:31.833 align:middle line:84% this is what the growth rate is going to be. 00:44:31.833 --> 00:44:34.020 align:middle line:84% Then when you're in deep due diligence and somebody 00:44:34.020 --> 00:44:36.560 align:middle line:84% asks you a hard question about, well, 00:44:36.560 --> 00:44:41.380 align:middle line:84% what happens if the sales don't materialize 00:44:41.380 --> 00:44:43.100 align:middle line:90% as you projected them to be? 00:44:43.100 --> 00:44:45.540 align:middle line:84% You can think about the work that you did on this model 00:44:45.540 --> 00:44:48.300 align:middle line:84% and say, well, we would push out these hires 00:44:48.300 --> 00:44:51.160 align:middle line:84% and we would push out the production side of things. 00:44:51.160 --> 00:44:53.340 align:middle line:84% And we could adjust the model so that we 00:44:53.340 --> 00:44:56.860 align:middle line:84% can get to break even sooner or we can get to profitability 00:44:56.860 --> 00:44:58.460 align:middle line:90% more effectively. 00:44:58.460 --> 00:45:01.280 align:middle line:84% You can't really say that intuitively with credibility, 00:45:01.280 --> 00:45:03.340 align:middle line:84% unless you've dug into this whole thing 00:45:03.340 --> 00:45:08.460 align:middle line:84% and built it from the bottom up, as we say. 00:45:08.460 --> 00:45:12.220 align:middle line:84% Some other supplies, non-salary expenses. 00:45:12.220 --> 00:45:16.420 align:middle line:84% I see literature PR here, which is just marketing and going 00:45:16.420 --> 00:45:18.540 align:middle line:90% to trade shows. 00:45:18.540 --> 00:45:20.915 align:middle line:84% There's not a lot of hiring stuff. 00:45:20.915 --> 00:45:22.540 align:middle line:84% So if you're in a software firm, you're 00:45:22.540 --> 00:45:24.260 align:middle line:84% probably going to spend a lot of time 00:45:24.260 --> 00:45:27.040 align:middle line:84% reviewing resumes and talking to hiring firms. 00:45:27.040 --> 00:45:33.180 align:middle line:84% So that would go in this sheet as well. 00:45:33.180 --> 00:45:35.260 align:middle line:84% Salaries-- oh, I guess staffing plan 00:45:35.260 --> 00:45:38.960 align:middle line:84% is one of the inputs to hiring people. 00:45:38.960 --> 00:45:40.980 align:middle line:90% And then your rent. 00:45:40.980 --> 00:45:43.200 align:middle line:84% I always love telephone and internet. 00:45:43.200 --> 00:45:44.420 align:middle line:90% I don't know why. 00:45:44.420 --> 00:45:47.530 align:middle line:84% Telephone and fax machine seems to stay forever 00:45:47.530 --> 00:45:48.870 align:middle line:90% with the accounting firms. 00:45:48.870 --> 00:45:50.670 align:middle line:90% They always have that as a line. 00:45:50.670 --> 00:45:52.950 align:middle line:84% But like, who has a telephone anymore? 00:45:52.950 --> 00:45:54.470 align:middle line:90% Who has a fax line anymore? 00:45:54.470 --> 00:46:00.570 align:middle line:84% So anyways, that all rolls up again to your profit and loss 00:46:00.570 --> 00:46:03.570 align:middle line:90% quarterly statement here. 00:46:03.570 --> 00:46:07.650 align:middle line:84% And so that kind of gets back to the beginning 00:46:07.650 --> 00:46:08.707 align:middle line:90% where we started from. 00:46:08.707 --> 00:46:10.290 align:middle line:84% So we went through all of those sheets 00:46:10.290 --> 00:46:11.917 align:middle line:84% and we put in all the values that we 00:46:11.917 --> 00:46:14.250 align:middle line:84% wanted to get to in order to create this profit and loss 00:46:14.250 --> 00:46:15.250 align:middle line:90% statement. 00:46:15.250 --> 00:46:21.230 align:middle line:84% And then what comes out of it is CapEx and cash flow. 00:46:21.230 --> 00:46:24.290 align:middle line:84% So the way to read this is-- you see where 00:46:24.290 --> 00:46:26.210 align:middle line:90% it says beginning cash flow? 00:46:26.210 --> 00:46:27.530 align:middle line:90% I kind of need a-- 00:46:27.530 --> 00:46:29.150 align:middle line:84% do I have a laser pointer on here? 00:46:29.150 --> 00:46:31.570 align:middle line:84% I hate to do it, but I'm going to do it. 00:46:31.570 --> 00:46:32.810 align:middle line:90% I'm going to do it. 00:46:32.810 --> 00:46:37.590 align:middle line:84% So beginning cash flow-- this is how not to do a presentation. 00:46:37.590 --> 00:46:38.850 align:middle line:90% This is for OCW, right? 00:46:38.850 --> 00:46:41.130 align:middle line:84% Put my back to the audience and point at the screen. 00:46:41.130 --> 00:46:44.830 align:middle line:90% OK, beginning cash flow 0. 00:46:44.830 --> 00:46:48.320 align:middle line:84% I add $5 million investment, and then I spend a bunch of money, 00:46:48.320 --> 00:46:49.780 align:middle line:90% and I end up with $4 million. 00:46:49.780 --> 00:46:52.613 align:middle line:84% That $4 million pops up into the next year as my beginning cash. 00:46:52.613 --> 00:46:54.280 align:middle line:84% And then I subtract out a bunch of money 00:46:54.280 --> 00:46:55.322 align:middle line:90% and I get an ending cash. 00:46:55.322 --> 00:46:58.424 align:middle line:84% So you can see how this becomes like a little doot doot doot 00:46:58.424 --> 00:46:59.040 align:middle line:90% doot doot. 00:46:59.040 --> 00:47:03.360 align:middle line:84% So because you do this, you know that if I've got $5 million 00:47:03.360 --> 00:47:05.853 align:middle line:84% here, well, I'm going to need to raise some more money. 00:47:05.853 --> 00:47:08.020 align:middle line:84% And I'm only down to less than a million bucks here. 00:47:08.020 --> 00:47:10.020 align:middle line:90% I better raise $12 million here. 00:47:10.020 --> 00:47:12.320 align:middle line:84% So as long as your projections show 00:47:12.320 --> 00:47:13.900 align:middle line:84% that the things are working out well, 00:47:13.900 --> 00:47:15.700 align:middle line:84% you can raise the $12 million here. 00:47:15.700 --> 00:47:21.400 align:middle line:84% And that's what I was trying to show with the graphic of how 00:47:21.400 --> 00:47:22.880 align:middle line:90% a cash flow works. 00:47:22.880 --> 00:47:25.220 align:middle line:84% It is intuitive when I show it to you that way. 00:47:25.220 --> 00:47:27.078 align:middle line:84% But a lot of people just leave it off. 00:47:27.078 --> 00:47:29.120 align:middle line:84% It's like, can we just look at your balance sheet 00:47:29.120 --> 00:47:31.160 align:middle line:90% and your income statement? 00:47:31.160 --> 00:47:32.760 align:middle line:90% I don't care about cash flow. 00:47:32.760 --> 00:47:34.880 align:middle line:84% It does help a lot of accountants 00:47:34.880 --> 00:47:37.940 align:middle line:84% understand where the ebb and flow is in the business, 00:47:37.940 --> 00:47:40.355 align:middle line:84% and if you get into trouble in certain areas, 00:47:40.355 --> 00:47:42.480 align:middle line:84% whether or not you're going to need to buffer it up 00:47:42.480 --> 00:47:47.960 align:middle line:84% with some kind of interim cash needs and stuff. 00:47:47.960 --> 00:47:49.900 align:middle line:90% So I don't completely ignore it. 00:47:49.900 --> 00:47:51.840 align:middle line:84% But you might find that in your conversations, 00:47:51.840 --> 00:47:53.632 align:middle line:84% they just want to see the income statement. 00:47:53.632 --> 00:47:55.282 align:middle line:84% Just show me the income statement, 00:47:55.282 --> 00:47:56.740 align:middle line:84% which is kind of what we show here. 00:47:56.740 --> 00:48:01.920 align:middle line:90% So yeah, this is the end result. 00:48:01.920 --> 00:48:03.780 align:middle line:84% Steady, consistent evolutionary model. 00:48:03.780 --> 00:48:06.760 align:middle line:84% So when you present the model during due diligence 00:48:06.760 --> 00:48:08.960 align:middle line:84% to an investor and then they ask questions 00:48:08.960 --> 00:48:10.900 align:middle line:84% and they kind of beat it up a little bit, 00:48:10.900 --> 00:48:13.275 align:middle line:84% or you ask your friends and they beat it up a little bit, 00:48:13.275 --> 00:48:16.200 align:middle line:84% it's good to continually iterate on it 00:48:16.200 --> 00:48:21.880 align:middle line:84% to really get a solid feel for where the limitations are. 00:48:21.880 --> 00:48:25.000 align:middle line:84% Usually at this stage, there's no tax consequences 00:48:25.000 --> 00:48:27.060 align:middle line:90% or there's no tax consideration. 00:48:27.060 --> 00:48:29.300 align:middle line:84% That's more of an advanced topic. 00:48:29.300 --> 00:48:31.580 align:middle line:84% And especially when you're losing money every year, 00:48:31.580 --> 00:48:34.000 align:middle line:84% you don't need to worry about tax. 00:48:34.000 --> 00:48:36.100 align:middle line:84% And I don't allocate G&A expenses at this point. 00:48:36.100 --> 00:48:36.980 align:middle line:90% Was there a question? 00:48:36.980 --> 00:48:37.480 align:middle line:90% No? 00:48:37.480 --> 00:48:39.840 align:middle line:90% OK. 00:48:39.840 --> 00:48:41.840 align:middle line:84% All right, so presentation suggestions 00:48:41.840 --> 00:48:44.710 align:middle line:84% for an executive summary, annual P&L for five years that 00:48:44.710 --> 00:48:47.430 align:middle line:84% shows the percentage, so they can kind of do-- so I think 00:48:47.430 --> 00:48:50.150 align:middle line:84% the other point about business models and comparisons 00:48:50.150 --> 00:48:52.070 align:middle line:84% is that one thing you heard from the VC panel 00:48:52.070 --> 00:48:54.370 align:middle line:84% is that there are pattern matchers. 00:48:54.370 --> 00:48:57.670 align:middle line:84% So if they see, like, oh, your ratios look like this model 00:48:57.670 --> 00:49:00.790 align:middle line:84% that I know-- this successful business that I know-- then 00:49:00.790 --> 00:49:02.430 align:middle line:84% you fit in that category and they're 00:49:02.430 --> 00:49:07.990 align:middle line:84% more likely to lean in and look at the next phase of things. 