Valuation &

Funding of Startups
Monday September 28th 2020
Joris Kersten, MSc BSc RAB
Kersten Corporate Finance/ The Netherlands
Trainer/ Consultant

➢ Joris Kersten (1980);

➢ Independent M&A
consultant;
➢ Independent Trainer Globally
in Valuation and Financial
Modelling;
➢ Co-owner real estate DIY
sector;
➢ Trainer Financial Modelling at
AMT Training London, New
York and Hong Kong;
➢ Trainer Corporate Finance at
Leoron Institute Dubai/ UAE.
 Trainer/
Consultant
➢ Adjunct Lecturer Corporate Finance &
Accounting at: TIAS Business School,
Nyenrode University, Maastricht School
of Management (MSM);
➢ Adjunct Lecturer Corporate Finance &
Accounting at partner Universities of
MSM at: Peru/ Lima, Mongolia/
Ulaanbaatar, Surinam/ Paramaribo and
Kuwait/ Kuwait City.
➢ Education: MSc Strategic Management &
BSc Business Studies, both from Tilburg
University;
➢ Registered Advisor Business Acquisitions
– Tax & Legal (RAB);
➢ Degree to teach in Universities;
➢ Registered Valuator (RV) – Right now
following this education/ training myself.
Kersten Corporate ➢ Consulting in M&A and Valuation
Finance ➢ Training in Valuation and Financial Modelling
➢ Address: Gording 67 – 5406 CN Uden – The
www.joriskersten.nl Netherlands
www.kerstencf.nl
➢ Joris@kerstencf.nl / +31 (0)6 8364 0527
Face to face ➢ 6 days - Business Valuation & Deal
Structuring.
training
➢ 28, 29, 30, 31 October 2020 + 2, 3 November
Registration at 2020.
joriskersten.nl or email ➢ Location: Crown Plaza Hotel @ Amsterdam
joris@kerstencf.nl South (“Zuidas”)/ The Netherlands.
Face to face training
Registration at joriskersten.nl or
email joris@kerstencf.nl

➢ 6 days - Business Valuation &

Deal Structuring.

➢ 28, 29, 30, 31 October 2020 +

2, 3 November 2020.

➢ Location: Crown Plaza Hotel @

Amsterdam South (“Zuidas”)/
The Netherlands.
Early bird discount (registration
before 1st October 2020)

Course manual + registration form available

at: www.joriskersten.nl
Topics of this presentation

1. Funding stages & Startup valuation methods

2. The equity valuation model
3. The equity valuation model with “multiple
investment rounds” & “multiple exit scenarios”
4. The “convertible debt with discount” model &
“convertible debt with discount & cap” model
5. Getting the financial numbers right (P&L estimates) +
An example
6. Building you own P&L estimates & Valuation
Sources used

Founder’s pocket guide: Startup Valuation (2017).

Author: Stephen R. Poland. 1X1Media US.

The #1 guide to startup valuation: How to value

your startup in 12 easy steps (2018). Author:
Joachim Blazer. Publisher: Venture Value
Amsterdam*.
*When you can only read 1 book on startup valuation, then read the
book of “Joachim Blazer”. The book is great and will teach you all the
basics, and even advanced techniques, of startup valuation.
Part 1

Funding rounds & Startup

valuation methods

Source used:
Founder’s pocket guide: Startup Valuation (2017). Author: Stephen R.
Poland. 1X1Media US.
Early staged funding
• The first round of funding in many start-ups comes from the founders
themselves. This in the form of working in their own business for free
for months. And because of this it is called “sweat equity”.

• A variation on “sweat equity” is called “bootstrapping”. Bootstrapping

basically means that you use whatever resources in order to finance
your business.

• For example you might be able to find a client who is willing to finance
the company a little.

• And then there are the “friends & family” or there is “self-funding”.

• With self-funding this is a very strong signal for potential investors.

These investors are then straight away interested in how & why an
entrepreneur is doing that. So at least you will get attention.
Early staged funding:
Incubators
• And then there are the well know “incubators”. Start-up
entrepreneurs can also join an "incubator" or "accelerator" in
order to get financing.

• The financing will range from 25,000 USD to 150,000 USD in early
staged/ seed funding. And this for 5-10% of the shares.

• These incubators are focused on different industries like:

healthcare, hardware, software, mobile etc. And they are focused
on different regions in the world.

