Let me start by letting you in on what may be a well-known secret â€“ investors don’t believe your startupâ€™s financial projections and never use them as you provide them.
The part of the secret that may not be as well-known is that early stage investors don’t expect you to have it all ironed out right now.
The trick is for you to learn to be â€“ and be satisfied being â€“ â€œmostly right.â€
â€œMostly right financials?â€ What? Let me explain.
When it comes to financial projections for startups, I typically run into four types of people:
- Knowledgeable, non-financial founder â€“ knows their stuff and simply doesn’t know how to put the information into a model. My role â€“ I help to build a model with them and they take it from there.
- Knowledgeable, financially uncertain founder â€“ slight perfectionist and not sure when to call it and move on. My role – I help talk them off the ledge in a similar vein as this post.
- Knowledgeable, financially stage-realistic founder – model is well laid out and is based on solid, reasonable assumptions. My role â€“ I have a great conversation and debate with them about the business.
- Other – My role â€“ I tell them to go learn their business.
This post is mainly for 1 & 2; 3, you got this; and 4, your issues go beyond this post.
So, if investors donâ€™t believe or use your projections, why do we ask for them from an early-stage company? I can’t speak for all of us, but for me, it tells me a lot about you and how you think. It shows me whether you know the drivers for your business, it tells me how big you think this can be and whether you are thinking about how you can scale it efficiently in the coming years.
If I don’t blindly use your projections, what do I do with them? I try to break them. I question and validate each major assumption. I get you to walk me through a transaction. Fundamentally, do you understand your business? Can I, as an outsider, break it in less than 20 minutes? Can you answer my probing questions? What is the quality of your assumptions?
We understand it is difficult to predict something disruptive this early and to anticipate how the market will respond. No one is right at this stage. No one. Not the investors, not the founders, but you better be able to stand behind it.
Perfectionists â€“ I get it, it’s hard not to be deeply fixated on being accurate. The bulk of our education is based on a foundation of getting the right answers or saying the right things and often our credibility is rooted in being accurate or providing accurate information. I have 15 years of experience in finance, operations & corporate development and have struggled with trying to be perfect, but I have learned that where it really matters, there are no right answers. Let go of being exactly right and live within the realm of reasonability. If you don’t know the right answer, be honest with yourself and others. Use the best information available utilizing an opportunity cost approach and have a plan for figuring it out.
So, cut yourself some slack. You need to get yourself over that hump of pinning yourself to something and move on. With every customer interaction, every sale and every “no” you receive, you will gain proof and over time being accurate will be easier. Just as you would your product, put the financial model in the hands of others and ask them to break it. Have them challenge your assumptions and see what you can stand behind.
Don’t think of developing these financial projections simply as a way to check the box in a due diligence request for an investor. If done properly, developing your financial model will help you better understand the drivers of your business. It will allow you to monitor them and track them to allow you to make course corrections along the way before something completely sidelines your business.
Remember, at this early stage, no one is right. You just need it to be mostly right. You need to stop spending so much time on predicting the future and go make it.