Business Model, Financial & Projections
If you have followed the recent emails and are starting to formulate your “story” about what your proposal is going to be, then the timing is right for us to talk about how you are going to make money from it, how much you have made in the past and how much you are looking to make in the future.
The first thing the investor needs to glean is – how are you going to make money? Is it a software for service model, is it a franchise model with upfront franchise fees and a trailing income, is it a vanilla retail, manufacturing model? Anything that is out of the ordinary should be disclosed. Further, ideally you are not reinventing the wheel and have devised a business model that has never been tried and tested before which may be difficult for the investor to get their head around; this would serve as additional investment risk and potentially be an unnecessary diversion. Most investors are easily distracted – best not to give them permission to focus on potentially non-productive matters. Though new business models are not off limits, it is safer if you tap into one that is reasonably familiar.
It is necessary for you to disclose what you have achieved to date, in terms of revenue and profit, and state that you are pre-revenue if there is no revenue.
Next it is all about what you are going to make in the future. State your revenue projections in different ways to allow for the investor to verify the numbers ie if you have to sell 10,000 units to make 10,000,000 in the first year then say this both ways. If it is across several different products or regions then say this too. When it comes to disclosure in written form then of course this level of detail is a given, but often when pitching verbally projections are vaguely disclosed, when the information can be made so much more valuable by just adding a few things like units sold.
A couple of tips from the coals face:
1) Make your historic P&L look better than it was by quoting your “normalised” historical profit and loss – ie adjust from your audited or otherwise finalised accounts those items that are not relevant to the future eg corporate adviser costs in relation to your capital raise, development wages and salaries that should be booked as software development on the balance sheet. This is absolutely allowable, though be careful pushing the envelope.
2) Make sure your projected profit and loss is not wildly off the scale. If you have a hockey stick projections rising at an exponential rate be prepared for them to get knocked down. Also, a typical approach from the uninitiated is to quote a % market share top down estimate. This will invite suggestions that you are not clear on the steps you will take to achieve this market share. Approach from the bottom up eg units secured arriving at a revenue of $x for example.