• At Silicon Valley the incubators only have become popular since

about 2007. And they are partly responsible for the explosion in
the number of start-ups around.
Seed & angel funding
• Most founders get to their seed financing round by completing successfully 2 or
3 of the “early stage” funding strategies discussed above.

• Although it is possible that some founders skip the “early stage” funding
strategies completely.

• In this case, think of a start-up in a market that is really “hot”. Like for example
when you built a really nice app in the on-demand space in 2014-2015.

• Uber and Airbnb were really hot in this time period, and it was then possible to
raise 1.5 million USD in seed funding straight away.

• Also founders who sold their former start-up to google or facebook are often
able to get to seed funding straight away.

• This since the market believes they understand the startup-game. And this way
they can attract seed financing with simply a basic prototype or slide deck.
Series A
• The series A is the most important round for a start-up, because
this is typically done by a professional VC firm.

• These VC firms will join the board of the company. And they will
also create a good “governance” structure in the start-up.

• And a governance structure simply means that from then on

there will be a board of directors. And these will have regular
board meetings.

• These meetings will result in "board resolutions" all with an eye

on maximizing the shareholder value of the start-up.

• After a successful series A, subsequent rounds will follow: B, C, D,

E, F and mezzanine.
Startup valuation: An
introduction

• Early stages of a startup are funded by the founder

and/ or friends and family. Here for in general no
valuation needs to be made.

• But in a later stage also “angels” and “venture

capitalists” are involved in the funding and then a
valuation is needed.

• So at a certain stage startups need to have a valuation.

The basic valuation equation
• Before outside investors are attracted to a startup, the founders
own 100% of the equity.

• Investors buy a part of that ownership by giving cash to the

company.

• So the money is given TO THE COMPANY.

• This since the company needs the cash to buy assets, create
assets and pay for example the employees and rent for the office.

• When you want to negotiate a deal with investors you need to

take three steps:
The basic valuation equation
1. Assign a value to the startup BEFORE the “investment
money” is injected. This is what we call the PRE-
MONEY VALUATION of the startup;

2. Then add the money invested in the startup to the

pre-money valuation. And this is what we call the
POST-MONEY VALUATION of the startup;

3. Divide the money that is invested in the company by

the post-money valuation. And now the “equity-
stake” that the investors get within the company
becomes clear. Also this is also called the “founder’s
dilution” percentage.
The basic valuation equation
Example:
1. The pre-money valuation of your startup is:
2.000.000 euros ( = pre-money valuation);

2. The amount invested is: 1.000.000 euro ( =

money invested);

3. The total valuation is then: 3.000.000 euro

(2.000.000 + 1.000.000) ( = post-money valuation).
Calculating the investor
ownership percentage (or
founder dilution)
• How to actually make a valuation of a startup will be
discussed later in this presentation.

• These are the so called “valuation methods”, and again

I will discuss them later in this presentation.

• Let’s for now assume that the pre-money valuation of a

startup is 1.000.000 euros.

• And let’s assume that the investors brought 250.000

euros in the company.
Calculating the investor
ownership percentage (or
founder dilution)
Then the investor ownership (or founder dilution)
looks as follows:

1. Pre-money valuation = 1.000.000 euros;

2. Amount invested = 250.000 euros;
3. Post money valuation = 1.250.000 euros.

So the percentage of equity owned by the investors

after the investment is:
• 250.000/ 1.250.000 * 100% = 20%.
• Or we could say that the founder dilution = 20%
Expressing your valuation to
investors
Option 1: Implied valuation

• When a startup founder is talking to investors, they could say that

they are raising 150.000 euros for 15% of the company/ shares.

• This implies a post-money valuation of 1.000.000 euros.

• This because: 150.000/ 0,15 = 1.000.000 euros ( = post-money

valuation)

• And this again implies a 850.000 euros pre-money valuation.

• This because 1.000.000 euros (post-money valuation) – 150.000

euros (amount invested) = 850.000 euros.
Expressing your valuation to
investors
Option 2: Implied founder dilution

• Another way of expression your valuation to investors is to

express the money you want to raise on a certain pre-money
valuation.

• For example you say that you want to raise 500.000 euros on a
1.000.000 euros pre-money valuation.

• This way the post-money valuation = 1.500.000 euros (1.000.000

+ 500.000).

• And then the implied ownership percentage the investors get (or
founders dilute) is: 500.000 euros/ 1.500.000 euros * 100% =
33%.
Different valuation methods
Source:

In order to valuate early stage startups there are

different valuation methods.

