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The Brode Report  |  April 2011

David Brode profile   First, thanks for the referrals. My phone has been ringing off the hook the last two months--I've probably seen more deal flow in those two months than anytime in the last 20 years. Also, I launched a blog last month. Check out the posts here.

This month's newsletter is about patterns I'm seeing in how companies come to The Brode Group because the need a financial model for investors, but walk away with that and more. It's the "more" part that's really valuable.
  Struggling with spreadsheet data overload? Crazy-hard analysis?
Multiple entity forecasts? Complex cash flow structures?
I'm always happy to discuss situations--call me at (303) 444-3300.
What Startups Needs

One of the salutary effects of running many similar projects at once is that I can see patterns, and now I'm starting to become more systematic about moving startup companies forward toward funding and execution by giving them the information they need. At a high level, startups need two things:
  1. A well thought out strategy
  2. Investor pitch materials
If you're raising money, the need for investor pitch materials is obvious. Here a financial model is de rigueur. And frankly, anyone can produce a financial forecast--I see dozens of these every year, and most of them are pretty bad. (In the last week, seven people self-rated their models at 57% using my 25-point model scorecard online tool.)

Some founders treat the model as a "check the box" requirement and they are happy with one of these models and try to use it for fundraising. Other founders, however, know that a good model does more than convince investors using the elements in the 25-point model scorecard, but it also aligns management behind a single vision and helps everyone understand the economic worldview that leads to success.

And that's the strategy part of financial modeling. A complete financial model describes a business model for obtaining revenue and shows the operating plan that will achieve it. I've been getting ever more focused on the process of getting the plan together.

Generally, we need to solve the revenue puzzle first. Sometimes in capital intensive businesses we first spec out what we're building and how much that will cost (think about a telecom network here), but quickly we're talking about the capacity of that equipment and how much revenue it can generate, customer by customer. It's all about p x q: how many units you're selling at what price. To get there you need a product offering and a customer base. And once we've handled the expense side (typically easy to do) and balance sheet effects, we can understand how much money is needed.

Then the balancing act begins: given funds required and the resulting business created, does the cap table show the kind of returns that makes investors and founders happy? Here we begin iterating to find the intersection of a possible business and a financially rewarding business to all involved. Once we have this high-level skeleton in place we fill in details.

This process generally takes 3-6 weeks depending on business complexity, research completed before we begin, responsiveness of the team, etc. And in the end, I like seeing deals getting done and watching the plan--once just a dream--begin to be executed.

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