00:49:07.990 --> 00:49:09.683 align:middle line:90% You do want to have-- 00:49:09.683 --> 00:49:11.350 align:middle line:84% any kind of assumptions you make, you do 00:49:11.350 --> 00:49:14.050 align:middle line:84% want to have data and sources behind that. 00:49:14.050 --> 00:49:16.310 align:middle line:84% So you want to make sure that the average selling 00:49:16.310 --> 00:49:19.310 align:middle line:84% price, you have some level of precedent for why you're pricing 00:49:19.310 --> 00:49:22.228 align:middle line:84% things the way they are, what quarter you'll be profitable, 00:49:22.228 --> 00:49:23.770 align:middle line:84% and then your total cash requirement. 00:49:23.770 --> 00:49:26.290 align:middle line:84% So I think in this one it was $6 million. 00:49:26.290 --> 00:49:28.510 align:middle line:84% I always like to raise a little more than that. 00:49:28.510 --> 00:49:30.750 align:middle line:84% And then the full business plan-- 00:49:30.750 --> 00:49:33.710 align:middle line:84% which, I don't know if people do full business plans anymore-- 00:49:33.710 --> 00:49:36.650 align:middle line:84% annual P&L, quarterly P&L for all four years, 00:49:36.650 --> 00:49:39.530 align:middle line:84% staffing plan, and quarterly cash flows. 00:49:39.530 --> 00:49:42.520 align:middle line:84% And this is when-- if the investment firm, 00:49:42.520 --> 00:49:45.020 align:middle line:84% if it's a large VC firm, they're going to have a CFO. 00:49:45.020 --> 00:49:47.260 align:middle line:84% And they might dig in really deeply into this 00:49:47.260 --> 00:49:50.900 align:middle line:84% and push you on your staffing plan and why are you-- 00:49:50.900 --> 00:49:53.700 align:middle line:84% and push you on the tight parts of the cash flow 00:49:53.700 --> 00:49:56.020 align:middle line:84% and why things are the way they are. 00:49:56.020 --> 00:49:59.380 align:middle line:84% And if you get big enough into the series A and series B, 00:49:59.380 --> 00:50:01.380 align:middle line:84% you bring your CFO to those conversations. 00:50:01.380 --> 00:50:03.960 align:middle line:84% So you have a finance professional on the team, 00:50:03.960 --> 00:50:05.700 align:middle line:84% and you can start to get into more 00:50:05.700 --> 00:50:08.700 align:middle line:84% of these sophisticated discussions. 00:50:08.700 --> 00:50:10.907 align:middle line:90% Questions? 00:50:10.907 --> 00:50:12.240 align:middle line:90% Questions on the financial plan? 00:50:12.240 --> 00:50:15.080 align:middle line:84% Otherwise, we'll get into equity and how to share the pie. 00:50:15.080 --> 00:50:16.620 align:middle line:90% Yes, ma'am. 00:50:16.620 --> 00:50:20.380 align:middle line:84% AUDIENCE: I'm coming from [INAUDIBLE] corporate, 00:50:20.380 --> 00:50:21.420 align:middle line:90% working over there. 00:50:21.420 --> 00:50:24.540 align:middle line:84% For any initiatives, the only thing 00:50:24.540 --> 00:50:28.380 align:middle line:84% I needed to give to get money was NPV. 00:50:28.380 --> 00:50:32.540 align:middle line:84% Business case, if I have net present value is positive. 00:50:32.540 --> 00:50:34.140 align:middle line:90% So that was my only job. 00:50:34.140 --> 00:50:36.320 align:middle line:84% So when I wanted to make a [INAUDIBLE], 00:50:36.320 --> 00:50:39.200 align:middle line:84% that was the way I thought about it. 00:50:39.200 --> 00:50:42.420 align:middle line:84% Hey, let's show that your value will be positive-- hopefully 00:50:42.420 --> 00:50:43.980 align:middle line:90% very positive. 00:50:43.980 --> 00:50:45.120 align:middle line:90% So is that enough? 00:50:45.120 --> 00:50:46.440 align:middle line:90% Is it necessary? 00:50:46.440 --> 00:50:48.740 align:middle line:90% [INAUDIBLE]? 00:50:48.740 --> 00:50:51.100 align:middle line:84% STEVE DEREZINSKI: I mean, net positive value creation 00:50:51.100 --> 00:50:53.760 align:middle line:84% is the kernel of what you're trying to get at. 00:50:53.760 --> 00:50:56.620 align:middle line:84% What we're showing you with the full financial plan is, 00:50:56.620 --> 00:50:58.000 align:middle line:90% you need an infrastructure. 00:50:58.000 --> 00:50:59.020 align:middle line:90% You need overhead. 00:50:59.020 --> 00:51:00.600 align:middle line:90% You need rent. 00:51:00.600 --> 00:51:02.040 align:middle line:90% You need manufacturing. 00:51:02.040 --> 00:51:03.357 align:middle line:90% You need a hiring plan. 00:51:03.357 --> 00:51:04.440 align:middle line:90% You need a marketing plan. 00:51:04.440 --> 00:51:08.600 align:middle line:84% So in a corporation, if you're a single business unit, 00:51:08.600 --> 00:51:10.900 align:middle line:84% you want to show that my product has net present-- 00:51:10.900 --> 00:51:12.200 align:middle line:90% has positive cash flow. 00:51:12.200 --> 00:51:15.160 align:middle line:84% But what's ignored is all the overhead around it. 00:51:15.160 --> 00:51:17.160 align:middle line:84% Here we're showing the whole thing. 00:51:17.160 --> 00:51:20.220 align:middle line:84% But I think if you start with that as the kernel 00:51:20.220 --> 00:51:23.500 align:middle line:84% and you build up from there, I think that's not a bad way 00:51:23.500 --> 00:51:25.060 align:middle line:90% to look at things. 00:51:25.060 --> 00:51:27.120 align:middle line:84% Because if that's not net present value, 00:51:27.120 --> 00:51:29.000 align:middle line:90% then work on another business. 00:51:29.000 --> 00:51:31.140 align:middle line:84% AUDIENCE: All the overhead, everything 00:51:31.140 --> 00:51:34.820 align:middle line:84% I was just putting people, marketing-- everything 00:51:34.820 --> 00:51:38.930 align:middle line:84% for me was people, putting the average salary for everyone, 00:51:38.930 --> 00:51:41.170 align:middle line:84% including overhead for the company. 00:51:41.170 --> 00:51:44.970 align:middle line:90% So I was just simplifying. 00:51:44.970 --> 00:51:46.690 align:middle line:90% I was like, [INAUDIBLE]. 00:51:46.690 --> 00:51:48.930 align:middle line:84% So does it make sense to go with that? 00:51:48.930 --> 00:51:51.990 align:middle line:84% Because that is where I very [INAUDIBLE]. 00:51:51.990 --> 00:51:53.350 align:middle line:90% I have done it a million times. 00:51:53.350 --> 00:51:54.250 align:middle line:84% STEVE DEREZINSKI: I think when you're first 00:51:54.250 --> 00:51:55.790 align:middle line:90% starting, that's probably fine. 00:51:55.790 --> 00:51:57.493 align:middle line:84% But as you start to get into where 00:51:57.493 --> 00:51:59.410 align:middle line:84% people are going to really give you real money 00:51:59.410 --> 00:52:01.370 align:middle line:84% and they want you to really spend it on-- they 00:52:01.370 --> 00:52:02.990 align:middle line:84% don't want you to spend it on an average person. 00:52:02.990 --> 00:52:04.710 align:middle line:84% They want you to spend it on a real hire. 00:52:04.710 --> 00:52:07.210 align:middle line:84% So that's when you have to get really more granular and more 00:52:07.210 --> 00:52:08.098 align:middle line:90% specific on it. 00:52:08.098 --> 00:52:09.890 align:middle line:84% So I think it can work out when you're just 00:52:09.890 --> 00:52:12.490 align:middle line:84% trying to flesh out business models and strategies-- to just 00:52:12.490 --> 00:52:14.630 align:middle line:84% kind of say, well, an average salary is this, 00:52:14.630 --> 00:52:16.213 align:middle line:84% and I'm going to need like five people 00:52:16.213 --> 00:52:17.670 align:middle line:90% to do that after three years. 00:52:17.670 --> 00:52:20.570 align:middle line:84% That's a good way to back-of-the-napkin sketch things 00:52:20.570 --> 00:52:21.070 align:middle line:90% out. 00:52:21.070 --> 00:52:22.650 align:middle line:84% But what we're talking about here is, 00:52:22.650 --> 00:52:23.930 align:middle line:84% we're going to raise capital and we're 00:52:23.930 --> 00:52:25.430 align:middle line:84% going to actually spend all this money. 00:52:25.430 --> 00:52:27.230 align:middle line:84% So these are the real salaries of people. 00:52:27.230 --> 00:52:28.573 align:middle line:90% AUDIENCE: Thank you. 00:52:28.573 --> 00:52:29.490 align:middle line:90% STEVE DEREZINSKI: Yep. 00:52:29.490 --> 00:52:31.490 align:middle line:90% Other questions? 00:52:31.490 --> 00:52:33.390 align:middle line:84% Otherwise, we can go into equity. 00:52:33.390 --> 00:52:37.920 align:middle line:84% Oh, ChatGPT over here has a question. 00:52:37.920 --> 00:52:39.920 align:middle line:90% Prove you're not an AI. 00:52:39.920 --> 00:52:45.840 align:middle line:84% AUDIENCE: They can do captchas now, so I really can't. 00:52:45.840 --> 00:52:48.360 align:middle line:84% My question was, when you're testing out different business 00:52:48.360 --> 00:52:52.900 align:middle line:84% models, that's what you put in the financial one, right? 00:52:52.900 --> 00:52:58.330 align:middle line:84% So for this year, we have this set of revenue streams 00:52:58.330 --> 00:53:01.540 align:middle line:84% and we're going to start testing this model to see if it works. 00:53:01.540 --> 00:53:05.328 align:middle line:84% Or do I stick with a small form management plan? 00:53:05.328 --> 00:53:07.620 align:middle line:84% STEVE DEREZINSKI: I have somewhat of an answer to that, 00:53:07.620 --> 00:53:11.000 align:middle line:84% but I'm going to look at Joe and maybe he has a better answer. 00:53:11.000 --> 00:53:15.240 align:middle line:84% Typically, when you figure out the right business model 00:53:15.240 --> 00:53:19.037 align:middle line:84% that works, or what the technology is 00:53:19.037 --> 00:53:20.620 align:middle line:84% and how you're going to productize it, 00:53:20.620 --> 00:53:22.280 align:middle line:84% there's typically one business model 00:53:22.280 --> 00:53:23.820 align:middle line:84% that you're going to really go with. 00:53:23.820 --> 00:53:26.160 align:middle line:84% And you can figure that out intuitively. 00:53:26.160 --> 00:53:26.860 align:middle line:90% So I'm not sure. 00:53:26.860 --> 00:53:28.360 align:middle line:84% Is there a more detailed example you 00:53:28.360 --> 00:53:30.180 align:middle line:84% can say where you want to test out other ones, 00:53:30.180 --> 00:53:32.060 align:middle line:84% like you want to test market other business models? 