1. Market comp valuation method;

2. Step up valuation method;

3. The Venture Capitalist (VC) quick valuation method;

4. The VC valuation method.

Let now start with the so called “market comps”.

The market comp valuation
method (1): An introduction
• Valuation “comps” for startups, short for
“comparison”, are often used by investors to get a
quick estimate valuation for the startup.

It goes something like this:

• “you are like startup X and that one was just valued
at 1,5 million USD pre-money. So your startup must
be in the same pre-money range”.

[ e.g. REVENUE MULTIPLES ]

Market comp method (1):
steps
In order to valuate with market comps you need to make a few steps:

Step 1: Create a short profile of your startup

• You need to list the factors that describe your startup, like: stage of
development, target markets, technology approach, customer traction
etc.

Step 2: Find similar startups with known valuations to use as comps

• Several websites and startup blogs offer detailed information, like for
example:
· CrunchBase: www.crunchbase.com
· Gust: www.gust.com
· AngelList: www.angel.co
Market comp method (1):
steps
Step 3: Compare your startup profile to the comp’s profile
• Once you have found 2 or more startups that are similar to yours, then
make notes to compare them in detail. Compare them for example on:
• Industry, niche, founder experience, company location, customer
traction, B2B or B2C, stage of development, funding level, team etc.

Step 4: Adjust the comp valuation for large and obvious differences
• It can be difficult to find comp startups that align perfectly with your
startup. This always is an issue with comps, even in valuation in M&As
for mature companies.
• And some factors have a major impact on the validity of the comp. Think
for example of the stage of development of the startup.
• If you find a good comp where most of the comp factors match, except
one or two, then adjust the valuation up or down to compensate for the
difference.
• Remember that comps are not an exact science, you need to use your
judgement to make adjustments. And try to be fair since later on you
need to defend your adjustments in front of investors.
 The step up valuation
method (2)
• Startup founders often take their accomplishments into
account. So they measure their progress and plan their next
goals and milestones.

• And with this “step up valuation method” a structured

approach is used to look at achieving these goals and
milestones. This in order to come up with a valuation.

• This “step up valuation method” is developed by “1x1Media

US”, and they are the developers of the book I have used as
a source for this presentation:
Founder’s pocket guide: Startup Valuation (2017). Author:
Stephen R. Poland. 1X1Media US.

When you are a startup entrepreneur, or consultant to startup

founders, this book is highly recommend to read. And the
other books on startups that have been published in this range
(“Founder’s pocket guides”) are highly recommended as well. I
really like that these books are just practical!
The step up valuation
method (2)
Within the “step up valuation method” they basically look at 5 startup characteristics,
further divided over 10 factors, in order to determine a valuation.

The 5 startup characteristics considered are:

1. Quality of management team – 0 to 500.000 USD added to pre-money valuation;

2. Sound idea - 0 to 500.000 USD added to pre-money valuation;

3. Working prototype - 0 to 500.000 USD added to pre-money valuation;

4. Quality of the board of directors - 0 to 500.000 USD added to pre-money valuation;

5. Product roll-out or sales - 0 to 500.000 USD added to pre-money valuation.

Now let’s take a look at how to further divide these characteristics in 10 valuation
factors.
Step up model (2): 10
valuation factors
• The 5 startup characteristics are further divided over 10
valuation factors.

• And the method works very simple since it just

provides 250.000 USD in (pre-money) valuation for
every “yes”.

• So in total you can get to a valuation of 2.500.000 USD

for an early staged startup. Since this is a common limit
for most investors to consider.

• And now it is just a matter to "rate" (say yes or no) the

startup on the following 10 factors.
Step up model (2): 10
valuation factors
1. Total market size over 500.000.000 USD;
2. Business model scales well;
3. Founders have previous “exit experience” or other
significant experience;
4. More than one founder is committed full time;
5. MVP (minimum viable product) is developed, and
customer development under way;
6. Business model is validated with paying customers;
7. Significant industry partnerships are signed;
8. Execution road-map developed and being achieved;
9. IP (intellectual property) issued or technology is
protected;
10. Competitive environment is favourable.
Step up model (2): 10
valuation factors
And as mentioned, for every ticked box (so a “yes”)
you can determine a 250.000 USD pre-money
valuation.

E.g. with 6 ticked boxes you get to a pre-money

valuation of:

• 6 times 250.000 USD = 1.500.000 USD pre-money

valuation.
The VC (Venture Capital)
quick valuation method (3)
• The VC quick valuation method is a little more quantitative in
nature.

