Regarding revenue projections for your startup, think of them as speculative fiction, similar to a Hollywood screenplay that is “based on a true story.” Although your predictions are based on the historical performance of your firm, the future is an uncertain and wild place.
In fact, you may be operating a regular firm rather than a startup if your financial future looks a lot like your past. While that is OK, venture capitalists (VCs) are not interested in that.
The Fallacy of Foreseeability
A business plan or three to five year financial forecast may be requested by certain investors, but this is not because they will ever trust your estimates.
Some may want it because it gives them the impression that they are reducing the risk of their investment choice for themselves or the investors they represent (although they are not, but beliefs do matter).
Investors are mostly interested in learning about your thought process and approach to developing those models.
The Value of Cognitive Process
Your financial model is more than just a collection of figures; it is a representation of your goals, your comprehension of the industry, and your aptitude for strategic planning. What investors are actually seeking is as follows:
- Assumptions and Rationality: They are looking to determine the rationality and realism of your assumptions. Is your sales growth based on reliable market research? Are any risks taken into consideration in your cost projections?
- Adaptability and Flexibility: Is your model able to evolve with the times? The startup scene is dynamic, therefore being able to change course quickly is essential. Potential outcomes should be reflected in your financial model, and it should show that you are flexible.
- Recognizing Essential Drivers: What motivates your company? Selecting and concentrating on important metrics demonstrates a thorough comprehension of the factors that drive your startup.
Just as significant as the Y axis is the X axis.
Your financial modeling is likely to be more accurate the longer your past revenue history is, but the opposite is also true: the shorter your company’s history, the less probable it is that you will be able to predict the future.
Therefore, avoid becoming the three-month-old firm whose financial model projects that it will break even in a year and then turn a profit in five years, making you a revenue unicorn.
Generally speaking, most startups overestimate their financial potential; as a general guideline, I frequently advise clients to present investors with a future that is roughly twice as lengthy as their prior trading experience. If your MVP is still free to use, the following year is usually a reasonable estimate, and the year after that is helpful only inasmuch as it demonstrates how you have developed your model and your strategic thinking.
Cooperation is Essential.
To be honest, not every founder is an expert in finance. If you are not good with numbers, work with someone who is knowledgeable with financial modeling. Working together can help your projections look as good as possible and make them somewhat credible.
Envisioning Achievement
Your financial model need to convey a narrative of expansion, possibility, and achievement. Make the most of the images. Visual aids such as charts, graphs, and other illustrations can successfully highlight important points and simplify complex material. Recall that an image may convey a thousand words and, in the case of startups, a million dollars’ worth of investment.
For me, I find that even while I might find it difficult to understand financial models, I excel at matching patterns visually. The revenue line in startup pitch decks is one element that never changes: it constantly projects exponential revenue growth, up and to the right!
Every time you carry out the “landing” phase of your “land-and-expand” strategy in foreign markets, there will be future variations that you can anticipate (such as a dip or flattening in revenue), and then there will be some unexpected terrain ahead that you cannot anticipate (such as a competitor being acquired by a tech giant and suddenly 10x-ing their marketing spend).
Naturally, it makes no sense to predict the unforecastable, but meeting a startup that can predict the forecastable, like a “land-and-expand dip” that plateaus income and raises operating expenses for a few quarters as the business gets used to the new environment, can be a welcome shift.
Last Words
As far as art forms go, financial modeling for startups is quite bleak, yet it is as much science as storytelling. It involves creating a story that, despite their knowledge that it is somewhat fantastical, investors can somewhat buy into. The data you provide should be used to demonstrate your strategic thinking, market knowledge, and future vision rather than to make precise predictions. Therefore, accept the speculative nature of financial forecasts, work with specialists, and present an engaging image of the potential of your startup. Ultimately, in the realm of venture capital, confidence is the most precious asset one can possess
