Interview: Gregg Smith on Entrepreneurial Investment

The following is an interview with Gregg Smith, Founder, Evolution Corporate Advisors, for my Advanced Entrepreneurial Finance graduate course. Gregg and I have known each other since about 2010. We discuss entrepreneurial investment from an investor’s perspective

Q. Tell me little about yourself and Evolution Corporate Advisors as it may relate to or support the financing of entrepreneurial ventures and small businesses.

A. I spent ~20 years on Wall Street as an investment banker, with most of my career spent helping growth stage companies execute private placements. I have completed over 120 private placement transactions for clients in the healthcare, technology, consumer & retail, energy and other sectors. I have also (conservatively) reviewed more than 1,000 business plans and met with 100s of management teams and entrepreneurs. I have seen many success stories of small companies I financed that were sold for >$10 billion, and many I financed that failed.

Q. When considering an investment, which is more valuable to an investor, experience in an industry vs. experience as an entrepreneur? Why?

A. Many outsiders have come to existing, “old world” antiquated industries and completely disrupted the norm—all with no prior in-depth industry experience. I would rather back a highly successful entrepreneur who has succeed elsewhere in a new industry, than back an industry insider who does not have any meaningful record of success. Also, many outsiders have a fresh perspective on things that don’t live with every day and may innovate and/or solve a problem that is not obvious to the industry insider.

Q. In your experience, which is more important in early state financing, the fit with the entrepreneur, the apparent accuracy of the pro forma assumptions, or the expected potential of the business? Why?

A. In the more than 120 transactions I completed, I have only had one client meet their first quarter projections after closing a deal. Things are very difficult to predict, and everything in life ends up costing more and taking more time than one anticipates. The same holds true with even the most sophisticated management teams using their best judgment to project where their business will be in one-quarter or one year. It is hard. I am more interested in understanding the drivers of a business and the assumptions used to project where growth will come from and anticipated costs. With this being said, for someone that is backing an early stage business, the “fit” with the entrepreneur is paramount. You will live and die at the hand of this individual, and you must understand their strengths and weaknesses. If you have confidence in the leader, then it is easier to understand the potential of the business and how and if it will be achieved.

Q. What are the top three things you look for when considering an investment partnership with an entrepreneur? Why are these three things the most important to you?

A. When evaluating a new [early stage] investment opportunity I first look at the business. Does it excite me? Will it disrupt the norm? Can it scale and scale fast? What are the barriers to entry? Next, I look at the individual and the team. Is this a team that can do it and have they had previous “wins”? Do I have confidence in them and do I want to be partners with these folks—thru good and bad? Lastly, I look at what is required to execute the plan in terms of resources and funding requirements and what is my potential exit for this investment. If invest today, what expectation should I have and how am I going to exit this investment and get a return on my capital? Will it be an IPO or a sale to another company?

Q. How important is a formalized business plan for a venture when considering an investment? What are those things you look for in a plan?

A. Formal “business plans” were popular until sometime within the last ten years. In the 1990s, I got long business plans sent to me almost daily that were mostly comprised of pages and pages of text and some financial statements. Today, most of what you see is a “deck,” some type of PowerPoint presentation on the company and opportunity that tells you everything you want to know in a more graphically, storytelling manner. Ultimately, I like seeing a deck and a working “model,” which would be an Excel file with quarterly projections and use of funds and, most importantly, assumptions that I can change and toggle if I want to evaluate my own assumptions.

Q. What are the three most important financial measures (statements, ratios, etc.) when reviewing a pro forma or a later stage investment?

A. This depends on the business. A retailer or manufacturer of a consumer product will have different metrics to review and understand than a biotech company. As it pertains to a financing, there is always risk involved when investing in a company and an investor always seeks to minimize the risks they take. Hence, I want always to understand “How far will this capital last the company?” when I am investing, and I want to try to reduce my “financing risk.” If a company tells me they need $2MM to execute their plan and get to a meaningful milestone, I don’t want to invest if they can only raise $1MM, because this would leave me exposed that they may not be able to raise the next $1MM to meet such critical milestone.