• It looks at how much money the founders need in order to

survive for 18 months.

• Let’s say the founders need 3 million USD to survive for 18

months at the current “burn rate”.

• A VC wants to own at least 20% of the shares in a company, other

wise it is irrelevant for them.

• Since anything less than 20% isn’t worthwhile, and anything

significantly more than 20% (probably) dilutes the founders and
existing shareholders too much.
The VC (Venture Capital)
quick valuation method (3)
Well in this case the post-money and pre-money
valuation is calculated as follows:

1. 3 million USD = 20% shares;

2. 15 million USD = 100% shares (3/ 0,2 = 15);

3. 15 million USD (post money valuation) – 3 million

USD investment = 12 million USD pre-money
valuation.
The VC valuation method (4):
Exit values
• With the VC valuation method, we need to make a few steps.

• For the people involved in “private equity” and M&As this method has
the same kind of thinking as when you build a “Leveraged Buyout” (LBO)
model in excel.

• So with this method you need to estimate upfront what your “exit
value” will be.

• For example, startups in your industry are sold for about 2 times the
yearly revenues.

• When yearly revenues are expected to be 20 million USD in year 5 (your

exit year), then the exit value is:

2 times 20 million USD = 40 million USD (exit value)

The VC valuation method (4):
Exit values
• Another example is that startups in your industry have
P/E ratios (price/ earnings ratios) of 10.

• Assume that you expect you return on sales to be 16%

as an example. And assume you expect your sales to be
25 million in year 5 (your exit year). Then the
calculations are as follows:

16% * 25 million USD turnover = 4 million USD earnings.

4 million USD * factor 10 = 40 million (exit value)

The VC valuation method (4):
Continued
So let’s assume that the expected value of the startup is 40 million USD in
5 years (exit value).

When we assume that a venture capitalist want to get their money back
20 times (ROI multiple = 20) in 5 years, we can make the following
calculations:

1. 40 million USD/ factor 20 = 2 million USD (estimated exit value/ ROI

multiple = CURRENT post money valuation);

2. Assume that you are trying to raise 500.000 USD;

3. 2.000.000 USD - 500.000 USD = 1.500.000 USD (CURRENT post money

valuation – investment = CURRENT pre-money valuation);

4. 500.000 USD/ 2.000.000 USD = 25% (investment/ post-money

valuation = investor ownership percentage).
The VC valuation method (4):
Continued
• So this implies that when you want to raise 500.000
USD now, your pre-money valuation is 1.500.000 USD
now.

• And your startup needs to be acquired for 40 million

USD in 5 years in order to be able to make the investors
a desired multiple on their money of 20.

• So with the VC valuation method we calculated

backwards.
Part 2

The equity valuation model

Source used:
The #1 guide to startup valuation: How to value your startup in 12
easy steps (2018). Author: Joachim Blazer. Publisher: Venture Value
Amsterdam*.
*When you can only read 1 book on startup valuation, then read the book of “Joachim Blazer”. The
book is great and will teach you all the basics, and even advanced techniques, of startup valuation.
Equity
What is the value of a startup ?

Example:

• You want to raise 1.5 million euro in a seed round;

• Let’s determine the valuation in 12 steps.

Source example & 12 steps method:

The #1 guide to startup valuation: How to value
your startup in 12 easy steps (2018). Author:
Joachim Blazer. Publisher: Venture Value
Amsterdam.
Equity

Source spreadsheet & example:

The #1 guide to startup valuation: How to value your startup
in 12 easy steps (2018). Author: Joachim Blazer. Publisher:
Venture Value Amsterdam.
Equity
Step 1: Estimate year of exit

• Assumption: At the end of year 7

Step 2: Estimate revenue multiple at exit

• Assumption: Multiple of 5

Step 3: Estimate revenue @ exit year

• Assumption: 100 million euro in year 7

Equity
Step 4: Calculate exit value

• Multiple 5 times 100 million euro = 500 million euro

Step 5: Estimate “Internal Rate of Return” (IRR) an investor want to make

• Assumption: 20% IRR

Step 6: Calculate return multiple at “seed stage”

• (1 + IRR) ^ 7 = 1.2 ^ 7 = 3.58

( in other words, with a 20% yearly return, you go from 1 million euros to 3.58
million euros in 7 years )
Equity
Step 7: Estimate probability of success @ seed stage

• Assumption: 10% probability @ seed stage of a 500 million euro exit

valuation. 90% probability @ seed stage of a exit valuation of zero.