00:53:32.060 --> 00:53:34.477 align:middle line:84% Or are you talking about just like running your financials 00:53:34.477 --> 00:53:37.640 align:middle line:84% in two different ways to see which one looks better? 00:53:37.640 --> 00:53:43.200 align:middle line:84% AUDIENCE: Well, for example, having a premium business model 00:53:43.200 --> 00:53:45.480 align:middle line:84% first, and then having one or two team 00:53:45.480 --> 00:53:50.150 align:middle line:84% accounts that are going to be either for credits, for example. 00:53:50.150 --> 00:53:52.354 align:middle line:84% For example, with an AI product it 00:53:52.354 --> 00:53:56.440 align:middle line:84% could be credit-based versus subscription-based. 00:53:56.440 --> 00:53:58.300 align:middle line:90% So how do I plan for that? 00:53:58.300 --> 00:54:00.420 align:middle line:84% Or just have two different financial plans 00:54:00.420 --> 00:54:01.360 align:middle line:90% for each account? 00:54:01.360 --> 00:54:02.860 align:middle line:84% STEVE DEREZINSKI: So are you talking 00:54:02.860 --> 00:54:06.260 align:middle line:84% about different enterprise-- like team plan, enterprise-- 00:54:06.260 --> 00:54:08.060 align:middle line:84% like a SaaS business kind of thing? 00:54:08.060 --> 00:54:10.220 align:middle line:84% I think those are different product offerings. 00:54:10.220 --> 00:54:11.860 align:middle line:84% Those aren't necessarily different business models. 00:54:11.860 --> 00:54:13.443 align:middle line:84% Unless you're planning on selling them 00:54:13.443 --> 00:54:15.000 align:middle line:84% completely differently, like you're 00:54:15.000 --> 00:54:18.700 align:middle line:84% going to license one or white label one, 00:54:18.700 --> 00:54:22.800 align:middle line:84% or you're going to sell it as a service just on a website. 00:54:22.800 --> 00:54:25.698 align:middle line:84% Are you talking about very different things like that? 00:54:25.698 --> 00:54:26.240 align:middle line:90% AUDIENCE: No. 00:54:26.240 --> 00:54:29.360 align:middle line:84% I mean, you know how sometimes you buy a software subscription 00:54:29.360 --> 00:54:30.680 align:middle line:90% and you pay for credits? 00:54:30.680 --> 00:54:32.020 align:middle line:90% STEVE DEREZINSKI: Yeah, yeah. 00:54:32.020 --> 00:54:34.830 align:middle line:84% AUDIENCE: [INAUDIBLE] you pay a fixed subscription 00:54:34.830 --> 00:54:40.070 align:middle line:84% and upgrade if you add another user to that kind of detail. 00:54:40.070 --> 00:54:41.362 align:middle line:90% Would that be-- 00:54:41.362 --> 00:54:43.070 align:middle line:84% STEVE DEREZINSKI: I think you can totally 00:54:43.070 --> 00:54:44.710 align:middle line:84% model all those out and figure out 00:54:44.710 --> 00:54:47.013 align:middle line:90% which strategy you want to use. 00:54:47.013 --> 00:54:48.430 align:middle line:84% Is that what you're talking about? 00:54:48.430 --> 00:54:50.678 align:middle line:84% I think in that scenario, it's easy enough 00:54:50.678 --> 00:54:52.470 align:middle line:84% to just try out a bunch of different models 00:54:52.470 --> 00:54:54.370 align:middle line:90% and then see what makes sense. 00:54:54.370 --> 00:54:57.470 align:middle line:84% I think ultimately it's going to come down to what do people buy? 00:54:57.470 --> 00:54:59.730 align:middle line:84% You can model it all to your heart's content. 00:54:59.730 --> 00:55:01.490 align:middle line:84% But until you get to the marketplace and people are like, 00:55:01.490 --> 00:55:02.090 align:middle line:90% I don't want that. 00:55:02.090 --> 00:55:02.850 align:middle line:90% That's too expensive. 00:55:02.850 --> 00:55:05.183 align:middle line:84% Or why would I want to buy all that if I just want this? 00:55:05.183 --> 00:55:09.110 align:middle line:84% You'll find out once you launch what really works. 00:55:09.110 --> 00:55:10.170 align:middle line:90% Other questions? 00:55:10.170 --> 00:55:13.550 align:middle line:90% 00:55:13.550 --> 00:55:16.590 align:middle line:84% AUDIENCE: Thank you for this presentation. 00:55:16.590 --> 00:55:20.670 align:middle line:84% One of the very important things in the financial projections 00:55:20.670 --> 00:55:23.670 align:middle line:84% is, as you say, sales projections. 00:55:23.670 --> 00:55:28.070 align:middle line:84% And you said that we should take it from the bottom up. 00:55:28.070 --> 00:55:31.820 align:middle line:84% But how do you start out the sales? 00:55:31.820 --> 00:55:34.940 align:middle line:84% [INAUDIBLE] year invoices year three or year four 00:55:34.940 --> 00:55:37.200 align:middle line:84% would be like would be radically different. 00:55:37.200 --> 00:55:42.700 align:middle line:84% So are there tools or resources available to better forecast 00:55:42.700 --> 00:55:49.673 align:middle line:84% sales or are there actual sales projections from companies? 00:55:49.673 --> 00:55:51.340 align:middle line:84% STEVE DEREZINSKI: There are, but they're 00:55:51.340 --> 00:55:53.020 align:middle line:84% from companies that already exist. 00:55:53.020 --> 00:55:55.680 align:middle line:84% And you're a brand new company, so you've got to figure it out, 00:55:55.680 --> 00:55:57.980 align:middle line:90% my friend. 00:55:57.980 --> 00:55:59.560 align:middle line:90% I know what you're getting at. 00:55:59.560 --> 00:56:03.580 align:middle line:84% It's really hard, because you're predicting the future. 00:56:03.580 --> 00:56:05.900 align:middle line:84% And I think that's why they said, 00:56:05.900 --> 00:56:08.660 align:middle line:84% we expect conviction from you, because we want you 00:56:08.660 --> 00:56:10.360 align:middle line:90% to show us your projections. 00:56:10.360 --> 00:56:12.828 align:middle line:84% And we want you to show that you can do this. 00:56:12.828 --> 00:56:14.620 align:middle line:84% And you've convinced yourself and your team 00:56:14.620 --> 00:56:15.860 align:middle line:90% that you can do this. 00:56:15.860 --> 00:56:19.540 align:middle line:84% Because you're talking about going off into the future 00:56:19.540 --> 00:56:22.240 align:middle line:84% and saying what's going to be possible tomorrow. 00:56:22.240 --> 00:56:24.440 align:middle line:84% And last I checked, nobody could predict the future. 00:56:24.440 --> 00:56:26.173 align:middle line:90% But that's what we're all doing. 00:56:26.173 --> 00:56:28.840 align:middle line:84% A lot of times there's a lot of discussion about, like, you said 00:56:28.840 --> 00:56:29.757 align:middle line:90% were going to do this. 00:56:29.757 --> 00:56:31.740 align:middle line:84% Well, we were all predicting the future, 00:56:31.740 --> 00:56:34.320 align:middle line:84% and you had a more rosy view of the future than I did, 00:56:34.320 --> 00:56:36.488 align:middle line:90% so it didn't work out that way. 00:56:36.488 --> 00:56:38.780 align:middle line:84% I don't know if you have any other answers to the sales 00:56:38.780 --> 00:56:41.420 align:middle line:90% forecast question, Joe. 00:56:41.420 --> 00:56:42.560 align:middle line:90% He does, of course. 00:56:42.560 --> 00:56:43.877 align:middle line:90% I love it. 00:56:43.877 --> 00:56:45.460 align:middle line:84% JOSEPH HADZIMA: Yeah, I think you just 00:56:45.460 --> 00:56:49.300 align:middle line:84% have to think of what the model is that you're going to take. 00:56:49.300 --> 00:56:52.500 align:middle line:90% 00:56:52.500 --> 00:56:58.380 align:middle line:84% If it's a product, how long does it take to manufacture it? 00:56:58.380 --> 00:57:00.540 align:middle line:90% Is it a six month lag time? 00:57:00.540 --> 00:57:02.940 align:middle line:90% Is it a one month turnaround? 00:57:02.940 --> 00:57:04.660 align:middle line:90% When do you have to start? 00:57:04.660 --> 00:57:06.380 align:middle line:84% If you have direct sales, how long 00:57:06.380 --> 00:57:09.340 align:middle line:84% does it take a sales person to get up to speed? 00:57:09.340 --> 00:57:11.120 align:middle line:84% What is the sales cycle in the industry? 00:57:11.120 --> 00:57:12.800 align:middle line:84% Now, if you're disrupting the industry saying, 00:57:12.800 --> 00:57:14.920 align:middle line:84% well, we're not actually selling you the product. 00:57:14.920 --> 00:57:17.800 align:middle line:84% It's a subscription to a cloud-based thing, 00:57:17.800 --> 00:57:19.720 align:middle line:90% that's a different model. 00:57:19.720 --> 00:57:20.680 align:middle line:90% How many users? 00:57:20.680 --> 00:57:23.660 align:middle line:90% How quickly will people adopt? 00:57:23.660 --> 00:57:24.760 align:middle line:90% And play with those. 00:57:24.760 --> 00:57:27.140 align:middle line:84% You can even use Charlie's spreadsheet, 00:57:27.140 --> 00:57:29.130 align:middle line:84% where you can put different models 00:57:29.130 --> 00:57:31.770 align:middle line:84% or different actual revenue streams. 00:57:31.770 --> 00:57:33.590 align:middle line:84% You have to then go down and say, well, 00:57:33.590 --> 00:57:36.250 align:middle line:84% to support that revenue stream, I might need some other rows. 00:57:36.250 --> 00:57:38.570 align:middle line:84% You have to really modify the spreadsheet. 00:57:38.570 --> 00:57:40.990 align:middle line:84% I use this base spreadsheet all the time. 00:57:40.990 --> 00:57:44.310 align:middle line:84% I've modified it for FDA and other kinds of things. 00:57:44.310 --> 00:57:46.890 align:middle line:90% But it's a good starting point. 00:57:46.890 --> 00:57:48.810 align:middle line:90% STEVE DEREZINSKI: Excellent. 00:57:48.810 --> 00:57:50.323 align:middle line:90% Thank you. 00:57:50.323 --> 00:57:50.990 align:middle line:90% Other questions? 00:57:50.990 --> 00:57:53.390 align:middle line:84% Otherwise, let's talk about how do we split up the pie. 00:57:53.390 --> 00:57:54.490 align:middle line:90% Oh, got a question here? 00:57:54.490 --> 00:57:55.270 align:middle line:90% Oh, over here. 00:57:55.270 --> 00:57:58.010 align:middle line:90% 00:57:58.010 --> 00:58:00.850 align:middle line:84% AUDIENCE: Thank you for the presentation. 