"The Financial Side"
entrepreneurship blog – Post 11

One of the biggest challenges of putting together a startup is dealing with the financial aspect.
How much do we expect to make in a year, what are the revenues, what are the expenses, how much does a general manager cost,  a programmer, a cleaner, what is advertising really worth to us, and how many people will actually be prepared to pay for our product?  And of course all these figures have to be based on serious research (what investors call “the basis for financial assumptions”).

Ze’ev and I had to deal with these and lots more questions, researching, digging, asking.  In this post I’m going to try and share the process with you.
First of all, if you have some money, the work is much easier.  For anything from a few thousand to tens of thousands of dollars (depending on what you have to invest) you can hire the services of companies who will provide detailed information.  But there’s a drawback.  If you need to show off your expertise and knowledge on the subject of your proposed business, you really need to do a lot of the research yourself.   This extra knowledge will definitely make you far more convincing to prospective investors. 
If you decide to undertake the research yourself, the best way is still to sign up for studies or mentoring with professionals in the field.  It costs less than hiring consultants and you’ll learn far more.
The first place people generally turn to for financial data is the Internet.  It’s a readily available and relatively reliable source, but remember:  once you get to investors, they’ll want to know “what the market is saying” – details such as potential customers, suppliers, competitors, strategic partners, etc.   In other words, they expect to hear some first hand information.  That means you have make a serious effort, but it will really pay off.  We’ll talk about that later.
The following points refer to sources of information that are relevant to an Internet startup, although many of them could be useful for other types of business.

First stage:  quantitative research

1.       Investigate your competitors:  Go into their sites and track their press releases.  In many cases they will reveal things like how many users they have, how long they have been in the market, and perhaps even more details.  If there are no direct competitors, make a comparison with companies selling similar products or services in terms of market size and so on.  Then contact them to verify the information.

2.       In the case of publicly traded companies:   The 10K and 20F documents are quarterly and annual reports published by these companies.  If your competitor is a public company, a great deal of financial information about them will be publicly available, and it will tell you a lot, not just about that specific company but about the market as a whole.  Through taking the ISEMI course for high tech entrepreneurs we were able to set up meetings with people from the international accounting firm Deloitte, who told us how to find these reports in databases, and what information was most relevant for us.

Examples of sites that present these reports: http://www.10kwizard.com/ , http://www.sec.gov/edgar/searchedgar/companysearch.html.  

3.       During our research we discovered that the US Government provides a free source of information, accessible to anyone engaged in research on a range of topics, from demographics to market size by product category for almost any country:  http://www.usa.gov/Business/Business_Gateway.shtml.

Another useful site is http://www.bls.gov/, where you can find out about market size in the USA broken down into areas such as medicine, and you can even generate detailed tables.

There are lots more sites of this kind on the Internet, for example:  http://www.internetworldstats.com/stats.htm, which gives statistical information on Internet penetration world wide.

4.       An important way for us to verify our numbers was to show them to senior people in the field.  Of course, before that we practiced our presentation over and over again to colleagues and tutors at ISEMI.  We also managed to set up a meeting with the general manager of an international Internet company and with other entrepreneurs in the same area.   This is certainly possible because there are so many Internet ventures in Israel.  In these meetings we went into every detail and got lots of feedback about our assumptions and about how markets behave.  There’s nothing like real world experience to give you reliable data.

5.       Professional associations:   There are all kinds of voluntary associations for just about every field of activity in the market, and many of them carry out research on areas that interest them.  There are associations for flower growers, garage owners, doctors – anyone you can think of.  Associations relevant to our venture were a good source of information.

6.       Professional literature and journals:  As I’ve already said, you can find out a lot from the Internet, but don’t forget the older sources.  There are a lot of market guides that are updated each year, professional journals and so on.

7.       Final tip:  lots of good quality research is available without payment.  Go to the sites of companies who do paid research and search their databases.  You can read the abstracts, and if a particular paper seems relevant, copy its name and do a Google search.   You might be lucky.  In our experience, it works and studies that are for sale can be found free on other Internet sites.

 
Second stage:  preparing financial reports 

Once you’ve found the data, you have to construct the financial reports.
Since neither of us had ever seen such a report (remember – we are industrial designers from Betzalel!), we first had to understand the subject.  Here too we had a lot of help from tutors on the high tech entrepreneurship course, people from international accounting firms.  From them we received report templates and a sample report, which was very helpful to us.
In the end you have to construct a table that is unique to you and clear to investors, and that is easy to update.  From experience, your basic assumptions will go through many changes and the tables must be dynamic. 
And one more tip to end this chapter – on the Internet there are a number of sites that offer financial calculators for startups, and you can use them for your preliminary calculations.  For example:  http://www.bplans.com/bc.

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