Step 8: Calculate risk multiple @ seed stage

• Risk multiple at seed stage = 1 / success probability = 1 / 10% = 10

Step 9: Estimate dilution @ seed stage

• Assume that the investor @ seed stage dilutes 50%

(so because of this assumed dilution we implicitly assume there will be
multiple investment rounds … more on this later …)
Equity
Step 10: Calculate the dilution multiple @ seed stage

• Dilution multiple @ seed stage = 1 / ( 1 – dilution @ seed stage) = 1 / ( 1

– 0.5 ) = 2

Step 11: Calculate the money multiple @ seed stage

• Money multiple @ seed stage = gross return multiple * risk multiple *

dilution multiple @ seed stage = 3.6 * 10 * 2 = 72
(money multiple will be explained in more detail …)
Equity
Step 12: Calculate the post money valuation @ seed stage

• Post money valuation @ seed stage = exit value / money multiple @

seed stage = 500 million euro / 72 = 7 million

So:

1. 7 million post money valuation

2. 1.5 million invested
3. 5.5 million pre-money valuation
4. 1.5 million / 7 million * 100 % = 21 % of shares for seed investors
Equity
The business case:

• Exit value = 500 million euros (100m revenues * factor 5);

• Dilution = 250 million euros (estimated 50%);

• Risk = 225 million euros (500m valuation – 250m dilution – (500m / 2.0
dilution / 10 risk multiple));

• Return = 18 million euros (500m – 250m – 225m – (500m / 2.0 / 10 /

3.6));

• Valuation = 7 million euro (500m – 250m – 225m – 18m)

Equity
Calculation backward/ check

1. Valuation of 7 million;
2. 7 million * 3.6 (1.20^7) = 25 million
3. 25 million * 2 (50% dilution) = 50 million
4. 50 million * 10 (10% success rate) = 500 million

Money multiple is about 72 (500/ 7)

Equity

Source spreadsheet & example:

The #1 guide to startup valuation: How to value your startup
in 12 easy steps (2018). Author: Joachim Blazer. Publisher:
Venture Value Amsterdam.
 Part 3

• The equity valuation model with “multiple

investment rounds” & “multiple exit
scenarios”

• Convertible debt with discount &

convertible debt with discount + cap

Source used:
The #1 guide to startup valuation: How to value your startup in 12 easy steps (2018).
Author: Joachim Blazer. Publisher: Venture Value Amsterdam*.
*When you can only read 1 book on startup valuation, then read the book of “Joachim
Blazer”. The book is great and will teach you all the basics, and even advanced
techniques, of startup valuation.
Equity
Let’s now take a look at a few “additions” in “Microsoft excel” on this
original equity model:

1. Valuation with “multiple investment rounds”;

2. Valuation with “multiple exit scenarios”.

The theory and workings of these “additions” van be found in the

book of “Joachim Blazer”.
Moreover, the excel models can be requested at the website of
“Joachim Blazer”:
www.venturevalue.com/book
Convertible debt
• A convertible loan (also called convertible debt) is a loan
that converts to equity in a next funding round;

• This conversion includes a discount on the price of the

shares in a future round, this is a reward of daring to invest
early;

• In 18 steps we can calculate how many shares we need to

give away.

Source spreadsheet & example:

The #1 guide to startup valuation: How to value your startup
in 12 easy steps (2018). Author: Joachim Blazer. Publisher:
Venture Value Amsterdam.
Convertible
debt

Source spreadsheet & example:

The #1 guide to startup valuation: How to value your startup in 12
easy steps (2018). Author: Joachim Blazer. Publisher: Venture Value
Amsterdam.
Convertible debt
Step 1: Estimate year of “series A” financing

• Assumption: You raise “series A” financing after 1.5 years.

Step 2: Estimate post-money valuation at year of “series A” financing

• Assumption: Valuation is 23 million euro at year of “series A” financing.

Step 3: Estimated investment at year of “series A” financing

• Assumption: You raise 5 million euro as “series A” financing.

Convertible debt
Step 4: Calculate pre-money valuation at “series A” financing

• 23 million – 5 million = 18 million

Step 5: Estimate debt amount (loan) at the seed stage

• Assumption: 1.5 million debt (loan)

Step 6: Estimate the interest in a year

• Let’s say this is 6%

Convertible debt
Step 7: Calculate conversion amount at year of “series A”

• Loan amount * ( 1 + interest/ year ) ^ year A = 1.5 million euro * (1 +

6%)^1.5 = 1.6 million euro = loan including interest.

