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ProjectionHub

What Percentage of Startups Bootstrap vs. Raise Funding

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Bootstrapping vs. Raising Funding

Based on our first 5,000 users who created financial projections using ProjectionHub, we have a pretty good sampling to determine what percentage of startups bootstrap vs. raise funding.

  • Percentage of Startups that Have a Loan – 40%
  • Percentage of Startups that Have an Investment – 38%
  • Percentage of Startups that Have an Investment or a Loan – 66%

S0 based on this data we can assume that approximately 34% of startups are planning on bootstrapping.

We also have some data on Existing Businesses:

  • Percentage of Existing Businesses that Have a Loan – 23%
  • Percentage of Existing Businesses that Have an Investment – 19%
  • Percentage of Existing Businesses that Have an Investment or a Loan – 33%

Startup Financing

  • The Average Projected Startup Loan – $230,000
  • The Average Projected Startup Investment – $325,000

Existing Business Financing

  • The Average Projected Existing Business Loan – $371,000
  • The Average Projected Existing Business Investment – $265,000

66% of Entrepreneurs Make a Personal Investment into Their Startup – Average $70k

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ProjectionHub is a web application that helps entrepreneurs create financial projections without Excel.  We looked at just over 200 startups who have used ProjectionHub to create their financial projections over the last couple months and discovered some interesting data.

A full two thirds of entrepreneurs intend to make a personal investment into their startup.  The average projected personal investment is just over $70,000.

This is an important stat for entrepreneurs to hear.  Many want to be entrepreneurs think they can start a business without putting any of their own capital at risk.  Often times you hear entrepreneurs say something like this, “I will just come up with a business plan, and then bring that to the bank and get a loan, or find an investor to fund our plans.”  This is unrealistic.  There are very, very few banks or investors that will give you a dime without some of your own skin in the game.

So, based on this data, if you want to start a business, the first thing you should probably do is start saving some money that you can use to make an investment into your startup.

You can start creating your financial projections with ProjectionHub today.  Make sure to use coupon code “ba25off” to get 25% off, or just use our free version of the tool.

Average Startup Expenses – Are you Spending Too Much?

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At ProjectionHub we help entrepreneurs create financial projections without using Excel.  Over the last 6 months we have had thousands of business owners use our tool to create their financial projections.   Out of the thousands of users, we chose 800 accounts that we believe have realistic data.  We took this aggregate data and found some interesting trends and numbers that we wanted to share related to expenses.  Approximately 80% of our users are startup companies, so here are some average expenses numbers that you can compare to your startup to help you determine if you are spending too much.

Also, just keep in mind that not every business actually had each of these expense categories, we calculated the average only based on the companies who actually projected spending something in that category.  For example, not everyone had legal expenses, but those who did, spent $1,006 per month on average over the first 3 years.  Here are several other average expense categories over the first 3 years of business.

Accounting – $482

Advertising – $2,767

Insurance – $298

Licenses – $262

Maintenance – $504

Office Supplies – $142

Rent – $1,800

Salaries – $16,700

Telephone – $356

Utilities – $190

Website – $689

Keep an eye out for additional blog posts as we continue to release interesting data related to startup finances.  Also, make sure to test out our financial projection tool at ProjectionHub. 

10 Key Startup Statistics | Read About Top First Year Business Goals for Your Startup – ProjectionHub

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See How You Compare with These 10 Key Startup Statistics

At ProjectionHub we help entrepreneurs create financial projections and goals for business without using Excel. Over the last six months, we have had thousands of business owners use our tool to create their financial projections. Out of the thousands of users, we chose 800 accounts to generate real startup statistics. We took this aggregate data and found some interesting trends and numbers that we wanted to share. Approximately 80% of our users are startup companies, so here are 10 key startup numbers for you to compare to your startup as well as a business startup
timeline for them. Check out some of our first year business goals and see your business or startup stacks up!