Q. How often would you, for example, use ratios to identify potential problem areas in a venture’s performance when compared to an industry sector? Which ratios are most important and why?

A. The most relevant ratios or measures I may look at today would include “customer acquisition cost” and gross margins and cost of goods. I want to understand how profitable a business is before you add in their overhead and as it relates to many online or product or service companies, how much are they spending to acquire a customer.

Q. How might seed investment requirements of an entrepreneurial venture differ from early-stage or late-stage requirements?

A. When investing in a company at the “seed stage” or start-up stage, there is a lot of risk because the company’s model may not have been proven out. In fact, a seed stage company may not even have a demonstrable product, customers or working prototype or website. In contrast, an “early stage” investment should have at least proof of concept or a working model as well as customers and customer references.

Q. What advice would you offer an entrepreneur seeking start-up or early-stage financing?

A. Finding money is almost as much about finding a partner that believes in you and your business, so there has to be some chemistry between the investor and entrepreneur. Try to find an investor that will also help accelerate the growth of the business in other ways than just providing money. Develop a pitch deck that clearly outlines what product or service you are offering, [for example] why it is better than existing solutions on the market today, how you will generate revenue and your growth strategy, why you are the strong candidate to lead this venture, how much capital you need (to do what with?), and how long it will last you till you hit milestones that will increase your valuation and lead you to raise more capital.

Investor Tip: Customer Acquisition Cost is Key

A conversation with an investor this week brought out that Customer Acquisition Cost is a key to his investment decision-making process. It occurred to me that many new entrepreneurs may not consider how important such a metric is for their venture, whether or not they are seeking investment. Customer Acquisition Cost is not just a measure to determine the average cost to acquire a customer; it is also used to determine the overall health of the business, the marketing budget, and the effectiveness of marketing and sales programs. For an investor, it will demonstrate the short- and long-term viability of the venture.

Let’s examine Customer Acquisition Cost in a little more detail.


Calculating customer acquisition cost (CAC) is not difficult. Start by totaling all of the marketing and sales costs for a period, and then divide those costs by the number of new customers acquired for the same period. Easy enough, right? Except that many entrepreneur’s—myself included—may miss costs in the calculation and do not get an accurate number against which to measure the customer acquired.

For a more detailed analysis of CAC, I think about spend and acquisition by channel. For example, in the chart below, I list the number of channels and further categorize them in measurable and non-measurable buckets. Measurable channels are those from which a customer’s purchase is trackable to the marketing or sales campaign, either through a link, a promo code, a special call-in number, or a sales order tied directly to a salesperson.

Non-measurable channels are channels which do not provide for an easily trackable source for a specific sale but are likely to contribute in some way to sales in general and should be calculated as part of the overall CAC. Brand campaigns might fall into this category, as would most promotional activities such as an entrepreneur’s speaking engagements, and networking events, to name a few. By adding the costs together and then dividing by the number of customers acquired for the period we arrive at an Average Customer Acquisition Cost.

One of the advantages of tracking spend and acquisition by a channel is the ability to determine which channel is most effective in generating customers. If, as in the example above, Inbound CAC is lower than PPC CAC, one might look more closely at the PPC campaigns to determine how and where improvements may need to be made if it appears those costs are out of line with expectations. But, how to do we determine what is reasonable? We need to calculate the lifetime value of a customer.


The Customer Lifetime Value (CLV) helps us determine the value of a customer over time. This helps us determine how much we can spend to acquire a new customer, and how much we could spend to retain that customer. The CLV estimate considers several key things: The average order value, the average number of purchases, and the average customer lifespan. The customer retention rate, average margin per customer, and a “discount rate” which adjusts the future profits from the campaign for the uncertainty of performance vs. investing instead in other business operations.

In the chart below, we estimate that a customer will have three purchases per year with an average order size of $35. We anticipate that the average customer lifespan is three years and we will have a 75% customer retention rate.  Based on the particular product we have an average of 70% profit margin per customer. The discount rate in the example chart below is set to 10%; however, the longer future customer revenue is expected, the higher the discount should be to factor the greater the possibility of inaccuracy.