Step 8: Estimate discount on “convertible debt”

• Assume that you give the seed round investor a 30% discount on the shares
at conversion.

Step 9: Calculate effective conversion amount

• Conversion amount / ( 1 – discount ) = 1.6 million euro / ( 1 – 30% ) = 2.34

million euro
Convertible debt
Step 10: Calculate effective pre-money valuation at year of “series A”

• 18 million euro – 2.34 million euro = 15.66 million euro

Step 11: Estimate number of shares of the founders at the start

• Assumption: 1.000 shares at the start

Step 12: Calculate total amount of shares at the start

• Only the 1.000 share of the founders

Convertible debt
Step 13: Calculate the total shares outstanding at the seed stage

• 1.000 shares

Step 14: Calculate the effective price per share at the year of “series A”

• Effective pre-money valuation / total shares = 15.66 million / 1.000 = 15,661

euro

Step 15: Calculate number of shares of the seed investors at the year of
“series A”

• Effective conversion amount/ effective share price = 2.34 million/ 15,661 =

149 shares

( 2,340,000 / 15,661 = 149 shares )

Convertible debt
Step 16: Calculate number of shares of “series A” investor

• 5 million euro / 15,661 = 319 shares

( 5,000,000 / 15,661 = 319 shares )

Step 17: Calculate total shares at year of “series A”

• 1.000 (founders) + 149 (converted) + 319 (series A) = 1,469

Step 18: Calculate number of shares of seed investor at the year of “series A”

• 149 / 1,469 = 10% of the shares at the series A event

Convertible
debt

Source spreadsheet & example:

The #1 guide to startup valuation: How to value your startup in 12
easy steps (2018). Author: Joachim Blazer. Publisher: Venture Value
Amsterdam.
Convertible debt
Let’s now take a look at an “addition” in “Microsoft
excel” on this original convertible debt model:

• A convertible loan with a discount PLUS a CAP

that puts a ceiling on the conversion price.

The theory and workings of this “addition” van be

found in the book of “Joachim Blazer”.
Moreover, the excel model can be requested at the
website of “Joachim Blazer”:
www.venturevalue.com/book
Part 4

Summary/ Final thoughts:

Equity & convertible debt

Source used:
The #1 guide to startup valuation: How to value your startup in 12 easy steps
(2018). Author: Joachim Blazer. Publisher: Venture Value Amsterdam*.
*When you can only read 1 book on startup valuation, then read the book of
“Joachim Blazer”. The book is great and will teach you all the basics, and even
advanced techniques, of startup valuation.
Summarised:
Equity & Convertible debt
Some thoughts:
• “One exit scenario” or “multiple exit scenarios” ?
With “multiple exit scenarios” you as a founder “dilute” less, because an
“exit scenario” of ZERO value valuation is unlikely …

• Convertible loan with a “discount” or a “discount & cap” ?

With only a “discount” since a “discount/ cap” will make the founder dilute
more. The cap is an advantage for the “convertible debt holders” …

• “Equity” or “convertible loan with discount” ?

With a convertible with discount the founder dilutes less (in our example)…

The theory and workings of these “thoughts” van be found in the book of
“Joachim Blazer”. Moreover, the excel models can be requested at the
website of “Joachim Blazer”: www.venturevalue.com/book
Part 5

Getting the financial numbers

right (P&L estimates)

+ An example …
From businessplan to pitch
book
• From the beginning of your startup it is important to get your financial numbers
right!

• Finance is the language of business!!

• A business plan including a strong financial paragraph is called a “pith book”.

• This pitch book is needed to convince investors to participate.

• Investors can be: angel investors or venture capitalists.
From businessplan to pitch
book
Pitch book =

1. Business plan (max 10 A4/ PP slides)

2. Plus financial paragraph (excel sheet, including explanation)

Components of the financial paragraph:

1. Estimated profit & loss statement;

2. Estimated cash flow statement;
3. Estimated balance sheet.
Estimated profit & loss
statement
• For your startup the most important thing concerning financing is
to make an estimate of sales!!!

• Moreover, you need to estimate the costs that come along.

Therefore we need to come up with:

1. Estimations for sales of your product or service;

2. Estimations for the production costs or buy in costs for your

product or service;

3. Estimations for the marketing costs;

4. Estimations for the overhead costs.

Estimated profit & loss
statement
• Making estimates is very difficult since we cannot predict
the future!

