How Startups Should Formulate Financial Projections
Q: Realizing investors often want to see financial projections, how do you go about preparing this data to make it as realistic as possible?
-Startup Boresto founder Davor
A: Although most early-stage investors don’t put a lot of weight behind financial projections, entrepreneurs should be ready to show them. For early-stage companies, projections that meant to present a startup's financial vigor down the road can go one of two ways: The successful ones blow their projections out of the water, while others blow their projections up.
When we request projections, it’s typically an exercise to see if the entrepreneur understands the drivers of their business. If your investors are intent on seeing a financial model with projections, focus on these drivers, which can include superior quality products and increasing web traffic, as they’re often more important than the actual numbers. Show the metrics of the business, such as labor wages, marketing spend, revenue growth to demonstrate your ability to make fair and reasonable projections.
When you pull together a first cut, make sure you extract and highlight all of the assumptions you’ve made about your business. For instance, you might look at your company's business environment and demographic information. Then, I would suggest building those assumptions onto a separate tab, where you’re able to change them at will and show how those changes flow through the business.
With a sound assessment, you can focus the discussion around whether your assumptions are reasonable, instead of whether your business model is good or not. During this discussion, you can use your potential investors as a sounding board or glean competitive intelligence. For instance, you might ask what metrics they are seeing in their other investment opportunities.
At the end of the day, the exercise is more about showing your ability to think through the business and engage in a thoughtful discussion with investors.
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Paul Lee is a partner at Lightbank, a VC firm focused on see and early-stage tech startups. Prior to joining Lightbank, Lee was the managing director and group head of digital at Playboy Enterprises and the founding partner at Peacock Equity Fund, a joint venture between NBC Universal and GE Capital.