Subject line: [Flawless Financials] Venture Capital 101 Flawless Financials the Financial Forecasting Online Newsletter from Minotaur Financial and David Brode March, 2004 Sent monthly to over 400 subscribers. Please pass on Flawless Financials to those in your network. To leave Flawless Financials, follow instructions at bottom. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * This month: Venture Capital 101 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Every so often I come across a piece so wonderfully written and filled with insight that I have to pass it on. This is the case with Bill Snow's delightful Venture Capital 101. (Find it at http://billsnow.com/EVER_Venture_Capital_101.htm). Myths abound about venture capital; these slowly give way to reality as you spend time with venture partners and associates, fund limited partners, and entrepreneurs. Venture Capital 101 provides a high-level education in the ways of venture capital. It's not a dry primer and it's a pleasure to read even if you've been a VC for the last decade. Snow starts with the basics of venture funds. He describes investors, their goals, as well as the fund structure and common operating constraints. The result of this detailed approach is that when Snow starts discussing how VCs behave, you can understand the reasons for this behavior. In general, the VC and classic entrepreneur psychology that Snow defines is a helpful reality check for all players. Venture Capital 101 on Financial Forecasts Given my focus on financial forecasts, I paid particularly close attention to Snow's discussion about the numbers. Snow starts off with a strong reminder that assumptions are what counts (as also covered my July 2003 newsletter, "Assumptions Tell The Story" http://www.brode.net/resources/Newsletter-2003-Jul.txt). "Let's face facts, most financial projections follow roughly the same revenue trajectory on the income statement: a couple of hundred thousand in year one, $5-8 million year two, $15-25 million year three, $40-50 million year four, $75-100 million year five." "The issue isn't what the top line numbers say. To be frank, those numbers are pulled from thin air. The real issue is the support mechanism offered to support the top line numbers. This support mechanism is the assumptions page." On the expense side of the forecast, Snow gives specific advice on how different groups of employees scale as the company grows. In general, he makes it clear that headcount is a big (if not the biggest) expense driver, and that headcount is related to revenue. [For more on this, review my July 2003 "Revenue Per Headcount" newsletter: http://www.brode.net/resources/Newsletter- 2003-Mar.txt] "Hey! Lookie here! It appears many expenses of a business are tied to the number of employees. This is one reason why it is important to have a separate worksheet that calculates the number of employees needed for a given revenue level. The other reason is because salary expense probably will be the biggest expense of your company." Venture Capital 101 on Cap Tables The capitalization table math gets in-depth attention. Snow's Lesson 11 follows a sample company from the idea stage and friends/family round through IPO and beyond. It discusses how each participant fares, and shows various company milestones and activities during these stages. Plus, he does it in both text form and with a detailed cap table spreadsheet as an appendix. The Last Word Venture Capital 101 has many other useful and enjoyable sections that I don't have space to discuss in this newsletter. It includes the National Venture Capital Association data on average deal size, number of deals, and overall investment from 1990 to 2002. It lists the VC target industries with a percentage breakdown. (Hint: software is almost 25%, and it's 50% if you add in biotech, telecom, and networking.) The "phrases of death" for entrepreneurs to avoid is a particularly enjoyable read. If you're interested in venture capital and want a solid overview, I heartily recommend Venture Capital 101. Or if you know it all now, perhaps this is the right thing to send your parents so they can finally understand the world you live in. I'll let the cover of the report get the last word. It says, "FREE! And worth the purchase price." I couldn't agree more. Until next month, all the best, David Brode -- Minotaur Financial Removing Financial Issues as a Deal Roadblock * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * NEWSLETTER ARCHIVE AVAILABLE Make sure to visit the Minotaur Financial website for the Newsletter Archive at http://www.brode.net/resources/ * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Thanks to Akira Hirai of Cayenne Consulting for finding Bill Snow's Venture Capital 101 first! http://www.brode.net mailto:David@Brode.net 1919 14th Street, Suite 510 Boulder, CO 80302 (303) 444-3300 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * ABOUT DAVID BRODE I’m a financial modeling specialist. Over the last fifteen years I’ve completed dozens of models and certainly thousands of versions to support corporate development, M&A, strategic planning, and debt and equity transactions. These models have raised over $1B in debt and $100M in venture capital and private equity. Over time I’ve consistently revised software tools and work processes to get the job done quickly and well. If you have a financial forecasting issue, I’d love to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * (c) 2004 Minotaur Financial, All rights reserved. You are free to use material from the Flawless Financials newsletter in whole or in part, as long as you include complete attribution, including a live web site link. Please also notify me where the material will appear. The attribution should read: "By David Brode of Minotaur Financial. More articles on financial forecasting can be found at http://www.brode.net " * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Are you struggling to convince others to do a deal which you think is a no-brainer? To discuss how you can take numbers off the table as a deal roadblock, call (303) 444-3300. I'm very accessible and glad to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * DO YOU LIKE THIS NEWSLETTER? You are welcome to share this email with colleagues who would benefit from better numbers. Your feedback is always welcome and appreciated. Write in to mailto:feedback@brode.net. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * PRIVACY POLICY: I never rent, trade, or sell my email list to anyone for any reason whatsoever. You'll never get an unsolicited email from a stranger as a result of joining this list. To SUBSCRIBE FREE to this newsletter, send an email to mailto:subscribe@brode.net. And you'll get Minotaur's Financial Forecasting White Paper in the deal. To be REMOVED from this list, send an email to mailto:remove@brode.net. (Please note that this message needs to come from the email address that originally subscribed. If you need help determining this, please email mailto:David@Brode.net.)