• And unfortunately in business we do not have a crystal ball

to predict the future.

• That is why with making estimates of the profit & loss

statement one speaks of an “educated guess”.
Estimated profit & loss
statement
So how do you make an educated guess for the P&L ??
• Start with the 4 P’s of marketing. It’s an OLD marketing tool BUT
effective !!
• The business model canvas is even more effective, use this when
you have a little more time.

1. Product: What product or service do you sell?

2. Price: Which sales price do you use (and why)?
3. Place: By which channels do you sell your product or service?
4. How do you promote/ market your product or service in each
channel?
Estimated profit & loss
statement
1. Product

Which product or service do you sell ??

Think about:
• What problem do you solve for the consumer? And why do you do that?

• Who are the competitors?

• How big is your potential market?

• What are the biggest risks? Are there product liability risks?

• Do you have the intellectual property of the product?

Estimated profit & loss
statement
2. Price

Which sales prices do you use (per channel) ?? And why ??

• Use average sales prices for your calculations.

Moreover, what are the cost prices for your products or

services ?
• Also use average cost prices for your calculations.

At last, notice your average margins per product or service.

Estimated profit & loss
statement
3. Place

• Through which channels are you going to sell your product

or service ?

• How many products or service do you expect to sell through

each channel ?
Estimated profit & loss
statement
4. Promotion

• Which marketing efforts do you use in each sales channel in order

to get sales for your product or service?

• What are the costs for these marketing tools?

• What are the “conversion rates” for these marketing tools?

➢Do the same for your sales effort !

➢What are the costs for the sales efforts?
➢What are the “conversion rates” for the sales efforts?
 Estimated profit & loss
statement
• This is a brilliant book to read in order to market/ promote the
product or service of your startup.

• Every startup entrepreneurs want ”traction” which means that your

product is “picked up” by potential customers.

• This in the form of for example website visits, app downloads and
preferably hard sales (real sales numbers).

• “traction and product development are of equal importance and

should each get about half of your attention.

• This is what we call the 50% rule: Spend 50% of your time on product
and 50% on “traction” (Weinberg & Mares, 2015)

• Most businesses actually get zero distribution channels to work. Poor

distribution, NOT PRODUCT, is the number one cause of failure
(Weinberg & Mares, 2015).
Estimated profit & loss
statement
Now that you know your marketing basis:

Make estimation for sales in all your sales channels.

Use conversion rates for ALL your marketing and sales tools, like:

• Sales through website;

• Sales through direct selling;
• Sales through shop;
• Sales through use of influencers;
• Sales through expose on business fare;
Etc. etc. etc.
Estimated profit & loss
statement
So when estimating SALES ALWAYS REFER TO “CONVERSION
RATES” !!!!

DO THIS FOR ALL YOUR SALES AND MARKETING TOOLS IN

ORDER TO MAKE AN:
Estimated profit & loss
statement
Now, how do you come up with the right conversion rates ?

• You will get the right conversion rates by doing research yourself. This can be
field research or desk research (e.g. read papers in your branch).

• But also do not forget to speak with other ”experts” like:

1. Other entrepreneurs;
2. Your accountant;
3. Your lawyer;
4. Your finance consultant;
5. Your coach;
6. Your banker;
7. Your branch specialist;
Etc. etc.
Estimated profit & loss
statement
• And then when you know your stuff, make estimations for
the estimated sales.

• Even with carefully looking at “conversion rates” one can

not be 100% sure, that is why we usually make 3 possible
scenario’s:
Estimated profit & loss
statement
Now we are almost ready to construct our estimated profit &
loss statement.

But we need to look at a few extra costs/ investments:

1. Do we need a building? And if yes what is the rent?

2. Do we need a team? What do the salaries cost?

3. What does research & development cost?

4. What are the transport costs?

Example
Now let’s apply all we have learned in an easy example:

My big passion, as Padi Divemaster, is scuba diving! So let’s introduce this

fantastic product.

Let’s assume that your company/ startup will distribute the “Triton Oxygen
Respirator” (diving without an air tank) in The Netherlands!

*the product really exists, but is still under development. All the
assumptions made in this example are fictive.
Example
Now let’s look at the business:

1. Product

• The product is quiet clear.

• We are going to sell the “Triton Oxygen Respirator” (diving

without an air tank) in The Netherlands.

• The product is bought in from the Korean producer.