Startup Capital

1.  Average Investment – $448,000

2.  Average Business Loan – $304,000

3.  Average Loan Term – 50 months

4.  Average Interest Rate – 8%

Days to Get Paid

5.  Average Number of Days to Get Paid for Products – 16 days

6.  Average Number of Days to Get Paid for Services – 22 days

Margins for Startups

7.  Average Gross Margins for Products – 65%

8.  Average Gross Margins for Services – 71%

Startup Sales Growth

Over 36 months of projections the average monthly growth rate for sales was as follows:

9.  Average Monthly Sales Growth Rate Products – 17%

10. Average Monthly Sales Growth Rate Services – 5%

How Accurate Should My Financial Projections Be?

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This is a common question I get from ProjectionHub users.  There is no simple answer but there are some basic principles I can share.

Who are the Projections For?

Depending on who the projections are for, you will need varying levels of accuracy.  Here are some differences in your projections based on how the projections will be used.

Investors – Primarily concerned with your business model in general.  They will want to know what your margins are and what your market potential is.  See my answer on Quora titled “How to Calculate Market Potential for a Startup”

Lenders – Concerned with financial ratios.  Will review your projected and current balance sheet to compare assets vs. debt, and cash balance to current liabilities, etc.

Planning Purposes – If you are creating projections in order to determine if you have enough cash to survive, or to find out when you will need more capital, you will need to improve your accuracy.  

Here are 3 ways to improve the accuracy of your financial projections:

1.  How to Improve Revenue Projection Accuracy?

In order to improve the accuracy of your revenue projections I recommend that you focus on 3 specific areas that will impact your final forecast.  

  • Sales Cycle – The most common mistake is probably an overly optimistic outlook on your sales cycle.  In other words, how long will it take from the time you met the potential customer to the time you closed the sale.  You might project a 30 day sales cycle and it turns out that it takes 120 days.  This will make a huge difference in your revenue.

  • Market Potential – You might think that “Everyone” is going to want your product or service.  Rather than assume your target market is Everyone, I recommend that you use the Google Adwords Keyword Tool to find how many people are searching for keywords relevant to your product or service.  I gave a detailed explanation of how to do this with Google Adwords on Quora.  Check it out.

  • Pricing – Lastly, your pricing will dramatically impact your revenue.  You might be able to sell a thousand units if you price the product at $5, but maybe you could sell 500 units at $50 a piece.  Although your units sold is cut in half, your revenue increases 5 times over at the $50 price.

2.  How to Improve Expense Projection Accuracy?

In order to improve the accuracy of your expense projections I recommend that you focus on the following 2 areas:

  • Cost of Goods Sold – Your cost of goods sold is the most important expense to get right.  Why?  Because when you are off, you are off every time you sell a unit or a billable hour.  For example, if you make a $1 mistake on how much it will cost to produce your product, it quickly becomes a $100,000 mistake when you sell 100k units.  It sounds much worse to make a $500 mistake with your monthly rent, but it actually will only cost you $6,000 of the 12 months of the year.  Cost of goods sold is variable, so the more units you sell the more important it is to improve the accuracy of your COGS projections.

  • Bad Debt Expense – It is easy to forget to include bad debt expense within your expense projections.  But every business, every industry can expect to have some bad debt.  Sometimes customers simply don’t pay.  The other important thing to remember with Bad Debt expense is that it is variable as well.  The more you sell, the more bad debt you are likely to have.  You should try to find what an average bad debt expense percentage is for your industry.  Maybe it is 3% of sales, maybe it is 10% of sales.  Whatever it is, try to be accurate here, or this expense could wreak havoc on your projections.

3.  How to Improve Cash Flow Projection Accuracy?

In order to improve the accuracy of your cash flow projections, I recommend that you focus on the following 3 areas:

  • Days to Get Paid – This is definitely the most common cash flow projection mistake.  No one realizes how long their customers will take to pay their bills.  Depending on your industry and the size of your customers you could be waiting up to 100 days to get paid.  This just kills your cash flow.  Many startups and small businesses end up factoring their receivables with companies like our partner Lendio.  You can actually sell your invoices at a discount for cash now.  So if you have a $50,000 invoice out to a customer, you might sell it for $47,500 in cash now rather than waiting 60 or 90 days for that customer to pay. You can find a factoring company that fits your needs at Lendio.

  • Days to Pay – While your customers may not pay for 90+ days, your vendors will likely require you to pay within 30 days or less.  When you are a startup, you probably won’t get good terms with your vendors.  Don’t assume you can wait 60 days to pay your vendors, if you do it will likely kill your cash flow projections.