00:58:00.850 --> 00:58:02.750 align:middle line:84% When I've done these things before, 00:58:02.750 --> 00:58:06.240 align:middle line:84% there's always been a question about what's your best-case 00:58:06.240 --> 00:58:09.330 align:middle line:84% and what's your worst-case scenario? 00:58:09.330 --> 00:58:11.790 align:middle line:90% What's the rule of thumb? 00:58:11.790 --> 00:58:14.090 align:middle line:84% Because I've gone through a venture before, 00:58:14.090 --> 00:58:19.610 align:middle line:84% we had to actually create kind of a bandwidth of revenue 00:58:19.610 --> 00:58:20.650 align:middle line:90% projections. 00:58:20.650 --> 00:58:22.690 align:middle line:84% Just kind of curious as to what's 00:58:22.690 --> 00:58:24.810 align:middle line:90% the current thinking on this. 00:58:24.810 --> 00:58:27.140 align:middle line:84% STEVE DEREZINSKI: So I usually get the a question, 00:58:27.140 --> 00:58:30.440 align:middle line:90% what are your biggest risks? 00:58:30.440 --> 00:58:32.740 align:middle line:84% So kind of beyond the financial plan, 00:58:32.740 --> 00:58:34.300 align:middle line:90% what are your biggest risks? 00:58:34.300 --> 00:58:35.880 align:middle line:84% And usually it has to do with not 00:58:35.880 --> 00:58:37.400 align:middle line:84% being able to make critical hires 00:58:37.400 --> 00:58:41.700 align:middle line:84% or some technology milestone gets missed or something. 00:58:41.700 --> 00:58:42.400 align:middle line:90% AUDIENCE: Sales. 00:58:42.400 --> 00:58:43.320 align:middle line:90% STEVE DEREZINSKI: Yeah, yeah. 00:58:43.320 --> 00:58:45.112 align:middle line:84% Well, the technology milestone gets missed, 00:58:45.112 --> 00:58:46.560 align:middle line:90% so the sales fall off. 00:58:46.560 --> 00:58:50.080 align:middle line:84% And I try and have some kind of scenarios 00:58:50.080 --> 00:58:52.920 align:middle line:84% planned behind the scenes so that I can show them. 00:58:52.920 --> 00:58:54.480 align:middle line:84% That's always what you want to do. 00:58:54.480 --> 00:58:56.883 align:middle line:84% If you know the questions you're going to have, 00:58:56.883 --> 00:58:58.800 align:middle line:84% you have the appendix teed up with the answers 00:58:58.800 --> 00:58:59.660 align:middle line:90% to those questions. 00:58:59.660 --> 00:59:01.785 align:middle line:84% Because then that gets you the A-plus in the class. 00:59:01.785 --> 00:59:05.543 align:middle line:84% So that question about what are your biggest risks? 00:59:05.543 --> 00:59:07.460 align:middle line:84% And if you have them modeled, out you can say, 00:59:07.460 --> 00:59:09.080 align:middle line:90% well, this, this. 00:59:09.080 --> 00:59:11.800 align:middle line:84% But then we're working hard to solve them with these four 00:59:11.800 --> 00:59:12.860 align:middle line:90% different reasons. 00:59:12.860 --> 00:59:16.600 align:middle line:84% That is a classic question that you always get. 00:59:16.600 --> 00:59:18.480 align:middle line:84% And I would recommend anybody include 00:59:18.480 --> 00:59:20.200 align:middle line:84% that in your financial projections 00:59:20.200 --> 00:59:22.480 align:middle line:84% or even in your pitch deck to have it in the appendix 00:59:22.480 --> 00:59:25.920 align:middle line:84% to make sure you can answer that well. 00:59:25.920 --> 00:59:27.680 align:middle line:84% Honestly talk about what the risks are 00:59:27.680 --> 00:59:29.720 align:middle line:84% and honestly talk about what your mitigation strategies 00:59:29.720 --> 00:59:30.260 align:middle line:90% for them. 00:59:30.260 --> 00:59:31.635 align:middle line:84% AUDIENCE: Keep it in the appendix 00:59:31.635 --> 00:59:35.022 align:middle line:84% or just keep it aside, just in case you're asked? 00:59:35.022 --> 00:59:36.480 align:middle line:84% STEVE DEREZINSKI: If I'm presenting 00:59:36.480 --> 00:59:39.500 align:middle line:84% and I'm controlling the slides, I keep it in the appendix. 00:59:39.500 --> 00:59:42.340 align:middle line:84% If I'm sending the slides, I don't send it. 00:59:42.340 --> 00:59:46.000 align:middle line:84% I hold it back until I have a conversation with them. 00:59:46.000 --> 00:59:48.600 align:middle line:90% Other questions? 00:59:48.600 --> 00:59:51.355 align:middle line:84% We got more question, then we'll get on to equity here. 00:59:51.355 --> 00:59:52.480 align:middle line:90% Let's see what we got here. 00:59:52.480 --> 00:59:53.543 align:middle line:90% Equity distribution, OK. 00:59:53.543 --> 00:59:54.960 align:middle line:84% AUDIENCE: In one of the slides you 00:59:54.960 --> 00:59:57.280 align:middle line:84% mentioned it's better to say what quarter 00:59:57.280 --> 00:59:59.060 align:middle line:90% are you going to be profitable. 00:59:59.060 --> 01:00:00.740 align:middle line:84% I was wondering-- I have a question. 01:00:00.740 --> 01:00:01.960 align:middle line:90% [INAUDIBLE] 01:00:01.960 --> 01:00:04.340 align:middle line:84% Without having concrete customers, 01:00:04.340 --> 01:00:07.480 align:middle line:90% how do we estimate that? 01:00:07.480 --> 01:00:10.200 align:middle line:84% STEVE DEREZINSKI: You do the financial planning. 01:00:10.200 --> 01:00:11.320 align:middle line:90% It's tricky. 01:00:11.320 --> 01:00:15.317 align:middle line:84% I mean, what we're talking about here, this is at the zero stage. 01:00:15.317 --> 01:00:16.900 align:middle line:84% We don't even have the $5 million yet. 01:00:16.900 --> 01:00:19.120 align:middle line:84% And we're building out a financial plan for that. 01:00:19.120 --> 01:00:22.360 align:middle line:84% So as you build out the growth and what 01:00:22.360 --> 01:00:26.110 align:middle line:84% we think we're going to do, that tells you 01:00:26.110 --> 01:00:27.850 align:middle line:84% where the profitability comes in. 01:00:27.850 --> 01:00:31.870 align:middle line:84% So what this is showing is kind of an iteration 01:00:31.870 --> 01:00:34.970 align:middle line:84% of a lot of different attempts at looking at the model. 01:00:34.970 --> 01:00:38.350 align:middle line:84% And I think the other answer to the other person's question 01:00:38.350 --> 01:00:39.830 align:middle line:90% earlier is-- 01:00:39.830 --> 01:00:41.350 align:middle line:90% how do you know? 01:00:41.350 --> 01:00:44.990 align:middle line:84% Well, you present this model to people and they beat it up. 01:00:44.990 --> 01:00:46.790 align:middle line:84% And they go, you can't sell that fast 01:00:46.790 --> 01:00:48.370 align:middle line:84% or you can't manufacture that fast. 01:00:48.370 --> 01:00:50.287 align:middle line:84% And then you have to go back and go no, yes, I 01:00:50.287 --> 01:00:53.090 align:middle line:90% can, and argue for why that is. 01:00:53.090 --> 01:00:56.110 align:middle line:84% Once that's beat up, then you have a solid model 01:00:56.110 --> 01:00:58.370 align:middle line:84% that you think really holds legs, 01:00:58.370 --> 01:01:00.990 align:middle line:84% and you're taking the collective wisdom of all the advisors 01:01:00.990 --> 01:01:02.030 align:middle line:90% that you've talked to. 01:01:02.030 --> 01:01:05.490 align:middle line:84% And then you'll have the quarter that you become profitable. 01:01:05.490 --> 01:01:08.992 align:middle line:84% So I think it's a little bit cheating to show the end result 01:01:08.992 --> 01:01:10.450 align:middle line:84% right in the beginning, because oh, 01:01:10.450 --> 01:01:11.610 align:middle line:84% look at this beautiful financial model. 01:01:11.610 --> 01:01:12.690 align:middle line:90% OK, we're done. 01:01:12.690 --> 01:01:15.730 align:middle line:84% But what we just showed you is all the blood, sweat, 01:01:15.730 --> 01:01:17.010 align:middle line:90% and tears that went into it. 01:01:17.010 --> 01:01:20.350 align:middle line:84% And luckily, this spreadsheet is a fantastic place 01:01:20.350 --> 01:01:22.260 align:middle line:90% to start with it. 01:01:22.260 --> 01:01:22.800 align:middle line:90% OK? 01:01:22.800 --> 01:01:23.633 align:middle line:90% Any other questions? 01:01:23.633 --> 01:01:27.000 align:middle line:84% Otherwise, we'll get on with equity and then we'll wrap up. 01:01:27.000 --> 01:01:30.220 align:middle line:90% 01:01:30.220 --> 01:01:34.860 align:middle line:84% Of course we like to save the best for last. 01:01:34.860 --> 01:01:37.940 align:middle line:84% Equity is always the thing that's most fought over and most 01:01:37.940 --> 01:01:40.380 align:middle line:90% confusing. 01:01:40.380 --> 01:01:43.180 align:middle line:84% But as you think about building your team 01:01:43.180 --> 01:01:45.180 align:middle line:84% and as you think about distribution 01:01:45.180 --> 01:01:48.100 align:middle line:84% of equity, ownership of the pie, you 01:01:48.100 --> 01:01:49.660 align:middle line:84% want to compensate for people that 01:01:49.660 --> 01:01:52.500 align:middle line:84% have IP that are bringing it into the company, the level 01:01:52.500 --> 01:01:54.800 align:middle line:84% of commitment, the risk that you're at. 01:01:54.800 --> 01:01:58.220 align:middle line:84% So if you're a pre-seed, you're really high risk. 01:01:58.220 --> 01:02:00.580 align:middle line:84% And in fact, I was talking to someone. 01:02:00.580 --> 01:02:02.340 align:middle line:84% And she will remain nameless unless she 01:02:02.340 --> 01:02:04.580 align:middle line:90% wants to offer herself. 01:02:04.580 --> 01:02:07.700 align:middle line:84% She did the NPV of staying in a corporate job versus doing 01:02:07.700 --> 01:02:08.320 align:middle line:90% a startup. 01:02:08.320 --> 01:02:10.860 align:middle line:84% And staying in a corporate job would actually 01:02:10.860 --> 01:02:13.540 align:middle line:84% be much better, more lucrative in her overall career 01:02:13.540 --> 01:02:14.520 align:middle line:90% than doing a startup. 01:02:14.520 --> 01:02:16.520 align:middle line:84% But the passion drove her to the startup. 