We use three different LTV calculations in the chart above: A simple LTV which calculates the sales over the customer’s lifespan, a more customized LTV based on the average gross margin on sales over the customers lifetime, and the more traditional LTV calculation which incorporates the discount rate. Then we average the three methods to arrive at an Average Customer LTV. Using the data in the above chart, the average customer has a value of $316 over his or her lifespan.

Now that we know our Customer Acquisition Cost and Customer Lifetime Value, we can determine whether our cost of acquiring a customer is reasonable given our assumptions, or if we’re using actual numbers, whether we may be overspending or under-spending to gain a customer.


Our CAC calculations indicate the average cost of acquiring a customer is $100.00. Our CLV calculations suggest that the average customer spends $105 per year. For most business types, an entrepreneur would want to limit the cost to acquire a new customer to approximately 30% of what an average customer spends in a year. Considering that the customer spends $105 per year, the target expenditure to acquire a new customer should approximate $35.00 as shown in the chart below.

The numbers used in this scenario suggest overspending on customer acquisition by about 186% more than necessary.

As a result of the overspending, the average customer is unprofitable the first year and reduces the overall profitability during his or her lifespan assuming the customer is retained as shown in the next chart. If the customer is not retained, the loss would be much greater.

In the scenario outlined here, the cost of acquisition is much too high and the possibility to recoup the investment over time is suspect. These factors would likely be a red flag for an investor.


Remember, Customer Acquisition Cost and Customer Lifetime Value will vary from venture to venture and industry to industry. Benchmarks are difficult to find, but using models such as these, a baseline can be established from which to work forward. As with all financial analysis, each entrepreneur should develop his or her own CAC and CLV models so that the specifics of the business are incorporated.  To assist, I have attached the spreadsheet model to download and explore below.

Understanding the Customer Acquisition Cost is critical to business operations. Every entrepreneur should know what it costs to acquire a new customer and how those costs flow through the business in particular to the impact on marketing budgets, the effectiveness of marketing and sales expenditures, and overall business profitability. Spending too little for customer acquisition will result in missed opportunities, but spending too much will decrease profitability.  Keeping track of Customer Acquisition Costs is a good first step in ensuring profitability, and it will likely play a role in a prospective investor’s decision-making process.

A few notes on this model:

  • This model is an example and is for use as is. It is not supported in any way. It is not intended to be a tool to use without customization based on the specifics of an entrepreneurial venture.
  • This model is only an example to give the reader an idea of how such a tool can be developed. It is not based on a real business. I compiled this model for a graduate class, but I have developed similar models for entrepreneurial ventures. Each business venture is different, and so is the CAC and CLV that are prepared for that venture.
  • Most CAC and CLV calculations are done annually using actual numbers. This model can be used in that way. It can also be used for estimating and creating variations in the start-up phase of a venture. In the later situation, “what if” scenarios might be deployed to determine the outcome of different of customer acquisition costs or levels of lifetime value.
  • This model is set up for annualized numbers; however, one could create a similar model with monthly numbers to track improvements over time.
  • All of the “Bold Blue” text areas can be changed to demonstrate how the interactivity might work. No other data can be changed.
  • Formulas can be seen in each of the cells (mouse over it), but only the values in the “Bold Blue” text area can be changed.
  • By downloading you acknowledge this is for personal use only. It is not to be sold or distributed in any way.


Featured Image Source: Getty Images/Martin Dimitrov

Answering Big What-Ifs: The Interactive Pro Forma

Startup entrepreneurs face a daunting challenge in forecasting cash flow, profitability, and return on investment. It can be so overwhelming that many just ignore the numbers and jump right into developing a product or service. Certainly, a refined product or service is a critical early step in launching the entrepreneurial venture; however, understanding the financial aspects of the business, including the inputs to the product or service development is paramount to forecasting cash flow and business profitability, is equally important.

