What VCs Look For

I was just reading an article in the Pennsylvania Gazette (the alumni magazine of the University of Pennsylvania) about funding IT grad's entrepreneurial ventures. A couple of Wharton grads decided to start a venture fund focusing on entrepreneurs with Penn connections. They've funded everything from Diapers.com to First Flavor.

The one statement that stood out to me most was this:

“When I’m looking at the financial projections for a company, the one thing I know for certain is that they’re wrong,” says Topche. “Maybe the market changes; maybe a new competitor will appear; maybe there will be a regulatory change. The ability of the management team to adapt to that change in their environment by adjusting their product or doing something different strategically is almost always the determining factor in the success of that company. These are things that you have to get comfortable with before you write a check.”

That's why Venture Capitalists like investing in smart management. While you can write a great plan and have detailed financial projections, you have to be flexible and able to adjust your plan as the market changes or opportunities present themselves.

To read more, visit this link: http://www.upenn.edu/gazette/0908/pro04.html

Financial Projections

One reason I haven't posted for over week is because I've been building a financial model. As I've tried out different scenarios, I've been reminded that a model's robustness (or flexibility) comes from the formulas and the assumptions. Having a flexible model that can show you the outcomes of different assumptions is crucial.

Here are some tips for building a model in Excel:

1. Write down your assumptions on a separate worksheet or in Word.
2. Develop formulas and links that carry through all the sections of your workbook.
3. Do your homework -- research the marketplace to understand volumes, prices, costs, etc.
4. Divide your workbook by worksheets (using the tabs at the bottom of the page):

• One summary sheet that is the profit and loss statement
• A Revenue sheet that has all the revenue, cost of goods sold and gross profit assumptions -- metrics, sources, prices, quantities, growth rates, etc.
• An Expenses sheet that has all of your overhead expenses.
• A Capital Expenditures Sheet
• A Depreciation Schedule.

5. Make sure you construct your formulas to carry from page to page. That way, if you change a revenue assumption, it shows up on the profit and loss sheet. This makes it easier to try out different scenarios.

I'll write more about financial statements later.

Please post questions or send me comments -- upstartwyn@gmail.com