01:02:16.520 --> 01:02:19.900 align:middle line:90% So what are you going to do? 01:02:19.900 --> 01:02:22.560 align:middle line:84% So I think it's important to recognize that. 01:02:22.560 --> 01:02:24.540 align:middle line:84% So when you're asking somebody, you 01:02:24.540 --> 01:02:26.500 align:middle line:84% need to quit your software job at Google 01:02:26.500 --> 01:02:28.180 align:middle line:84% and come work at this startup, it's 01:02:28.180 --> 01:02:31.040 align:middle line:90% like, I'm getting paid how much? 01:02:31.040 --> 01:02:34.420 align:middle line:84% And these guys said you want to drop your salary 01:02:34.420 --> 01:02:36.140 align:middle line:90% by a tremendous amount. 01:02:36.140 --> 01:02:39.180 align:middle line:84% But I think minimum viable salary is a good conversation 01:02:39.180 --> 01:02:42.180 align:middle line:84% to have with the early stage companies at that point. 01:02:42.180 --> 01:02:44.300 align:middle line:84% And then past and future contribution. 01:02:44.300 --> 01:02:48.220 align:middle line:84% The sad reality is you may find people that bring a lot of stuff 01:02:48.220 --> 01:02:49.960 align:middle line:84% to the table right in the beginning, 01:02:49.960 --> 01:02:53.500 align:middle line:84% but really, the work that is yet to be completed 01:02:53.500 --> 01:02:56.360 align:middle line:84% is more valuable than the work that's already been done. 01:02:56.360 --> 01:02:58.160 align:middle line:84% I'm sorry, but that's just the way it is. 01:02:58.160 --> 01:03:01.120 align:middle line:84% So when you have equity distribution, 01:03:01.120 --> 01:03:02.680 align:middle line:90% everybody vests for four years. 01:03:02.680 --> 01:03:05.600 align:middle line:84% So you have a one-year cliff where you come into the company, 01:03:05.600 --> 01:03:06.920 align:middle line:90% you get nothing for a year. 01:03:06.920 --> 01:03:09.205 align:middle line:84% And then you get, boom, one quarter of your equity 01:03:09.205 --> 01:03:10.080 align:middle line:90% after the first year. 01:03:10.080 --> 01:03:11.997 align:middle line:84% And then it's like monthly vesting after that. 01:03:11.997 --> 01:03:16.380 align:middle line:84% So every month you stay, you get more of the equity. 01:03:16.380 --> 01:03:19.650 align:middle line:84% And that's important because early on, people might just 01:03:19.650 --> 01:03:21.110 align:middle line:84% want to rage quit, which is great, 01:03:21.110 --> 01:03:24.490 align:middle line:84% because then you get rid of them early on and you can move on. 01:03:24.490 --> 01:03:26.650 align:middle line:84% But then as people commit and continue 01:03:26.650 --> 01:03:28.130 align:middle line:84% to stay with the business, you want 01:03:28.130 --> 01:03:31.070 align:middle line:84% to continue to grow that equity compensation for them. 01:03:31.070 --> 01:03:34.490 align:middle line:84% So let's go through some examples. 01:03:34.490 --> 01:03:37.750 align:middle line:84% These ownership percentage are after two rounds of financing. 01:03:37.750 --> 01:03:39.465 align:middle line:90% And these are not the founders. 01:03:39.465 --> 01:03:41.090 align:middle line:84% You have to look further down the chart 01:03:41.090 --> 01:03:45.040 align:middle line:84% to see that founding management gets two to three times that. 01:03:45.040 --> 01:03:46.790 align:middle line:84% And this is after two rounds of financing. 01:03:46.790 --> 01:03:48.550 align:middle line:84% So this is not from the beginning. 01:03:48.550 --> 01:03:49.850 align:middle line:90% I don't want to scare you. 01:03:49.850 --> 01:03:52.670 align:middle line:84% The founding CEO after two rounds of financing 01:03:52.670 --> 01:03:54.730 align:middle line:90% should have 10% to 15%. 01:03:54.730 --> 01:03:59.910 align:middle line:84% And the employees might have 5 to 10x of all that. 01:03:59.910 --> 01:04:02.650 align:middle line:84% There have been lots of times after a second round 01:04:02.650 --> 01:04:05.450 align:middle line:84% of financing that maybe the founding team got beat up 01:04:05.450 --> 01:04:09.430 align:middle line:84% too much and they're now losing interest, because it's like, 01:04:09.430 --> 01:04:11.570 align:middle line:84% well, my ownership is down to 1% and I'm 01:04:11.570 --> 01:04:13.050 align:middle line:90% a founder of this company. 01:04:13.050 --> 01:04:15.395 align:middle line:84% There are lots of examples of where the board will 01:04:15.395 --> 01:04:16.770 align:middle line:84% get together and say, OK, we need 01:04:16.770 --> 01:04:18.920 align:middle line:84% to re-up their compensation package 01:04:18.920 --> 01:04:21.167 align:middle line:84% and make sure that they're in it to win it, 01:04:21.167 --> 01:04:23.000 align:middle line:84% because they're one of the key people that's 01:04:23.000 --> 01:04:23.980 align:middle line:90% going to drive value. 01:04:23.980 --> 01:04:26.120 align:middle line:84% And for whatever reason, their percentage ownership 01:04:26.120 --> 01:04:27.100 align:middle line:90% got beat up. 01:04:27.100 --> 01:04:29.400 align:middle line:84% So that's happened a whole bunch. 01:04:29.400 --> 01:04:32.120 align:middle line:84% And that's what you pay the lawyers for. 01:04:32.120 --> 01:04:33.840 align:middle line:90% OK. 01:04:33.840 --> 01:04:39.520 align:middle line:84% This is a really good equity distribution example, I think, 01:04:39.520 --> 01:04:43.240 align:middle line:84% because it kind of lays out all the key questions that you have 01:04:43.240 --> 01:04:45.300 align:middle line:84% or all the key questions that I have. 01:04:45.300 --> 01:04:48.200 align:middle line:84% So at founding, we have three founders. 01:04:48.200 --> 01:04:50.780 align:middle line:84% And they're splitting it up 50%, 25%, 25%. 01:04:50.780 --> 01:04:51.600 align:middle line:90% That's it. 01:04:51.600 --> 01:04:53.700 align:middle line:84% Nothing else is involved in any of this stuff. 01:04:53.700 --> 01:04:56.620 align:middle line:84% So I'm just showing you the number of shares-- 01:04:56.620 --> 01:04:59.838 align:middle line:84% 4 million total shares in the business, and that's it. 01:04:59.838 --> 01:05:01.380 align:middle line:84% So there's not a lot of value, right? 01:05:01.380 --> 01:05:03.040 align:middle line:84% It's like, three people get around and decide, 01:05:03.040 --> 01:05:05.160 align:middle line:84% I get half the business, you get a quarter, you get a quarter. 01:05:05.160 --> 01:05:06.760 align:middle line:90% OK, let's get into business. 01:05:06.760 --> 01:05:09.240 align:middle line:84% Then after the next phase, I want 01:05:09.240 --> 01:05:11.660 align:middle line:84% to allocate some funding for some key employees. 01:05:11.660 --> 01:05:13.880 align:middle line:84% So I'm bringing on three more people 01:05:13.880 --> 01:05:18.360 align:middle line:84% and I'm also bringing on three board member advisors. 01:05:18.360 --> 01:05:21.103 align:middle line:84% So each one of those gets some shares as well. 01:05:21.103 --> 01:05:22.020 align:middle line:90% And those are granted. 01:05:22.020 --> 01:05:24.020 align:middle line:84% And they have a four year vesting cycle on it. 01:05:24.020 --> 01:05:28.032 align:middle line:84% So it goes from 4 million shares to 4.5 million. 01:05:28.032 --> 01:05:29.740 align:middle line:84% But you can see how the dilution happens. 01:05:29.740 --> 01:05:35.120 align:middle line:84% So the founding CEO went from 50% to 41% at that point. 01:05:35.120 --> 01:05:36.180 align:middle line:90% What do we have now? 01:05:36.180 --> 01:05:38.900 align:middle line:84% We have three founding members, we have some key team members, 01:05:38.900 --> 01:05:40.425 align:middle line:84% and we have some board and advisors. 01:05:40.425 --> 01:05:41.300 align:middle line:90% Do we have any money? 01:05:41.300 --> 01:05:45.760 align:middle line:84% No, but we have a great team and a great presentation 01:05:45.760 --> 01:05:48.940 align:middle line:84% to go and tell investors about our story. 01:05:48.940 --> 01:05:51.560 align:middle line:84% It's not just three people, it's three people 01:05:51.560 --> 01:05:53.760 align:middle line:84% plus some key employees, and it's also 01:05:53.760 --> 01:05:56.860 align:middle line:84% some advisors and some critical people from the industry. 01:05:56.860 --> 01:05:59.680 align:middle line:84% Those board/members are probably critical partners 01:05:59.680 --> 01:06:01.480 align:middle line:84% that we want to bring into the company. 01:06:01.480 --> 01:06:04.600 align:middle line:84% Now we go and talk to angel investors. 01:06:04.600 --> 01:06:08.080 align:middle line:84% And the only difference between the previous column and this one 01:06:08.080 --> 01:06:11.800 align:middle line:90% is just simply that $500,000. 01:06:11.800 --> 01:06:15.530 align:middle line:84% And in this example, $500,000 is 500,000 shares, 01:06:15.530 --> 01:06:17.090 align:middle line:90% so it's $1 a share for that one. 01:06:17.090 --> 01:06:20.190 align:middle line:84% It's not true for the other columns. 01:06:20.190 --> 01:06:21.570 align:middle line:90% So now we have 5 million shares. 01:06:21.570 --> 01:06:23.830 align:middle line:84% And you can see how the dilution flows up 01:06:23.830 --> 01:06:26.470 align:middle line:90% to the previous ownership. 01:06:26.470 --> 01:06:29.990 align:middle line:90% And then we actually raise-- 01:06:29.990 --> 01:06:32.052 align:middle line:84% there's a bunch of changes that happen here. 01:06:32.052 --> 01:06:33.510 align:middle line:84% One thing is we're adding an option 01:06:33.510 --> 01:06:36.870 align:middle line:90% plan for 1.6 million shares. 01:06:36.870 --> 01:06:39.930 align:middle line:84% So we need to bring in some managers and senior engineers. 01:06:39.930 --> 01:06:42.530 align:middle line:84% And we need to give them stock options in the company. 01:06:42.530 --> 01:06:46.430 align:middle line:84% And we have an option pool of 12% to incent them to stay. 01:06:46.430 --> 01:06:49.490 align:middle line:84% And a stock option is a non-voting share. 01:06:49.490 --> 01:06:51.910 align:middle line:84% And all you do is get the value of the stock at the time 01:06:51.910 --> 01:06:53.370 align:middle line:90% that you join the company. 