Pulling Your Financial Story Together For a Compelling Investment Opportunity

It's go time! You have developed an idea for a revolutionary new lighting technology that will allow users to simply pull linear fluorescent 4ft lights out from their sockets, and be replaced one-for-one by lights that directly snap into the existing sockets. Your amazing technology works in 100% of 4ft. fluorescent installations worldwide. Achieving this type of compatibility across the vast range of electrical variations in the field is unprecedented, but you've figured it out and you've filed a wide array of patents protecting your designs.

Why will people want to switch their perfectly good lights to begin with? Because fluorescent lights last for 25,000 hours, consume 32 Watts of energy, and can't be dimmed. Your technology lasts 50,000 hours, consumes 12 Watts of energy, and can be dimmed. You strongly believe that customers will find these attributes provide overwhelming value to their businesses and properties.

The only thing you need to do to make this happen is to raise some capital. Everything else will be easy... You've put together most of your investor slide deck explaining your great technology advantage, the strength of your team (or at least the one you have all set to be hired when you finish Series A investment), the value proposition, etc. Now you need to tie the story together with revenue/financial projections that will be compelling to investors and that you believe you can execute on. You estimate that from the time you close your Series A investment it will take you 12 months to get your product to market and start selling and you'll need to hire a team (described below) immediately upon closing Series A if you are to make all this happen.

To complete the deliverables, you've started to assemble the following relevant information below:

Market data:

• There are 325 million 4ft fluorescent lamps sold each year in the United States. These are lamps that are burning out and being replaced.
• There are 1.8 Billion 4ft fluorescent lamps installed in the United States. Basically, 18% of the lamps installed burn out every year, but you are hoping the value prop would motivate some people to take out perfectly "good" fluorescent lamps and replace them with your new technology.
• 70% of the installed lamps are used in Commercial Applications (e.g. office buildings, retail stores, etc.).
• 20% of the installed lamps are used in Residential Applications (think a shop-light in a garage).
• 10% of the installed lamps are used in Industrial applications (e.g. factories and warehouses).
• Fluorescent lamps of this type have an average selling price (ASP) of $3.00/lamp
• You plan on selling your lamps for $19.99/lamp in the first year you sell them, and expect to have 10% per year reduction in ASP.

Cost Information:

Your current design has a bill of materials (BOM) that totals $12.00/unit in quantity of 10,000 units, and based on design changes you plan to implement before releasing your product, you expect these costs to be reduced by 25%. In addition, you expect to see a 5% per year reduction in material costs after launch based on volume increases and further cost reduction in the design.

You have contacted a contract manufacturer and received several quotes. The manufacturer with the

most relevant experience that seems to have a facility and labor pool which align well with your

projected volume needs has provided you a quote to assemble, package, and ship units to your warehouse at a fixed rate of $2.50/unit in the first year of production. Based on volume increases over time, you expect to decrease the contract manufacturing cost by 10% per year.

You project that the cost to ship from your warehouse to the end customer (your distributor described below) will be $0.50/unit.

Your hiring plan consists of the following people that are needed to be hired before the product is released. All salary information below is fully loaded with benefits, etc. included.

CEO (That's You): You are planning to take a below market fully loaded salary of $50,000/year which will allow you to pay for living expenses and food etc.

You need a COO that will be setting up your production and managing the contract manufacturer.

$210,000/year

You need a senior electrical engineer to finish the electrical design, do validation testing and handle all electrical regulatory requirements: $175,000/year

You will have a Director of Marketing that is in charge of all corporate branding, communications, digital marketing, and trade-show presence: $150,000/year

You will be hiring a seasoned VP of Sales & Marketing to build out your sales channels and ensure seamless integration between your Director of Marketing and your external distribution sales force.

$160,000/year + 0.5% sales commission on each unit sold. The sale commission is small both because volumes in this industry are high AND because your sales force will be run through distributors where the majority of your sales commission expense will eventually be incurred. At this time you are assuming this will result in a higher ASP to the end customer and will not be paid directly by your company.

You will be hiring a Director of Finance who will initially be handling both your accounting needs and all finance related work required after you take investment. $150,000/year

You expect to be incurring $140,000/year initially through both part-time administrative assistance (through a temp agency) and periodic legal work.

In addition, you also expect to be incurring $350,000/year in other costs related to rent/lease, utilities, travel, trade-show expenses, and other general costs associated with operating the business (e.g. snacks. What great start-up doesn't have snacks?)

Because you are new to the whole "scaling a business" thing, you don't have a good idea about your future hiring plan so for all personnel costs you've chosen to assume 25% growth per year which is split between cost of living increases and adding employees. For non-employee related fixed costs (general costs for operating your business) you're assumption is that those will increase 10% per year. You assume that as soon as the investment is done, these people will magically be hired (if it were only that easy). They will work for you for 1 year finishing development and release the product for commercial sales. The 25% and 10% increases above will not start until 1 year AFTER commercial release of the product. For those first two years while the organization is getting it's feet on the ground, it's going to be a bit chaotic but you are staying lean.

Last but not least, your contract manufacturer requires you to invest $225,000 upfront which will be used to purchase injection molds, assembly tooling, and cover the cost of non-recurring engineering work required to set up your assembly line, train operators, and generate documentation and inspection procedures.

Sales Channel Information:

Based on your customer development, you've decided to focus on the Commercial Applications Market because typical office spaces are leaving their lights on 16+ hours/day, which makes the money saved from reduced energy consumption greater, and for retail spaces they really like the idea of having dimming capability because fluctuating light levels create "drama" in-store, which shoppers prefer.

You've also chosen to focus initially on relatively high electric rate locations. These geographic locations make up places with 20% of the United States population and you feel it's a fair assumption that the percentage of commercial buildings with fluorescent lamps installed is roughly proportional to population density. Your strategy to target 20% of the total US market will be your strategy for the first four years of commercial sales. After that, you expect your presence and brand to be strong enough to expand to the rest of the U.S. market. You still can only bring on one distributor per year however, and will need to decide whether it makes more sense to add additional distributors in the high electric rate areas, or expand to a larger market segment that may not have as much market pull. You believe that sales to those that are replacing lamps that have burned out will result in 85% of your sales AND you believe that sales to those that have lamps that work fine but are looking for a new solution will be 15% of your sales. In consultation with the person you'd like to hire as VP of Sales, you've decided that you can only bring 1 distributor online each year given the work required to train and support their sales staff. The distributors you are looking at bringing online are fairly similar in size and are regionally focused, so you are able to choose distributors doing business specifically in the areas you are targeting. In their region, each distributor has market penetration into approximately 15% of the customer base and there is very little overlap in customers between these distributors. Each distributor does, however, distribute products from your competitors so you will only be able to win some percentage of their business. You estimate that you will gain market share (of the sales that your distributor does) over time with each distributor as follows (e.g. In the 4th year after you start doing business with a distributor in an area with high electric rates, you will account for 5% of their sales for 4 ft. fluorescent lamps that they are replacing):

Expected percentage of a distributor's replacement lamp Year 1 Year 2 Year 3 Year 4 business that you expect to win vs. time that you are working with that distributor. High Electric Rate Areas Replacing Burned Out Lamps 1.75% Timeline for the Case: Time = 0 Time = 2 Years after Time = 4 Years after Company has concept Series A Series A and prototype developed. Needs to Close Series B Liquidation Event! raise money to get to Investment! market. Negotiating Series A Investment Year 1 Year 2 Year 3 Year 4 Year 5 Time = 1 year after Series A Release product and start selling