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Need advice on financial plan for Series A pitch

We are a MedTech telehealth software company with cloud-based solutions to detect chronic eye disease such as diabetic retinopathy, glaucoma, age related macular degeneration, etc.... We also offer live eye exam teleconsultation, EMR / eye care practice management and electronic referrals. We sell our solutions to different players with in the healthcare market: Institutional (hospital ophthalmology departments), Eye care professionals (ophthalmology / optometry practices) and corporate (retail eye ware chains).

Chronic eye disease is a huge problem in North America and around the world. Aging populations and increased incidences of diabetes are putting enormous pressures on the eye care market and there are simply not enough ophthalmologists to handle the demand. Our tools provide early detection of eye disease as well as a whole bunch of other health issues like hypertension, arteriosclerosis, sickle cell disease...all through ocular images of your eye's retinal wall and through computer aided diagnosis constructal algorithms. Diseases such as diabetic retinopathy (#1 clause of vision loss) are treatable if detected early enough. If they go undetected, the cost for the patient, insurers and health sisters are enormous.


We're now moving ahead quickly to a Series A round. We have had preliminary meetings with some VC that invest in telehealth and detection/diagnostic software companies like us. The feedback so far has been extremely positive and they want us to come back with a formal pitch deck. I've done this many times in my career, but I just want to validate a few things. Our pitch deck will be about 15-20 slides max and will be accompanied by our financial plan.


  • How far out should the financial plan forecast be? I was thinking 2 or 3 years In the past I've done 5 years (e.g. 3 years month to month with years 4-5 annual totals) but always felt that anything past 2 was an unrealistic will ass guesses. One of the VCs actually asked us for 5 years, which is why I'm asking the question. Maybe in life sciences and healthcare it's customary to ask for a longer forecast window.
  • How much detail is really needed on the expense side? Do we need to account for every foreseeable expense? Some of this can get pretty convoluted in a hurry. Try to figure out your HR recruitment costs: how many will be sourced through recruitment firms? Your costs per square foot for rent? OK if you have one office, but what if you have offices in different US cities or people working from home offices? Try to figure out your deferred revenues estimates when you collect money in advance of service delivery. And so on. In the past it was not uncommon for me to have over 250 "assumption" parameters. It used to drive me nuts.
  • Is it really all that important or necessary to project out your closing balance sheets in as reliable a manner as possible? Doing this in a spreadsheet can get a bit complicated.
  • While expenses are pretty easy to project and model, revenues are an entirely different matter. Part of our target market is straight forward: hospitals and eye care professionals. There are over 5600 hospitals in the US and thousands of ophthalmology departments. Thera are 18000 ophthalmologists in the US. Some work in hospitals but the vast majority are in private and group practice. There are over 45000 optometrists most of whom work in private practice or groups settings with about 25% associated with an eye ware chain. For these markets, I can come up with revenue models based on some assumptions. Where it gets more complicated is when trying to model the new markets we want to target. This includes primary care physicians and could even include large pharmacy chains. We're not exactly sure "today" what the revenue model / pricing is going to look like for these new segments. There are several different business models to consider. There's an ocular imaging device that's required which costs upwards of $25K per client. We're not sure how we will factor this in to our model yet. So I guess what I'm saying is that there's a huge market opportunity and both we and the VCs are seeing the same thing but I can't, at this moment, quantify it in financial terms.


Am I over thinking this too much? :)

12 Replies

Thomas J. Kaled
2
0
Thomas J. Kaled Advisor
Business Development Consultant @ thomas.kaled@gmail.com
Your projections should be based on market penetration/capture...i.e. how much of the market you will obtain in your venture. If for instance you know there are 529,000 cases of macular degeneration per annum (US) and you project to own 3% of the market you know that to be 15K cases and if each case has a value of $1000 to your venture your gross sales will be $15 Million. Now your task is to convince the VC how you can capture that percentage (or whatever % you propose to capture)..
Martin Omansky
0
0
Martin Omansky Entrepreneur
Independent Venture Capital & Private Equity Professional
Investors like us look at numbers in orders of magnitude. Details and precision are not necessary, and also violate the laws of nature. Make sure you can effectively y defend your numbers and assumptions. A good CFO will generate appropriate financial projections. Satisfy yourself that your expenses are realistic and conservative. Also be realistic about your ramp-up period and expected market share. And yes you are over-thinking this. Sent from my iPhone
Simone Cimiluca-Radzins, CPA
0
0
Cannabis CPA and Management Consult
Hey there,

1.I would do 3 years if you know your pricing is really not going to fluctuate and there have been established trends.