01:06:53.370 --> 01:06:56.550 align:middle line:84% And so whatever the value increases while you're there 01:06:56.550 --> 01:07:00.430 align:middle line:84% is basically what the value of the stock option is. 01:07:00.430 --> 01:07:03.890 align:middle line:84% And in addition, we've raised $5 million, 01:07:03.890 --> 01:07:07.230 align:middle line:84% which we need to give out 6.6 million shares in order 01:07:07.230 --> 01:07:09.450 align:middle line:90% to be that 50% valuation. 01:07:09.450 --> 01:07:11.990 align:middle line:84% And this is the $5 million, 50% valuation 01:07:11.990 --> 01:07:16.300 align:middle line:84% that we talked about in the beginning of the presentation. 01:07:16.300 --> 01:07:20.380 align:middle line:84% And then finally, post-VC round, the biggest change here 01:07:20.380 --> 01:07:24.660 align:middle line:84% is that additional 8.8 million shares for $10 million 01:07:24.660 --> 01:07:26.020 align:middle line:90% that we brought in. 01:07:26.020 --> 01:07:29.240 align:middle line:84% And so that kind of gets you to 22 million shares. 01:07:29.240 --> 01:07:34.760 align:middle line:84% You can see how Jack has 9.1% and 4.5%. 01:07:34.760 --> 01:07:39.900 align:middle line:84% So that kind of gets back to he's got two times 5% 01:07:39.900 --> 01:07:42.500 align:middle line:90% as a founding CEO at that point. 01:07:42.500 --> 01:07:47.240 align:middle line:84% But hopefully, you're doing $100 million exit opportunity. 01:07:47.240 --> 01:07:50.778 align:middle line:84% So now Jack gets $9 million out of $100 million exit. 01:07:50.778 --> 01:07:51.320 align:middle line:90% I don't know. 01:07:51.320 --> 01:07:51.940 align:middle line:90% Is that great? 01:07:51.940 --> 01:07:53.820 align:middle line:90% I don't know. 01:07:53.820 --> 01:07:57.400 align:middle line:84% So that's how it kind of rolls out. 01:07:57.400 --> 01:07:59.820 align:middle line:84% And there's a spreadsheet on the Nuts and Bolts site 01:07:59.820 --> 01:08:02.540 align:middle line:84% where you can just enter the things as you want them. 01:08:02.540 --> 01:08:04.860 align:middle line:84% And it does the calculations for you 01:08:04.860 --> 01:08:09.420 align:middle line:84% in terms of how much you want to raise and what kind of deal 01:08:09.420 --> 01:08:12.940 align:middle line:84% you get, like what kind of valuation you get on that. 01:08:12.940 --> 01:08:14.860 align:middle line:90% OK. 01:08:14.860 --> 01:08:16.319 align:middle line:90% I think that's about it. 01:08:16.319 --> 01:08:17.080 align:middle line:90% Is that about it? 01:08:17.080 --> 01:08:19.380 align:middle line:90% Are we done? 01:08:19.380 --> 01:08:20.020 align:middle line:90% Summary. 01:08:20.020 --> 01:08:21.359 align:middle line:90% Well, you can read the summary. 01:08:21.359 --> 01:08:24.220 align:middle line:90% 01:08:24.220 --> 01:08:24.979 align:middle line:90% Questions? 01:08:24.979 --> 01:08:28.500 align:middle line:90% 01:08:28.500 --> 01:08:29.420 align:middle line:90% Go ahead. 01:08:29.420 --> 01:08:33.340 align:middle line:84% AUDIENCE: So when VC says we want 5x, 10x return, 01:08:33.340 --> 01:08:34.521 align:middle line:90% how many years? 01:08:34.521 --> 01:08:35.979 align:middle line:84% STEVE DEREZINSKI: When VCs say they 01:08:35.979 --> 01:08:37.963 align:middle line:84% want a return on their investment, 01:08:37.963 --> 01:08:39.380 align:middle line:84% it's typically three to five years 01:08:39.380 --> 01:08:42.399 align:middle line:84% is what they're planning for after they put money in you. 01:08:42.399 --> 01:08:45.080 align:middle line:84% AUDIENCE: On the FDA approval of a clinical study, 01:08:45.080 --> 01:08:46.779 align:middle line:90% it takes like three years. 01:08:46.779 --> 01:08:49.439 align:middle line:84% So when your product is ready, everything is ready, 01:08:49.439 --> 01:08:51.941 align:middle line:84% it's a long time for medical devices. 01:08:51.941 --> 01:08:52.899 align:middle line:90% STEVE DEREZINSKI: Yeah. 01:08:52.899 --> 01:08:55.600 align:middle line:84% So I was going to say, with the exception of the pre-seed guy, 01:08:55.600 --> 01:08:57.920 align:middle line:84% because he was put the pre-seed in. 01:08:57.920 --> 01:09:00.620 align:middle line:84% It's going to take six or seven years before I actually 01:09:00.620 --> 01:09:01.680 align:middle line:90% see an exit on that. 01:09:01.680 --> 01:09:04.725 align:middle line:84% So I think it's three to five years for a series A investor. 01:09:04.725 --> 01:09:06.100 align:middle line:84% But if they're earlier than that, 01:09:06.100 --> 01:09:07.850 align:middle line:84% you have to add a couple of years to that. 01:09:07.850 --> 01:09:10.370 align:middle line:84% And for medical devices, those investors 01:09:10.370 --> 01:09:11.670 align:middle line:90% are extremely sophisticated. 01:09:11.670 --> 01:09:12.910 align:middle line:90% They understand the process. 01:09:12.910 --> 01:09:14.090 align:middle line:84% They understand what you're going through 01:09:14.090 --> 01:09:15.670 align:middle line:84% and how long is it going to take. 01:09:15.670 --> 01:09:17.950 align:middle line:84% And then actually, one guy said, hey, 01:09:17.950 --> 01:09:20.590 align:middle line:84% we've got a whole network of lawyers. 01:09:20.590 --> 01:09:22.283 align:middle line:84% So depending on what phase you're at, 01:09:22.283 --> 01:09:24.450 align:middle line:84% we can tell you exactly which lawyers to choose from 01:09:24.450 --> 01:09:26.090 align:middle line:90% or which ones to interview with. 01:09:26.090 --> 01:09:27.990 align:middle line:84% A medical investor would be like, OK, 01:09:27.990 --> 01:09:29.270 align:middle line:90% you need this FDA approval? 01:09:29.270 --> 01:09:32.330 align:middle line:84% This is the guy that's done my past five deals 01:09:32.330 --> 01:09:33.550 align:middle line:90% and you got to hire him. 01:09:33.550 --> 01:09:34.870 align:middle line:84% And this is what he's going to charge you. 01:09:34.870 --> 01:09:37.510 align:middle line:84% And we're going to be able to get through the approval process 01:09:37.510 --> 01:09:38.975 align:middle line:90% in a much faster time frame. 01:09:38.975 --> 01:09:40.350 align:middle line:84% AUDIENCE: So for a business plan, 01:09:40.350 --> 01:09:43.689 align:middle line:84% it makes sense for a 10 year plan instead 01:09:43.689 --> 01:09:45.274 align:middle line:90% of five years, three years? 01:09:45.274 --> 01:09:46.649 align:middle line:84% STEVE DEREZINSKI: If that matches 01:09:46.649 --> 01:09:51.390 align:middle line:84% exactly the regulatory problems and the time to get to market, 01:09:51.390 --> 01:09:52.130 align:middle line:90% absolutely. 01:09:52.130 --> 01:09:52.930 align:middle line:90% Yeah. 01:09:52.930 --> 01:09:55.810 align:middle line:84% I mean, this is just kind of tech, generic hardware, 01:09:55.810 --> 01:09:56.630 align:middle line:90% and software. 01:09:56.630 --> 01:09:58.550 align:middle line:90% So software you can compress. 01:09:58.550 --> 01:10:00.265 align:middle line:84% And now with AI software, you get down 01:10:00.265 --> 01:10:01.390 align:middle line:90% to six months or something. 01:10:01.390 --> 01:10:03.150 align:middle line:90% Time to exit in six months. 01:10:03.150 --> 01:10:05.830 align:middle line:84% So big return in a short period of time. 01:10:05.830 --> 01:10:06.650 align:middle line:90% Yes. 01:10:06.650 --> 01:10:07.275 align:middle line:90% AUDIENCE: Yeah. 01:10:07.275 --> 01:10:15.720 align:middle line:84% Can we talk a little bit about control and when you should be-- 01:10:15.720 --> 01:10:19.200 align:middle line:84% because if you found a company and you're 01:10:19.200 --> 01:10:22.000 align:middle line:84% the initial founder of the company, 01:10:22.000 --> 01:10:24.700 align:middle line:84% eventually you're going to have to give up control. 01:10:24.700 --> 01:10:30.420 align:middle line:84% But there's a period where want to see your baby, 01:10:30.420 --> 01:10:34.800 align:middle line:84% at least to a point where you're confident in the people you 01:10:34.800 --> 01:10:37.200 align:middle line:84% hired, you're confident [INAUDIBLE]. 01:10:37.200 --> 01:10:40.695 align:middle line:84% And I've seen so many startups where the founders start 01:10:40.695 --> 01:10:42.320 align:middle line:84% to lose complete control of the company 01:10:42.320 --> 01:10:45.263 align:middle line:84% and really get screwed over by their investors 01:10:45.263 --> 01:10:46.180 align:middle line:90% at the end of the day. 01:10:46.180 --> 01:10:50.800 align:middle line:84% And that would be an example that I know quite well. 01:10:50.800 --> 01:10:53.000 align:middle line:84% And I was kind of curious what your thought is 01:10:53.000 --> 01:10:54.200 align:middle line:90% on something like that. 01:10:54.200 --> 01:10:56.200 align:middle line:84% STEVE DEREZINSKI: So I thought Jon's comment was 01:10:56.200 --> 01:10:57.960 align:middle line:84% very interesting in the previous panel, 01:10:57.960 --> 01:11:00.200 align:middle line:84% where he said you really want to build 01:11:00.200 --> 01:11:03.600 align:middle line:84% a relationship with these guys because it is about trust. 01:11:03.600 --> 01:11:06.220 align:middle line:84% And a lot of times, if he's a pre-seed guy, 01:11:06.220 --> 01:11:08.080 align:middle line:84% he expects like three or four more rounds 01:11:08.080 --> 01:11:09.940 align:middle line:84% that he may or may not participate in. 01:11:09.940 --> 01:11:11.960 align:middle line:84% And there are a lot of opportunities, 01:11:11.960 --> 01:11:15.120 align:middle line:84% if there is a very strong control 01:11:15.120 --> 01:11:17.622 align:middle line:84% element of the board of directors in the cap table, 01:11:17.622 --> 01:11:19.080 align:middle line:84% that they can just kind do whatever 01:11:19.080 --> 01:11:20.530 align:middle line:90% they want at some phase. 01:11:20.530 --> 01:11:22.280 align:middle line:84% I mean, unless you're at the table, right? 