Tiecon 2010 Money, Money, Money How Much Do I Need? How Long Will It Last? How To Be Convincing

Deborah Kranz  35 years of Financial Experience  Fortune 100 Corps, VC’s & startups  Motorola, Syva, Saga, 3Com, EY, KPMG, Interwest & Mayfield Fund  Clients- Admob, ArcSight, Aruba Networks, Palo Alto Networks, Xros, Kace, Aster Data, Clearwell, Mimosa, Rhapsody, Lookout, Kior, Calera  Significant Experience with Financial Plans

Starting Your Company Where to Begin

Why You Need A Model 4  Determine amounts and timing of cash needed to reach milestones and cash flow breakeven  Determine the sources and uses of cash from startup to breakeven  To help investors understand the ROI & Exit

Compelling Idea Initial $ Needed What Milestones Break Even Point Market / % Share Profitability/Exit Research - Study Markets & Competitors Financial Statements Understand Financial Assumptions & Why They Matter Develop Company Financial Model & Validate The Plan Process

Developing A Financial Model 6  Knowledge Prerequisites  Sources of Comparative Information  Presentation Format  Development Steps  Using the Model  Frequent Problems

Knowledge Prerequisites 7 Understand Your Industry  What Problem Am I Solving?  What Products & Services Am I Providing  Understand & Analyze Your Customers & Markets  Understand & Analyze Competitors

Knowledge of Products & Services 8  Articulate problem you are solving & size of problem  What is the value proposition I can offer?  Understand & determine technology road map and specify key milestone dates  Understand & determine pricing for products  What are my competitive advantages?  Are there barriers to entry?  What are milestone dates for revenue

Knowledge of Markets & Customers 9  What are the markets and how large?  Who are the customers & what is their geographic distribution?  What is my potential market share?  How long is the sales cycle?  What are my sales channels?  Who are the competitors?

Analysis of Competitors 10  Research & understand your competitors  Public Information  Bankers, attorneys, advisors  How do you differentiate yourself from competitors

Sources of Comparative Data 11  Market Studies – Industry report (Hoovers,1st Research) – Investment bankers (Goldman, Morgan Stanley) – Big 4 CPA industry reports – Google

More Sources of Comparative Data 12  EDGAR System  S-1,10K (financial data, business) – Accessible through Yahoo Finance – Google “Company Name S-1”  Financial Consultants (Kranz & Assoc) – Comparative Start Ups

SalesforceS-1 Information from Edgar 13

Salesforce S-1 Information from Edgar 14

Presentation Format 15  Key Financial Statements – Income Statement – Cash Flow – Timing differences – Equipment, Inventory  Other Important Data – Headcount – Cash Burn – Cash – Capital Expenditures if significant – Inventory, if applicable

Format of Income Statement 16

Format of Cash Flow 17

How To Use The Model 18  Go to  Click on Resource Tab Useful Articles  Tiecon Model Available May 20, 2010  Input Cells are Blue

Definitions 19  Cost of Sales – Costs directly attributable to sales  Gross Margin – Revenue minus Cost of Sales  Operating Expenses (OpX) – Company Expenses except for Cost of Sales  Capital Expenditures (CapX) – Cost of Equipment  Cash Burn – Cash going out of company

Steps in Developing Plan 20  Forecasting bookings and revenue  Forecasting cost of goods sold-COGS  Forecasting operating expenses-OPX  Forecasting capital expenditures-CAPX  Forecasting other uses of cash  Forecasting sources of cash

Bookings & Revenue Assumptions 21  Number of units sold  Average selling price per unit  Timing of orders vs. delivery  Bookings versus Revenue  Timing of customer payments

COGS Assumptions 22 Costs Related to Revenue Generation  Manufacturing or Operations Dept Costs  Materials or Hosting & Bandwidth  QA & Testing  Purchasing

Department Assumptions - OpX 23  Research & Development  Sales & Marketing  General & Administrative

Research & Development Assumptions 24 Costs to achieve technical milestones  Staffing  Recruiting  Consulting & Outside Services  Development Costs