2. As a CPA, I go into a lot of detail to really build the proformas.. We wouldn't show this to investors in the actual PL (for example tradeshows would roll up into a selling expense..)

3. I think balance sheets are helpful with the pro-formas.

4. Congrats on the market opportunity. Adding this in the pitch deck would suffice in my opinion.


Rob Gropper
1
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
Richard, build your financial model to serve you and our team not an investor pitch. You have to be confident in the numbers first - no point in fooling yourself. With respect, i disagree with Thomas K. i would not build a top down model "if the market is 60 gazillion $$ an we capture 10% then we'll have 6 gazillion in revenue and valuation of 100 gazillion". Build your model from the bottom up: i.e. "how many sales of x, y and z products/services (users/customers) can i realistically achieve in y timeframe with z resources? how much will those resources cost me? How fast can i realistically locate, recruit, hire, train, etc. the personnel necessary to build, sell, market, count the beans, etc. for this number of widgets/customers/users? The numbers have to make sense to me first and foremost, no happy ears, no BS - do these numbers make sense to me and my team? I use the summary pages in my model to recruit personnel. they can see all the assumptions and the results and understand that we've done our homework. It's a powerful recruiting tool. "Can i realistically recruit and on-board 2 new sales people in month 2 and how much can they realistically achieve in months 3, 4, 5... ?" If i bring on another developer and an inside sales person in month 5 how does that affect our burn rate and cash balance? I start with product (development/engineers) and sales first and the resources those people need and then add bodies in logical progression moving forward - as what point will i need someone other than me to manage the sales team? When do we bring on an inside sales team? how much time for them to ramp up? What is my recruiting expense in the first 6 months? I do monthly for the first 12 months, quarterly in yr 2 and yearly for 3 and 4. Build a big as* spreadsheet with tabs for key inputs - sales, personnel (who and when), personnel costs (salaries, benefits), engineering, marketing, etc. My model has 35 tabs including market analysis data, potential prospects, competitors and competitive analysis, etc. All in one place. It's my bible. Summary tabs for a balance sheet, income statement, personnel plan, etc. Now you can do what-if modeling to test your various assumptions and do a sanity check when some input changes. Test boundary cases. "what happens if i add a second sales person in month 3 rather than month 5?" Once the numbers make sense to you, you can present the data in the summary pages in your pitch and you have all the detail to back it up and all the inputs needed if someone challenges an assumption. You need to details to run your business. Investors mostly want to know how you think, what assumptions you've made and and based on those assumptions do the numbers sound sane? that's my $0.02.
Thomas J. Kaled
1
0
Thomas J. Kaled Advisor
Business Development Consultant @ thomas.kaled@gmail.com
I am assuming you selected the Pitch Series specifically? Your business plan is a hypothesis and whether you prove it inductively or deductively in the Pitch is moot. Regardless of your line of reasoning it is requisite that you provide the proof in a short slide series (probably no more than 20-40 in Series A).. Although a detailed plan will be required, Series A is generally considered an Aperitif if I may use that analogy and if you spend a great deal of time describing every proposed course thereafter, it's proper pairings, your rationale for them, the historical rationale, the nutritional value of each and the Digestif, my guess is you will lose your audience.

I have read that those who have authored books often write the Preface after the entire book hence the Series A Pitch, like a Preface, will need to be grounded in fact and detail which follows in Series B. and thereafter.

However rather than provide a 'point-counterpoint ad ad nauseum' why don't I just refer you to what other experts have said on the subject responsive to the scenario you provided:

http://www.reportally.com/investor-pitch-deck-series

http://bestpitchdecks.com/

http://www.slideshare.net/DanielleMorrill/mattermark-2nd-final-series-a-deck

http://www.securedocs.com/blog/how-to-make-the-perfect-series-a-pitch-presentation-deck


