There are an ever increasing number of startups and small businesses looking to raise capital via crowdfunding.  You might be interested in crowdfunding because you think it will be easier than raising capital from a traditional source.  This may be true, but I am here to tell you that you should not take the crowdfunding process lightly.  In fact, many of the current equity-based crowdfunding platforms like MicroVentures and Fundable put their potential applicants through a rigorous screening process before releasing the investment opportunity on their platform.  One area that crowdfunding applicants should pay special attention to is financial projections.  Here are 3 reasons why:

1.  Can Your Business Scale? – The first reason you need to create financial projections is to determine what happens if you get more pre-orders or more investment than you expected.  Many businesses have been using platforms like Kickstarter and IndieGoGo to essentially accept pre orders for their product.  The only problem is that you may start out assuming that you will sell 100 units, but then someone with 200,000 followers on Twitter finds your product, sends out a tweet, it goes viral, and the next thing you know you have sold 50,000 units.  I think it is worth your time to do some quick what-if analysis with your financial projections and project what would happen financially if you blow your expectations out of the water.  Similarly, what if you were looking to raise $200,000 and you have $2 million in interest?  Would you accept it?  How would you use it?  Again, I think it is worth your time to create a set of financial projections that will help you understand what it will take to scale the company.

2.  How Much Funding Is Required? – One major risk with crowdfunding is not knowing how much cash you actually need, only getting part way there, and then losing the investment altogether.  For example, you might start a crowdfunding campaign and set a goal of raising $100,000.  You successfully raise the funds, but then as you get started you realize that you actually need an additional $50,000.  If you are unable to raise the additional funds, the entire initial investment is at risk.  For this reason, it is vital that you have a clear understanding of your funding needs based on a 12 month cash flow projection.

3.  When Will You Breakeven? –  You need to know when you will breakeven, and the best way to do this is to create a set of projections.  For example, you might have $10,000 in monthly overhead expenses, and you might make $10 of gross profit on each unit that you sell.  That means you need to sell 1,000 units per month in order to breakeven.  These are numbers that you need to provide to potential equity investors, but you will also want to know when you breakeven if you are taking a pre-order approach.  For example, you might want to set up your Kickstarter campaign in such a way that you only produce the product if you get 1,000 orders because you know you will lose money if you only sell 50 units.

Crowdfunding can be an extremely powerful funding solution, but it can also be overwhelming, a waste of time, and ultimately damaging to your company if you do not develop a set of financial projections to prepare in advance.  Good luck!

About the Author: Adam Hoeksema is the Co-Founder of ProjectionHub which is a web application that helps entrepreneurs create financial projections without the need to have a PhD in spreadsheet modeling.

Although the rules for equity crowdfunding for non accredited investors still have not been established by the SEC, there may be some expectation, for business owners attempting to raise capital through crowdfunding, to provide some level of financial projections for potential investors.  The Jumpstart Our Business Startups Act opens up a new world of potential funding sources for small businesses and early stage companies.  The Act already outlines certain financial statement requirements based on the amount of investment you are looking to raise, but it does not appear to specifically outline requirements for financial projections or forecasts for a company.

I intend to update this blog post as new rules are released from the SEC, but for now I am going to speculate on a few things, and outline how I believe you should develop your financial projections for your crowdfunding campaign.

Basic Financial Projection Structure

First I think your projections should have the following characteristics:

• 3 years
• Monthly projections with annual summary sheet
• Balance Sheet
• Profit & Loss
• Cash Flow Projections
• Assumptions that demonstrate how you came up with projections

If you provide this level of detail, my guess is that you will be far ahead of the game.

Now let me show you with ProjectionHub exactly how I would create projections for three potential crowdfunding structures.

• Equity – this is where you actually give up a portion of the ownership of your company to the crowd
• Revenue Share – this structure allows you to keep ownership of the company and instead you pay a royalty on each sale back to the crowd until they have received the agreed upon return on investment
• Loan –  this structure allows you to keep ownership and will have set repayment terms

 Step #1

First I am going to start by going to www.projectionhub.com and creating financial projections for an existing business.

Step #2

Now it is time to start setting up your sales projections.  I am going to assume that I am selling a consumer product, and I want 3 years of projections.  First you will be asked to name the product, enter the price, your sales assumptions which should be based on data when possible, and how many days does it take  you to get paid by your customers.

Step #3

Now you will enter the number of units of this product you expect to sell each month for the next 36 months.  Again, potential investors want to know that your sales projections are based on data and realistic sales assumptions.  So in this example I am going to assume that we raise the funds in month 3 and we see an immediate 25% increase in sales.  Then I am going to keep in mind the seasonality of our consumer product business, so we will see higher sales during the last three months of each calendar year.

Step #4

Once you have entered in your sales projections it is time to enter in your Cost of Goods Sold.  This can be somewhat tricky depending on which type of crowdfunding you are raising.  If you are doing a revenue share structure, then you should put the royalty amount that goes back to your investors on each unit in one of the Cost of Goods Sold options.  So for this example, I am assuming that our consumer product price is $75 per unit, and we have an agreement with investors that requires us to pay 7% of each sale back to investors until they make their money back plus a given return.

7% of $75 is $5.25 per unit.  I am also assuming that the direct labor cost per unit is $3 and the direct material cost per unit is $5.  I am going to add the royalty to investors in with the material costs per unit since there is not a royalty per unit option.

Step #5

Next you will need to enter in your monthly expenses for the next 36 months.  If most of your expenses are monthly, quarterly, or annual, hopefully this will be a quick section to complete.

Step#6

Now it is time to enter in your funding that you expect to raise from the crowd.

Step #7

Now you can enter in other assets that you have already purchased or will purchase like equipment, furniture, land, or buildings, and then enter in your current balances for your existing balance sheet.

Step #8

Download and customize your financial projections.  Once you are done you will be able to download an Excel file with your 3 year financial projections which you can then customize.

You can purchase our template here