  • Sales Cycle – I know I already mentioned this above in the revenue projections section, but I wanted to reiterate how important this is.  One of the most common ways for cash flow projections to end up way off, is to be too optimistic with your sales cycle.  Do you really think it will only take 30 days from the time you meet a potential customer to the time that you close the sale?  This is a dangerous assumption to be optimistic about.  As you watch how long it takes to close a sale for your initial sales, tweak your projections to reflect that sales cycle.

At the end of the day the answer to how accurate should your financial projections be, is… it depends.  It depends on the purpose of the projections and your audience.  I recommend that you start with a very basic set of financial projections, and improve accuracy as needed.  If you have any specific questions about your projections, please feel free to reach out to me at adam@projectionhub.com

Get a Business Loan BEFORE You Spend All Your Cash

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It happens all the time.  A business owner neglects their financial projections before they start a business, they think they have plenty of savings to get the business started, but after spending every last dollar from their savings account, they need a bit more and they apply for a business loan.

The Result?

They will undoubtedly be Denied.

Wise entrepreneurs will leverage their cash to secure a business loan long before they need it.  Banks are not in the business of handing over a pile of cash to individuals who have no cash, or assets to pledge as collateral, but if you have cash on hand there are plenty of lenders who would be willing to provide at least a small loan.

Typically the experts say that it will take you twice as long and twice as much money as you expected to start your business.  We have been collecting some interesting data here at ProjectionHub and noticed that only 16% of startup business owners are taking a paycheck from the business in the first year.  This means that you not only need to worry about the expenses of the business, you need to consider your personal expenses as well during the first 2 critical years.

Receivables are Not the Same as Cash

Here is the typical situation that I have observed.  Business owners will invest cash reserves into their business in order to generate sales, they get the sale, but then they have to fulfill the sale.  They hire people, complete the service and then bill the client.  Here is the problem, you have to pay your employees, your suppliers, your rent, your utilities, etc, etc, but your client might not pay you for 60+ days.  Many first time entrepreneurs are not expecting or planning for this situation, so they start the business under-capitalized.

It is a death sentence.

You might think that you will be able to get a loan based on your receivables right?  Your customer owes you $50,000, someone should be willing to provide at least $45,000 now based on those receivables, so that you can pay your employees and suppliers right?  The problem is that lenders typically look negatively upon business owners that let themselves get into this situation in the first place.  They think you should have done a better job at planning, and secured the funds before you spent every last penny.

You simply must secure a loan or investment before you use your savings.

ProjectionHub Provides 200 College Students with Free Financial Projections

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We hit a milestone today at ProjectionHub!  We had our 200th college student sign up to create their financial projections for free using ProjectionHub.

We decided early on that we wanted to provide our tool for free to college students who were creating business plans for class, for business plan competitions, or to actually start a business while in college.  Since we first made the application available for college students about 8 months ago we have had students from the following colleges and universities use our tool:

  1. Stanford
  2. Harvard
  3. MIT
  4. Penn State
  5. Michigan State
  6. Michigan
  7. Northwestern
  8. Columbia
  9. Cornell
  10. Colorado
  11. Butler
  12. Univ of Houston
  13. North Carolina
  14. Georgia
  15. Bowling Green
  16. Wisconsin
  17. NYU
  18. Auburn
  19. UCLA
  20. West Virginia
  21. BYU
  22. Arizona State
  23. Baylor
  24. Toledo
  25. Tulsa
  26. Vanderbilt
  27. Morehead State
  28. Alaska
  29. Bucknell
  30. Villanova

And many more.

We are now looking to build ongoing relationships with colleges and universities to utilize our tool for free in their entrepreneurship classes and for business plan competitions.  If you are interested in working with us, just reach out to me at adam@projectionhub.com and I will get right back with you.

3 Reasons Crowdfunding Applicants Should Create Financial Projections

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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.

“Measure” Your Lean Startup Early and Often with Financial Projections

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Build. Measure. Learn.  These are the principles that the Lean Startup lives by.  In this blog post I am going to outline in detail how I believe a lean startup should integrate financial projections between each step of the process.  I believe that financial projections can help you measure your potential for success from the very beginning and then as you continue to build, measure and learn you will hone in on developing a more accurate set of projections.