In business, particularly in the start-up phase, “pro forma” financial statements provide a way for the entrepreneur and potential investors to see the financial forecast of a business given a set of assumptions. The pro forma financials will include a set of assumptions on which the numbers were based, a cash flow statement, an income statement, and a balance sheet statement. Together, these statements provide an approximation of business performance considering the assumptions. Most investors place little value on the numbers a start-up provides because the core assumptions may be inaccurate (Rogers, 2014).  And if the assumptions are inaccurate, the financial performance will change. One of the best ways to understand how assumptions change the financial performance of a business is to build an interactive pro forma.

The interactive pro forma will allow an entrepreneur to quickly change assumptions and easily see the possible financial impact on the business as those assumption flow through the other financial statements. Once set up, it allows an entrepreneur to play a “What-if” game with assumption inputs and watch how those changes affect the business performance. The interactive pro forma is also a great tool to use when seeking outside investment. If the assumptions are challenged by an investor, they can be modified in real-time, and those modifications flow out to the other statements. This provides an instant view of the new business financials once new assumptions are in place.

Spreadsheet tools make building an interactive pro forma easy, although it does take some knowledge of the tools and a few hours to set up the models. Most of the time spent should be given to considering the assumptions. Assumptions are the most important part of the model and where entrepreneurs should put the bulk of their time.

Here’s one way to build an interactive pro forma:

  • In a spreadsheet program, create a new workbook with four tabs. Label each tab as follows: Assumptions, Cash Flow Statement, Income Statement, and Balance Sheet.
  • On the Assumptions Tab, list all of your assumptions about the business. Depending on the business one might choose product pricing, sales figures, monthly costs of operation, depreciation, taxes, insurance, etc. Make sure everything that could affect the business costs or revenue structure is included.
  • On the Cash Flow Statement tab, include the beginning cash balances, your sources of cash, and the uses of cash for each month. Use the assumptions to drive the revenue (sources) and expenses (expenses) on this tab. Note that the cash that’s left over at the end of each month becomes the Beginning cash balance for the following month. The Cash Flow Statement shows how the business will use the money it receives each month.
  • The Income Statement tab pulls data from the Cash Flow Statement tab but formats it differently. The Income Statement in a pro forma shows whether the business is profitable for a period by looking at the revenue and expenses based on the original assumptions (and cash flow).
  • The Balance Sheet pulls data from the Cash Flow Statement and the Income Statement to provide a look at the assets, liabilities, and equity of a company at a point of time. It helps the entrepreneur better understand what the company owes (liabilities), what it owns (assets), and the equity held by shareholders.

The above points are over-simplified. The idea is to give an overview of the process.  Each entrepreneur should develop his or her own pro forma to understand the specifics of his or her business better.

This said I have provided an example interactive pro forma workbook for an online publishing business for readers to download and explore. Some may have the skills and abilities to create a similar model, but others may need the help of a financial professional.

Using an interactive pro forma will help an entrepreneur get a better handle on his or her business by allowing the exploration of What-If scenarios what might impact the business. It is much better to explore these scenarios in advance of launch and develop contingency plans than it is to encounter the problems in “real time” without possible solutions waiting.



A few notes on this model:

  • This is an example for use as is. It is not supported in any way. It is not intended to be a tool to use without customization based on the specifics of an entrepreneurial venture.
  • This interactive pro forma is only an example to give the reader an idea of how such a tool can be developed. It is not based on a real business. I compiled this model for a graduate class, but I have developed similar models for entrepreneurial ventures. Each business venture is different, and so is the pro forma that is prepared for that venture.
  • On the Pricing Assumptions tab, all of the “Bold Blue” text areas can be changed to demonstrate how the interactivity might work. No other data can be changed.
  • The best way to explore this model is to look at the other statements before changing anything, then change one thing and see what effect it has on the model.
  • In this workbook, I have included an additional tab to for calculations of revenue and expenses based on the pricing assumptions. This worked easier for me to build the calculations, but others might do it differently.
  • Formulas can be seen in each of the cells (mouse over it), but only the values in the “Bold Blue” text area can be changed.



Rogers, S. (2014). Entrepreneurial Finance: Finance and Business Strategies for the Serious Entrepreneur (3rd ed.). New York: McGraw-Hill Education.


Featured Image Source: Getty Images/blackred

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