When I was As an early-stage founder, I cringed at the idea of making a five- or even three-year financial forecast for my business. I can promise you one thing: it will be dramatically wrong. But as part of your fundraising, you should still do them, and there are some great reasons why.
VCs understand as well as you do that you can’t predict the future. Heck, this isn’t just true for pre-seed stage companies; if founders could predict the future, there wouldn’t be so much nervousness around IPOs.
But it’s worth bearing in mind that your investors aren’t asking you to predict to the last penny how your company will perform in 2030. They’re looking for two very specific things: whether you understand how the financial dynamics of your business work, and whether you’re a risk-taker. .
Being risk scale
To be able to invest risky, you need to be a “risk scale”. This means that if an investor puts $1 million into your business, you need to have a very firm idea of how you’re going to turn that $1 million investment into a $10 million return. Of course, not every business will do this, and it is not easy to guess which businesses will provide investors with 10x returns.
However, I can guarantee you one thing: if the financial projections show a steady 10% annual growth for the next decade, it may be a good lifestyle business, but it will never give a 10x return on investment.
In other words: Yes, your financial projections should be “realistic” in the sense that they show a logical progression from where you are to where you want to be. But you also need to show in spreadsheets and numbers that you have at least a fighting chance of being risk scale. If your most optimistic, most aggressive growth trajectory doesn’t match this, you’re not going to have a good time as a VC-backed startup founder: it shows that you haven’t fundamentally understood why investors invest.
Understanding financial mechanics
When you raise 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?