*the product really exists, but is still under development. All

the assumptions made in this example are fictive.
Example
2. Price

• Let’s assume that you can buy in the product for 750 EUR
excl vat;

• The product will be sold to (dive-)shops for 1.000 EUR excl

vat (indirect channel);

• The consumer pays 1.250 EUR for the product excl vat;

• When the product is directly sold to the consumer you will

receive 1.250 excl vat (direct channel).
Example
3. Place

Let’s assume that you are going to sell the product

through 2 channels:

1. Online: Direct sales to the consumer;

2. Through selected shops: Indirect to the

consumer.
Example
4. Promotion

Let’s assume that you are going to use the following

promotion “tools”:

1. A sales manager to sell to the selected shops;

2. Use of “influencers” to sell online.

Example
The business
Example
Now make assumptions:

1. How many shops will you get as a customer?

2. How many products will you sell in each shop that is a

customer?

3. How many influencers will you use?

4. How many sales will come forth out of the influencers?

Therefore, you have to make calculations !!

Example
Example 1: Hiring a sales manager/ account manager

1. A sales manager/ account manger will cost you about 90.000 EUR a
year (including car, petrol, laptop etc.);

2. He or she will work 1600 hours a year (40 weeks of 40 hours);

3. 75% of his or her time, he or she is visiting customer. A customer visit

will take 4 hours including travel time;

4. After 3 customer visits you will have a new customer. The success
rate is 10%.

To come with the above “conversion rates” use common sense AND input
of experts (entrepreneurs, consultants, senior managers etc. etc.)
Example
Example 1: Hiring a sales manager/ account manager

1. 75% * 1600 hours = 1200 hours visiting customers;

2. 1200/ 4 hours = 300 customer visits every year;

3. 300 visits/ 3 visits needed = 100 full sales cycles every year;

4. 100 full sales cycles * 10% success rate = about 10 new

customers per account manager.

To come up with the above “conversion rates” use common sense

AND input of experts (entrepreneurs, consultants, senior managers
etc. etc.)
Example
Example 2: Make us of an influencer

1. An influencer will cost you 25.000 EUR per year;

2. A specific influencer will reach 100.000 people;

3. 0,5 % will be persuaded every year;

4. 100.000 * 0,5 % = 500 sales every year (non repetitive for this
kind of product)

To come up with the above “conversion rates” use common sense

AND input of experts (entrepreneurs, consultants, senior managers
etc. etc.)
Example

• So, for every sales tool or marketing tool that you

use make an estimate for sales !!

• Hereby, you need to show your calculations.

• Always link marketing efforts to sales numbers !!

Example
Estimates for the shop sales
Example
Estimates for the direct sales
Note year 2017: costs go before earnings !!

Estimated P&L’s
Fixed costs:
• Almost all costs are fixed !!
• Fixed costs need to be paid out of your margin !!!
Example
Working capital (money that will be “put” in accounts
receivable and stock) needs to be assessed.
Example
The cash flow statement

• 50.000 investments are for product testing, checking liability risks,

building sales platform etc.

• In year 2021 the company is cash positive.

Example
The cash flow statement
Cash flow stays behind due to massive investments in working
capital:
1. Stock.
2. Accounts receivable.
Example
• According to these calculations. This company needs about 165.000 EUR
to start.

• But you would be wise to calculate 3 scenario’s.

• Also calculate a worst case scenario. It is interesting to see how much

money is needed in case things do not work out well in the start.

• Also take the worst case scenario into account when you are collecting
investments.
Check for your own startup
Now get to work with your co-founders:

1. Come up with the P&L estimates for the upcoming 5-7 years;

2. Use the “equity valuation model” to calculate the “post money

valuation” at the “seed stage” (or later stage, as you wish).

When you have done this already, then:

• Calculate your equity valuation with “multiple investment

rounds”;

• Calculate your equity valuation with “multiple exit rounds”.

 Do not hesitate to contact me with
End any questions:

Any Questions ??
➢Joris@kerstencf.nl
Sources used

Founder’s pocket guide: Startup Valuation (2017).

Author: Stephen R. Poland. 1X1Media US.

The #1 guide to startup valuation: How to value

your startup in 12 easy steps (2018). Author:
Joachim Blazer. Publisher: Venture Value
Amsterdam*.
*When you can only read 1 book on startup valuation, then read the
book of “Joachim Blazer”. The book is great and will teach you all the
basics, and even advanced techniques, of startup valuation.
Contact
Details

Kersten Corporate Finance

Joris Kersten
Joris@kerstencf.nl
+31 (0)6 8364 0527
www.joriskersten.nl

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