Sales & Marketing 25 Expenses required for sales forecast  Staffing  Recruiting  Travel  Consulting & Outside Services  Advertising & Promotion

General & Administrative 26  Staffing – CEO, Finance/Accounting, HR, IT  Recruiting  Consulting & Outside Services – Legal (General & IP) – Audit and Tax  Facilities (rent, utilities, communications)  Supplies, other

AssumptionsJanuaryFebruaryMarch Employee Staffing (#) Operations000 Research & Development, Eng223 Sales & Marketing000 General & Admin111 Fringe Benefit % of Salary20% Bonus % of Salary000 Avg Employee Salary ($000) Operations Research & Development, Eng$15.3$15.0$13.3 Sales & Marketing General & Admin$12.5 Recruiting Cost per new Emp ($000) Operations$8.0 Research & Development, Eng$8.0 Sales & Marketing$8.0 General & Admin$8.0 Travel Cost per Emp FTE ($000) Operations$0.2 Research & Development, Eng$0.3 Sales & Marketing$1.0 General & Admin$0.5 Sales Commissions as % or Revenue10% Staffing Assumptions $ in 000’s

28 JanuaryFebruaryMarch Headcount (Year End)333 Income Projection ($000) Bookings$ - Revenue$ - Operations Salary and related$ - Recruiting$ - Travel$ - Consulting/outside services$ - Expensed equip/software$ - Occupancy, supplies, other$ - Operations Total$ - Materials/direct costs$ - Cost of Goods Sold$ - Gross Margin$ - Gross Margin Assumptions $ in 000’s

Other Uses of Cash 29  Operating losses ([SALES-COGS-OPX] <0)  CAPX  Other assets (deposits, prepaid expenses, accounts receivable, inventory)  Debt payments

Forecasting CAPX 30 Outlining your Equipment Needs  Computers and Software  Industry Specific Equipment  Leasehold Improvements  Furniture

Sources of Cash 31  Operating profit ([SALES-COGS-OPX] >0)  Equity financing  Debt financing  Customer prepayments  Accounts payable

Debt Financing 32  Growth capital loans  Equipment loans  Equipment leases  Account Receivables lines of credit

33 JanuaryFebruaryMarch Research & Development, Eng Salary and related36 48 Recruiting––8 Travel111 Consulting/outside services555 Expensed equip/software444 Development related17 Occupancy, supplies, other222 Research & Development, Eng Total65 85 Sales & Marketing Salary and related––– Recruiting––– Travel––– Consulting/outside services––– Sales & Marketing related––– Occupancy, supplies, other––– Sales & Marketing Total––– General & Admin Salary and related15 Recruiting––– Travel111 Consulting/outside services333 Legal, insurance, fees10 Occupancy, supplies, other13 General & Admin Total42 Total Operating Expenses Operating Income (Loss)($106) ($126) Operating Expenses $ in 000’s

34 JanuaryFebruaryMarch Operating Income (Loss)($106) ($126) Inventory (increase) decrease––– Accnts Rec (increase) decrease––– Prepaids/Deposits (increase) decrease(5) Accnts Payable increase (decrease)14 Accrued Payroll increase (decrease)111 Cash Flow from Operations(97) (116) Cash (Used for) Capital Expenditures(50) Debt Service Payments (prin + int)––– Equip/Growth Capital Financings––– Equity Investments10,000–– Cash Flow from Financing10,000–– Increase (Decrease) in Cash$9,853($147)($166) Beginning Cash$–$9,853$9,707 Ending Cash$9,853$9,707$9,541 Sources & Uses of Cash $ in 000’s

Financings, Cash Burn, Cash Balance 35 Cumulative Financings Cumulative Cash Burn Cash Balance

Common Forecast Problems 36  Time to market longer than forecast  R&D staff ramp slower than forecast  CAPX needs higher than forecast  Sales ramp slower than forecast (both units & ASP)  COGS higher than forecast

 Formed in 1995  40 experienced professionals – Cross all industries & stages  Experience with: – Over 200 companies all stages – Over 20 Venture Capital firms – Over 15 IPO’s – Over 20 Mergers & Acquisitions  Cost effective solution for startups

 QUESTIONS? 38