Don Ross
0
0
Don Ross Entrepreneur
Managing Partner Digital Health at Life Science Angels
Some overarching principles may be worth considering. When I'm reviewing funding applications, I start with two high-level concepts for looking at the financials: 1. Short term (say 24 months) that has sufficient detail that the management team knows how to run a business and can execute. I want this to be concrete and detailed. 2. Longer term (say 5 years) to show how big you think the opportunity will be. You are correct, the details beyond 2-3 years have little meaning. It is meaningful to know whether you think the business will be a $10M buisness or a $100M business in 5 years. Regarding your question regarding known markets (e.g., ophthalmologists) vs new markets (e.g., primary care physicians), I wouldn't spend much time going into detail on the new markets. If you need these markets to make a successful business, you've just increased the investment risk substantially. The new markets can be the expanded upside opportunity beyond your basic plan. I notice that Retina Labs is located in Montreal and the current customers are in Canada. My guess is that you will have to address the US market to get to scale. The economics and buying process in the US healthcare market is quite different from Canada. It would be good if you could add a US customer to show customer validation in the US. Hope this helps. *Don Ross* *Managing Partner Digital Health* *Life Science Angels* [removed to protect privacy] [removed to protect privacy] *Sand Hill Angels, Sierra Angels*
Laura Oliphant
2
0
Laura Oliphant Advisor
Business Development and Venture Capital Professional
You should have a comprehensive, bottoms up 5 year P&L, balance sheet, and cash flow model. Yes, it's tedious, and I can assure you that it will be overly optimistic, but as a vc, I know that you've done some homework if it exists.
Nevine Gulamhusein
0
0
Nevine Gulamhusein Entrepreneur
Consultant, HR Resource Management Support at The World Bank
Hi Richard, Having been involved in a similar Education opportunity, I agree: 1. 3 years detailed with revenues and expenses for years 4 and 5 should suffice but have details available if asked. Longer forecasts are normally requested because of the length of research and development time frames. Do not forget to outline and include your plan of expansion 2. Expenses - should be fairly detailed in terms of Payroll and benefits, consulting, rental (space and equipment) interest and insurance costs, entertainment / marketing, Auditing, banking fees (line of credit charges), lobbying efforts if any. These are primarily major expenses. These can be estimates with increasing variances over the 5 years 3. Target modelling. Once you have a successful model, this can be emulated or slightly modified as you expand. But you should have in mind the areas you want to penetrate and its community. 4. Deferred revenues in advance of service delivery - Hold these in an escrow account. These only get taken into revenue once the service is completed; the balance gets recorded as work in progress (because it is your potential work load). This will keep it simple for tax purposes. If you need help with putting this together on a spreadsheet (macros and pivot tables) I could help you with this. Best regards and good luck, Nevine Gulamhusein-Rahemtulla, M.B.A, PhD
Abhishek Krishna
0
0
14 yrs+ Business Planning Expert/ Corporate Finance / M&A
Hi Richard.
IMO you need a 3/4 yr BS, CF and P/L statement that includes Assumptions for Revenues and Expenses. Revenue wise you will need to project customers (Hospitals, Opthalmalogists, etc) and amount earned per customer by each state/ country that you wish to target. So as per your strategy/ roadmap you will need to show detailed Sales & Expenses. In case you are interested we can do the Financial Model / Plan for you. We have expertise to do this for Venture funding purposes.
Richard Pridham
0
0
Richard Pridham Entrepreneur • Advisor
Investor, President & CEO at Retina Labs
Rob Groper: I'm with you Rob. I too am not a fan of the top down / market penetration approach. The real world never never seems to work out this way. Bottom up is the way to go for sure. I have all the market stats to do this.

I think you and others have answered my questions. It looks like I'm going to need a 5 year FP. I'll do 3-years' month to month and year 4 and 5 will be annuals totals with assumptions built in for revenue growth, expense indexing, etc... I think the core of the FP is going to be the revenue modeling. This is where I need to spend most of my effort. The institutional segment is really straight forward. It's the other markets (with the biggest potential) that are trickier as we haven't thought through the entire spectrum of business models). But nonetheless, I think I have a pretty good hunch as to what's going to work.

Don Ross: You are correct that this company has been solely focused on the Canadian market prior to my investment and assumption of its leadership. There are opportunities in Canada but the big opportunity is in the US. There are over 40M diabetics in the US and that number is growing. If you are a diabetic, you are prone to many vascular health issues, including eye diseases. All diabetics should get screened annually for diabetic retinopathy but less than 50% actually do so. Using a top down approach (I won't but just for argument's sake), we get 5% of the people who don't get screened. That means 1M screenings per year. At $50/screen, that's $50M right there. There's an even bigger market going after the gen pop (non diabetics) for early detection of other conditions using the exact same approach. Many people don't realize that your eyes are a window into your body and can reveal and predict all kinds of health conditions (even HIV believe it or not).

The "for profit" US healthcare really fits our model nicely. Telehealth reimbursement is now covered in 46 states (soon to be 50) and by all insurers whereas it's not uniformly covered in Canada. Everything takes longer in Canada and the market size is a fraction of the US. Prevention, early detection and treatment are big incentives for insurers. We have some key team members coming on board in the US so we're in good shape to hit the ground running.


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