01:11:22.280 --> 01:11:24.800 align:middle line:84% One of my favorite quotes is, you're either at the table 01:11:24.800 --> 01:11:25.860 align:middle line:90% or on the menu. 01:11:25.860 --> 01:11:28.720 align:middle line:90% 01:11:28.720 --> 01:11:31.740 align:middle line:84% I don't know why that just hits perfectly. 01:11:31.740 --> 01:11:34.780 align:middle line:84% I heard it in DC first, which totally makes sense. 01:11:34.780 --> 01:11:37.352 align:middle line:84% But now for this kind of activity, 01:11:37.352 --> 01:11:39.060 align:middle line:84% it's like if you're in the board meeting, 01:11:39.060 --> 01:11:41.680 align:middle line:84% then you know you're playing the game. 01:11:41.680 --> 01:11:44.020 align:middle line:84% There's two levels of control in any company. 01:11:44.020 --> 01:11:47.560 align:middle line:84% And hopefully I'm not stepping on Joe's toes here. 01:11:47.560 --> 01:11:51.640 align:middle line:84% There's ownership control and then there's board control. 01:11:51.640 --> 01:11:53.320 align:middle line:84% So when you bring in outside investors, 01:11:53.320 --> 01:11:55.560 align:middle line:84% they typically have a separate series 01:11:55.560 --> 01:11:57.940 align:middle line:84% of stock, which is not really shown in here. 01:11:57.940 --> 01:12:05.270 align:middle line:84% And with that series of stock, they get certain board access. 01:12:05.270 --> 01:12:07.770 align:middle line:84% So sometimes in pre-seed, there's no board access. 01:12:07.770 --> 01:12:10.430 align:middle line:84% Sometimes there's one or two board seats. 01:12:10.430 --> 01:12:13.870 align:middle line:84% And that kind of decision making power at the board 01:12:13.870 --> 01:12:17.510 align:middle line:84% is one level of control where things can happen and go awry 01:12:17.510 --> 01:12:18.750 align:middle line:90% if you're not careful. 01:12:18.750 --> 01:12:19.890 align:middle line:90% You don't know about that. 01:12:19.890 --> 01:12:22.450 align:middle line:84% So you got to be careful on that piece. 01:12:22.450 --> 01:12:25.110 align:middle line:84% And then there's the cap table control. 01:12:25.110 --> 01:12:28.550 align:middle line:84% So in this example, it's like right off the bat 50%-- 01:12:28.550 --> 01:12:30.410 align:middle line:84% or I guess the angel investor was just 10%. 01:12:30.410 --> 01:12:31.810 align:middle line:90% But then it was like 50%. 01:12:31.810 --> 01:12:34.990 align:middle line:84% So there's not a lot of equity control at that point. 01:12:34.990 --> 01:12:38.290 align:middle line:84% Presumably they maintain some board-level control on that. 01:12:38.290 --> 01:12:40.550 align:middle line:84% But I think the other side of it is 01:12:40.550 --> 01:12:45.750 align:middle line:84% it's really hard to manage that that closely and worry about it. 01:12:45.750 --> 01:12:48.410 align:middle line:84% If you develop a good relationship with the investors, 01:12:48.410 --> 01:12:51.030 align:middle line:84% the win is for the investors and the founders 01:12:51.030 --> 01:12:53.830 align:middle line:84% to make a lot of money together, because then that flows 01:12:53.830 --> 01:12:55.350 align:middle line:90% into their next investment. 01:12:55.350 --> 01:12:57.030 align:middle line:84% Everybody hears about how great they did 01:12:57.030 --> 01:12:59.710 align:middle line:84% and how wonderful they are, and they want to keep doing it, 01:12:59.710 --> 01:13:02.670 align:middle line:84% as opposed to whatever happened in other scenarios 01:13:02.670 --> 01:13:04.860 align:middle line:84% where you get a bad reputation and then 01:13:04.860 --> 01:13:07.800 align:middle line:84% nobody wants to talk to you anymore. 01:13:07.800 --> 01:13:10.800 align:middle line:84% So anyways, hopefully that answers your question. 01:13:10.800 --> 01:13:11.300 align:middle line:90% Yes. 01:13:11.300 --> 01:13:14.487 align:middle line:90% 01:13:14.487 --> 01:13:15.320 align:middle line:90% AUDIENCE: Thank you. 01:13:15.320 --> 01:13:17.640 align:middle line:84% It seems like this sheet is including the actual cash 01:13:17.640 --> 01:13:18.140 align:middle line:90% investment. 01:13:18.140 --> 01:13:21.300 align:middle line:84% How will the estimated value of the company 01:13:21.300 --> 01:13:25.060 align:middle line:84% change after each round of the investment? 01:13:25.060 --> 01:13:30.140 align:middle line:84% STEVE DEREZINSKI: So the actual valuation at each column? 01:13:30.140 --> 01:13:34.620 align:middle line:84% So let's see, I guess we can figure that out. 01:13:34.620 --> 01:13:38.040 align:middle line:84% At post-angel, if I put in a half a million dollars 01:13:38.040 --> 01:13:43.060 align:middle line:84% for 10% of the company, what's the value? 01:13:43.060 --> 01:13:44.120 align:middle line:90% $5 million? 01:13:44.120 --> 01:13:46.180 align:middle line:90% AUDIENCE: Not sure. 01:13:46.180 --> 01:13:51.865 align:middle line:84% STEVE DEREZINSKI: Well, $500,000 is worth 10%, what's 100% worth? 01:13:51.865 --> 01:13:52.740 align:middle line:90% AUDIENCE: [INAUDIBLE] 01:13:52.740 --> 01:13:53.823 align:middle line:90% STEVE DEREZINSKI: Come on. 01:13:53.823 --> 01:13:55.340 align:middle line:90% This is basic math here. 01:13:55.340 --> 01:13:57.020 align:middle line:90% It's like $5 million, right? 01:13:57.020 --> 01:13:58.360 align:middle line:90% Roughly? 01:13:58.360 --> 01:13:59.820 align:middle line:90% Yeah. 01:13:59.820 --> 01:14:03.460 align:middle line:84% And then the next one, what is it? $5 million 01:14:03.460 --> 01:14:04.760 align:middle line:90% for 50% of the company? 01:14:04.760 --> 01:14:08.420 align:middle line:84% And that includes the 10% So that's a $10 million valuation. 01:14:08.420 --> 01:14:12.220 align:middle line:84% And then the last one is $10 million 01:14:12.220 --> 01:14:15.000 align:middle line:84% at $15 million pre-money valuation, 01:14:15.000 --> 01:14:16.860 align:middle line:90% so the total is $25 million. 01:14:16.860 --> 01:14:20.720 align:middle line:84% So at the post-VC, it's valued at $25 million. 01:14:20.720 --> 01:14:22.580 align:middle line:84% But in the scenario that we talked 01:14:22.580 --> 01:14:25.560 align:middle line:84% about in the beginning, where if you raise the $15 million, 01:14:25.560 --> 01:14:27.900 align:middle line:84% you need to have at least $40 to $60 million 01:14:27.900 --> 01:14:30.073 align:middle line:84% so that your company is worth about $135 million, 01:14:30.073 --> 01:14:33.740 align:middle line:84% you have $46 million in revenue, so that the valuation 01:14:33.740 --> 01:14:35.760 align:middle line:90% of the company is $135 million. 01:14:35.760 --> 01:14:38.180 align:middle line:84% That was on one of the first slides. 01:14:38.180 --> 01:14:39.800 align:middle line:90% That's the exit scenario. 01:14:39.800 --> 01:14:42.440 align:middle line:84% So this is just what the VCs put money in. 01:14:42.440 --> 01:14:46.740 align:middle line:84% So if I put $10 million at a $25 million post, 01:14:46.740 --> 01:14:50.860 align:middle line:84% then I want my $10 million to be worth a heck of a lot more 01:14:50.860 --> 01:14:54.420 align:middle line:84% when you sell the business for $100 and whatever million. 01:14:54.420 --> 01:14:57.060 align:middle line:84% Which it should be in that scenario. 01:14:57.060 --> 01:14:57.900 align:middle line:90% Make sense? 01:14:57.900 --> 01:14:58.740 align:middle line:90% Yes? 01:14:58.740 --> 01:14:59.733 align:middle line:90% OK. 01:14:59.733 --> 01:15:01.650 align:middle line:84% AUDIENCE: How is the revenue being distributed 01:15:01.650 --> 01:15:03.178 align:middle line:90% across different [INAUDIBLE]? 01:15:03.178 --> 01:15:05.470 align:middle line:84% STEVE DEREZINSKI: How is the revenue being distributed? 01:15:05.470 --> 01:15:06.402 align:middle line:90% AUDIENCE: Yes. 01:15:06.402 --> 01:15:08.110 align:middle line:84% STEVE DEREZINSKI: So this is a cap table. 01:15:08.110 --> 01:15:08.870 align:middle line:90% This is equity. 01:15:08.870 --> 01:15:10.990 align:middle line:84% There's no revenue on this cap table. 01:15:10.990 --> 01:15:14.490 align:middle line:84% This is just share ownership in the business. 01:15:14.490 --> 01:15:16.430 align:middle line:84% So this would be on the balance sheet. 01:15:16.430 --> 01:15:18.630 align:middle line:84% So you have assets and liabilities and equity. 01:15:18.630 --> 01:15:20.850 align:middle line:90% So this is equity piece there. 01:15:20.850 --> 01:15:22.450 align:middle line:90% Yes. 01:15:22.450 --> 01:15:25.090 align:middle line:84% AUDIENCE: So how do you decide the percentage of equity 01:15:25.090 --> 01:15:29.968 align:middle line:84% to be allocated to key early employees and the board members? 01:15:29.968 --> 01:15:31.510 align:middle line:84% STEVE DEREZINSKI: Yes, good question. 01:15:31.510 --> 01:15:32.870 align:middle line:84% I mean, there are some rules of thumb, 01:15:32.870 --> 01:15:34.190 align:middle line:84% but it varies all over the place. 01:15:34.190 --> 01:15:35.850 align:middle line:84% And I'd love to hear from Joe or others 01:15:35.850 --> 01:15:38.530 align:middle line:90% who have experience on this. 01:15:38.530 --> 01:15:42.170 align:middle line:84% What we're showing here is kind of the typical arrangement. 01:15:42.170 --> 01:15:46.370 align:middle line:84% This is the typical scenario after two rounds of financing. 01:15:46.370 --> 01:15:51.570 align:middle line:84% And there are market rates for advisors and board members. 01:15:51.570 --> 01:15:54.710 align:middle line:84% Typically, if it's an outside advisor or outside board member, 01:15:54.710 --> 01:15:57.210 align:middle line:84% they get equity to compensate them 01:15:57.210 --> 01:15:59.040 align:middle line:90% for coming to board meetings. 01:15:59.040 --> 01:16:02.460 align:middle line:84% If it's an investor who also has a board seat, 01:16:02.460 --> 01:16:05.360 align:middle line:84% they don't get any more equity than just their investment 01:16:05.360 --> 01:16:06.780 align:middle line:90% in the company at that point. 01:16:06.780 --> 01:16:09.420 align:middle line:84% And they get the board seat as part of that investment round. 