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When I was As a first-time founder, I came up with the idea of developing a five- or three-year financial forecast for my business. I can promise you one thing, it will happen. Amazingly Error. But as part of your fundraising, you should do them anyway, and there are two good reasons for that.
VCs also understand that you can’t predict the future. Hell, this isn’t just true for companies at the pre-seed stage; If founders could predict the future, there wouldn’t be as much anxiety around IPOs.
But it’s worth considering that your investors won’t be asking you to predict how your company will do in 2030. They want two very specific things that you understand how the financial dynamics in your business work. And if you are venture-scale.
Being venture-sized
To venture-invest, you must be “venture-sized.” That means if an investor puts $1 million into your business, you need to understand how to turn that $1 million investment into $10 million. Now, of course not every business does this, and it’s not easy to predict which businesses will successfully deliver 10x returns to investors.
I can guarantee you one thing: if the financial projections show a steady 10% year-on-year growth for the next decade, it might be a good lifestyle business, but it will never provide a 10x return on investment.
In other words: yes, your financial projections should be “realistic,” meaning they show a logical progression from where you are to where you want to be. But you have to show in spreadsheets and numbers that you have the potential to be at least venture scale. If your most optimistic, most pessimistic growth trajectory falls below that, you’re not going to have a good time as a VC-backed startup founder: it shows that you fundamentally understand why investors are investing.
Understanding the mechanics of finance
When raising money, you need to show your investors that you have clear plans for why you are raising money. In other words, what are you going to do with the money?
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