How to allocate venture funding to OpEx on a shortform I/S-to-returns-model, and what to do with net income?

Hi all,

For context, my background is with LBO modeling, and I am working with best information provided and guidance on certain modeling targets.

I am working on evaluating a small company ($10m pre-money, $3m investment, $13m post money valuation to keep it simple) that is trading on a revenue multiple. I have no information about the company's CFS or BS other than that they have $500k on the B/S in cash.

I know that the company is going to be using the $3m investment for operating expenses (e.g., 40% to S&M, 40% to G&A, 20% to R&D) but I am confused as to how to project operating expenses, and am specifically wondering if I should project cumulative operating expenses no higher than the total investment amount ($3m) in the forecast period.

I have a "target" EBITDA margin of 30% (from a comparable company). If I only increase OpEx line items for a total increase of $3m over the forecast period, then I am way over my EBITDA margin at 50%.

So, I added a multiplier to those numbers in order to fit the EBITDA margin. For example, if "Year 5 OpEx = Year 4 OpEx + $800k of the $3M", my EBITDA margin is too high, so I multiplied those expenses by a multiplier toggle to meet my EBITDA margin target. I realize that can't possibly be best practices because I'm not sure where that money is coming from without the other two statements, which leads to my question below about how to account for net income.

I'm not sure what to do with Net Income, since I am used to using that to pay down debt. Should I add my yearly net income to the portion of that $3m investment I am using per year to project OpEx? E.g., if I use $800k of the investment in year 5, should I add year 4 NI to that number for projecting OpEx?

What I'm currently doing is taking the $3m, building a schedule, allocating a certain percent of that $3m per year, and allocating that percent of the $3m per year to each expense category (e.g., 40% S&M, 40% G&A, 20% R&D).

I'm having trouble because I'm not used to projecting OpEx on a basis of increasing it by the funds available from a Series investment, and I'm not sure if that's even the right way to go.

Thanks,
Bubba

PS - Do startups usually use the bulk of the cash upfront (e.g., $1.2m in year 1) or save it for when they're bigger (e.g., $1.2m in year 5)?

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