The reason I strongly believe in developing financial projections right from the get go is not because I think they will be accurate, it is because I think they might be able to uncover a fatal flaw in your business model sooner rather than later.  Each time you learn and gather more data, you will be able to tweak your assumptions in your financial projections and determine whether or not there is still potential for profit.  

Lean Startup Financial Projection Example

So now I want to go through an example of how an entrepreneur following the lean startup process might use financial projections to their benefit.  

Imagine a Business Model or Two

So you come up with a solution to a problem and you want to build a business around this solution.  In my humble opinion the first thing you should do is some simple back of a napkin type math and imagine what a business model might look like for this solution.  I am not suggesting a 30 tab spreadsheet financial model for the next 5 years of the business.  What I am suggesting is that you do 10 minutes of research and get a rough idea for the following data points:

  • How many customers might you be able to sell to?

  • How much might these customers be willing to pay?

  • How much will it cost you to produce this product or service?

The purpose of this exercise is to determine whether or not moving forward is worth your time.  If you conclude that your total market for this product or service might be $50,000 annually, then maybe you should spend your valuable time elsewhere.  Or maybe you realize that the technology just is not there yet, and it will cost you so much to produce the product that you would have to charge your customers an arm and a leg for the end product.  Maybe this is what happened with the Apple Newton.  The Apple Newton was a great idea, ahead of its time.  How do we know this?  Because of the success of the iPod, iPhone, and iPad, but the technology just wasn’t ready yet, and it cost too much for the limited functionality that it had.  

Build an MVP

Once you have passed the first test, and it looks like there is a business model that could be profitable, now build your minimum viable product.  Once you have a product or service for sale you can learn a number of details that will help you iterate on your financial projections.  

For example, let’s say you built a software application that you are selling.  Let’s also assume that it is NOT a recurring monthly or annual fee for the software.  The user purchased a license once and it is theirs forever.  

So you start out by selling it for $25 per license.  It is already built, so there aren’t really any cost of goods sold expenses.  In other words, you could sell 100 units or 1,000 units and your cost of goods sold would be the same.  With that in mind, then it is really all about customer acquisition costs.

You might start out selling your product primarily through advertising with Google Adwords.  You can test over a period of time and determine how much you pay in advertising for each unit you sell.  Let’s say you are paying $32 worth of advertising for each $25 sale.  It doesn’t take a rocket scientist to quickly determine that something must change.  So you can either work to optimize your advertising to lower your cost to acquire a customer, or you can increase your pricing.  

Adding New Features

As you add new features I think it is worth your time to create a quick financial projection for each feature.  For example, you might want to add live chat support to your software.  This is a slightly more complex projection, but a good example.  

The question is how do you know whether or not it might be worth adding the new feature before you spend the development time.

Let’s say you are going to use an out of the box live chat system like Olark.  You are also going to customize the integration a bit and you expect about 20 hours of development to be spent on implementation which will cost you about $1,000, along with $200 a month for the premium version of Olark.  The other thing to take into consideration is that you will need to hire live chat support.  Let’s say you pay $15 an hour and will have someone available 24 hours a day.  That is an additional $10,800 a month.

So in total we are looking at a $1,000 up front investment and $11,000 monthly expense.

Now the question is how will the addition of a live chat feature impact your sales?

If you think it could drastically increase sales, it might be worth moving forward, BUT before you hire a few people to man your live chat desk 24 hours a day, you need to Build, Measure, and Learn to determine whether the finances make sense.

So you could implement the most basic version of Olark’s live chat feature and test to see if your sales conversion rate increases.  Test it for a week.  With the addition of live chat do you convert 20% more website visitors into customers?  Now you can iterate on the financial projections again.  Is the 20% sales increase enough to justify the additional expense?

You could run this same experiment with each 8 hour shift.  Maybe it is profitable to have a live chat from 8 am to midnight, but not from midnight to 8 am.

With each cycle in the lean startup process I recommend a mini financial projection that can help you stay on the path toward a profitable business.

Let me know if you have any questions, I would love to chat.  Shoot me an email at adam@projectionhub.com

How to Create Financial Projections for Crowdfunding

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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