01:16:09.420 --> 01:16:12.020 align:middle line:84% So that's negotiated with the valuation. 01:16:12.020 --> 01:16:14.840 align:middle line:84% But I don't know if you have any more comments on that Joe. 01:16:14.840 --> 01:16:17.840 align:middle line:90% That's a hot topic. 01:16:17.840 --> 01:16:19.060 align:middle line:90% It's negotiated. 01:16:19.060 --> 01:16:21.120 align:middle line:90% It's negotiable. 01:16:21.120 --> 01:16:23.408 align:middle line:90% Maybe some rules of thumb? 01:16:23.408 --> 01:16:25.200 align:middle line:84% JOSEPH HADZIMA: Well, you have to remember, 01:16:25.200 --> 01:16:31.000 align:middle line:84% there is a market for people, and it changes over time. 01:16:31.000 --> 01:16:34.000 align:middle line:84% So you're going to be looking at salary.com and others 01:16:34.000 --> 01:16:36.720 align:middle line:90% to look at that. 01:16:36.720 --> 01:16:41.360 align:middle line:84% For things like advisors, board members-- 01:16:41.360 --> 01:16:45.040 align:middle line:84% you'll have an advisory board, maybe. 01:16:45.040 --> 01:16:46.920 align:middle line:84% A typical step might be for someone 01:16:46.920 --> 01:16:48.680 align:middle line:90% to be on an advisory board. 01:16:48.680 --> 01:16:51.320 align:middle line:84% And then as they get to know you, maybe you say, 01:16:51.320 --> 01:16:53.900 align:middle line:84% would you join my board of directors? 01:16:53.900 --> 01:16:56.740 align:middle line:84% The difference is, if you're on the real board of directors, 01:16:56.740 --> 01:16:59.640 align:middle line:84% if have fiduciary duties and you should be thinking 01:16:59.640 --> 01:17:02.080 align:middle line:90% about the company weekly. 01:17:02.080 --> 01:17:05.705 align:middle line:84% If you're on an advisory board, you can call me 01:17:05.705 --> 01:17:06.580 align:middle line:90% and maybe I'll think. 01:17:06.580 --> 01:17:08.600 align:middle line:90% But I'm not thinking about it. 01:17:08.600 --> 01:17:13.520 align:middle line:84% So typically, maybe a quarter of a percent. 01:17:13.520 --> 01:17:15.120 align:middle line:90% It depends, half a percent. 01:17:15.120 --> 01:17:16.520 align:middle line:84% STEVE DEREZINSKI: For an advisor? 01:17:16.520 --> 01:17:18.187 align:middle line:84% JOSEPH HADZIMA: For a board of advisors, 01:17:18.187 --> 01:17:23.620 align:middle line:84% and maybe half a percent for an actual board or for somebody. 01:17:23.620 --> 01:17:25.940 align:middle line:84% And you might want to identify those people early on, 01:17:25.940 --> 01:17:28.695 align:middle line:84% because when the VCs come in, they're 01:17:28.695 --> 01:17:29.820 align:middle line:90% going to have their people. 01:17:29.820 --> 01:17:33.000 align:middle line:84% And there's usually an independent director. 01:17:33.000 --> 01:17:35.000 align:middle line:84% And if you don't have somebody who 01:17:35.000 --> 01:17:37.800 align:middle line:84% you say I trust and is credible, they'll 01:17:37.800 --> 01:17:41.865 align:middle line:84% appoint somebody who's credible, but probably did other things 01:17:41.865 --> 01:17:42.740 align:middle line:90% for them in the past. 01:17:42.740 --> 01:17:45.040 align:middle line:84% So push comes to shove, they lean a little more 01:17:45.040 --> 01:17:47.100 align:middle line:90% towards the investor side. 01:17:47.100 --> 01:17:51.400 align:middle line:84% So you have to do your homework and then ask around. 01:17:51.400 --> 01:17:54.320 align:middle line:84% That's one of the things, Venture Mentoring Service. 01:17:54.320 --> 01:17:57.270 align:middle line:84% Somebody here was commenting on that. 01:17:57.270 --> 01:18:04.110 align:middle line:84% There's a whole email list where people that are mentees 01:18:04.110 --> 01:18:07.710 align:middle line:84% can ask questions and get responses back. 01:18:07.710 --> 01:18:12.470 align:middle line:84% What did you give your major senior engineers? 01:18:12.470 --> 01:18:13.750 align:middle line:90% Or stuff like that. 01:18:13.750 --> 01:18:17.523 align:middle line:90% It's real life, honest data. 01:18:17.523 --> 01:18:19.190 align:middle line:84% STEVE DEREZINSKI: I want to double click 01:18:19.190 --> 01:18:23.510 align:middle line:84% on one thing Joe said that I stumbled into early 01:18:23.510 --> 01:18:26.590 align:middle line:84% in my entrepreneurial career, which is asking someone 01:18:26.590 --> 01:18:29.230 align:middle line:84% to be an advisor to your business is really just asking 01:18:29.230 --> 01:18:32.730 align:middle line:84% for their support, and they get some equity compensation for it. 01:18:32.730 --> 01:18:34.570 align:middle line:84% And there's not a lot of liability there. 01:18:34.570 --> 01:18:37.530 align:middle line:84% I mean, there's reputational liability. 01:18:37.530 --> 01:18:40.470 align:middle line:84% And there's knowledge liability and credibility. 01:18:40.470 --> 01:18:43.130 align:middle line:84% Asking someone to sit on your board of directors, 01:18:43.130 --> 01:18:45.370 align:middle line:84% there's a fiduciary responsibility. 01:18:45.370 --> 01:18:49.250 align:middle line:84% There's a legal obligation to do what's best for the corporation. 01:18:49.250 --> 01:18:52.730 align:middle line:84% So one ask is pretty low level, low bar. 01:18:52.730 --> 01:18:54.598 align:middle line:84% The next ask is pretty high level, 01:18:54.598 --> 01:18:56.140 align:middle line:84% which is kind of why you want to work 01:18:56.140 --> 01:18:58.260 align:middle line:84% with them on an advisory board basis 01:18:58.260 --> 01:19:00.560 align:middle line:84% and make sure that you guys all get along, 01:19:00.560 --> 01:19:04.480 align:middle line:84% because as soon as you ask for that level, it's like, oh geez, 01:19:04.480 --> 01:19:05.040 align:middle line:90% really? 01:19:05.040 --> 01:19:07.572 align:middle line:84% I'm going to have to look at the financials and back this up 01:19:07.572 --> 01:19:09.280 align:middle line:84% if there's a lawsuit and stuff like that. 01:19:09.280 --> 01:19:11.080 align:middle line:90% So it's a big ask. 01:19:11.080 --> 01:19:12.700 align:middle line:84% Which is why most of the time it's 01:19:12.700 --> 01:19:15.283 align:middle line:84% people that put a bunch of money in you that are like, OK, now 01:19:15.283 --> 01:19:17.740 align:middle line:84% we want to watch this money and make sure it's 01:19:17.740 --> 01:19:19.740 align:middle line:90% going for the right place. 01:19:19.740 --> 01:19:20.260 align:middle line:90% Question? 01:19:20.260 --> 01:19:21.620 align:middle line:90% Yes. 01:19:21.620 --> 01:19:24.820 align:middle line:84% AUDIENCE: Do companies provide liability insurance 01:19:24.820 --> 01:19:25.920 align:middle line:90% for their board members? 01:19:25.920 --> 01:19:28.420 align:middle line:84% STEVE DEREZINSKI: Yeah, it's called D&O insurance, Directors 01:19:28.420 --> 01:19:30.370 align:middle line:90% and Officers insurance. 01:19:30.370 --> 01:19:33.520 align:middle line:90% AUDIENCE: [INAUDIBLE] 01:19:33.520 --> 01:19:34.237 align:middle line:90% 01:19:34.237 --> 01:19:35.820 align:middle line:84% STEVE DEREZINSKI: I'm trying to think. 01:19:35.820 --> 01:19:38.620 align:middle line:84% The last policy I had was like $25,000 a year, I think. 01:19:38.620 --> 01:19:39.760 align:middle line:90% Something like that. 01:19:39.760 --> 01:19:40.780 align:middle line:84% AUDIENCE: That covered the entire board? 01:19:40.780 --> 01:19:42.030 align:middle line:90% STEVE DEREZINSKI: What's that. 01:19:42.030 --> 01:19:43.613 align:middle line:84% AUDIENCE: It covered the entire board? 01:19:43.613 --> 01:19:45.988 align:middle line:84% STEVE DEREZINSKI: It covers the board of directors, yeah, 01:19:45.988 --> 01:19:47.720 align:middle line:84% for certain liability obligations. 01:19:47.720 --> 01:19:48.220 align:middle line:90% Yeah. 01:19:48.220 --> 01:19:50.805 align:middle line:84% And I mean, I can tell you, when you're 01:19:50.805 --> 01:19:52.180 align:middle line:84% sitting in a board meeting trying 01:19:52.180 --> 01:19:54.700 align:middle line:84% to get certain budgets passed and stuff, the D&O 01:19:54.700 --> 01:19:58.760 align:middle line:84% insurance gets passed very fast, because everybody's like, yes, 01:19:58.760 --> 01:20:01.260 align:middle line:84% of course, that's the obvious choice for us. 01:20:01.260 --> 01:20:04.053 align:middle line:84% That comes with outside VC investment. 01:20:04.053 --> 01:20:06.720 align:middle line:84% So it's like, OK, we're going to put a few million bucks in you. 01:20:06.720 --> 01:20:07.980 align:middle line:84% We want to make sure everything's clean 01:20:07.980 --> 01:20:10.230 align:middle line:84% and we want to make sure everybody's covered properly. 01:20:10.230 --> 01:20:12.660 align:middle line:84% So that's when you get-- and Chubb 01:20:12.660 --> 01:20:14.340 align:middle line:90% is the big underwriter there. 01:20:14.340 --> 01:20:15.840 align:middle line:84% I don't know if they own the market. 01:20:15.840 --> 01:20:17.480 align:middle line:84% Sorry, am I advertising too much, Joe? 01:20:17.480 --> 01:20:20.453 align:middle line:90% 01:20:20.453 --> 01:20:22.120 align:middle line:84% I don't have any affiliation with Chubb. 01:20:22.120 --> 01:20:24.540 align:middle line:84% I just remember my attorney loved 01:20:24.540 --> 01:20:27.700 align:middle line:84% reading through the details of whatever the Chubb disclosure 01:20:27.700 --> 01:20:28.520 align:middle line:90% document was. 01:20:28.520 --> 01:20:33.300 align:middle line:90% So anyways, other questions? 01:20:33.300 --> 01:20:34.800 align:middle line:90% 8:59, guys. 01:20:34.800 --> 01:20:37.140 align:middle line:90% Pretty good timing. 01:20:37.140 --> 01:20:38.000 align:middle line:90% Pretty good timing. 01:20:38.000 --> 01:20:39.980 align:middle line:90% Well done. 01:20:39.980 --> 01:20:40.680 align:middle line:90% All right. 01:20:40.680 --> 01:20:41.800 align:middle line:90% Thank you. 01:20:41.800 --> 01:20:44.250 align:middle line:90% [APPLAUSE] 01:20:44.250 --> 01:20:52.000 align:middle line:90%