Investors look at startup forecasts for concepts, not accuracy. When investors look at your projections, they are looking not for just the numbers, but essential insight into the knowledge, experience, and goals of the founders.
Important: you need to forecast to manage your business. Hard as it is to forecast, it’s much harder to run a business without forecasts. Forecasts become budgets and budgets become spending and you don’t have the luxury of not guessing. You go from guess to truth to revisions to management.
However, this post isn’t about that. It’s about what investors look for.
Investors look at startup forecast for insight
Here are some examples of the insight investors will take from a startup. Investors look at startup forecasts for what’s beneath the numbers. They answer some very important questions.
Do the founders understand the business? Do they know what’s realistic? For example, do they show reasonable and believable levels of, say, marketing expenses to sales, and profits to sales? Do they realize they’re going to wait months to get invoices paid? Do they understand the length of the sales cycle, and what web marketing costs? Do they know what a direct sales team costs? Do they understand margins through channels?
Do the founders understand about investors, exits, and returns? Raw revenue numbers give us a sense of scale and founder’s goals. There’s a big difference between a business trying to grow to $2M in five years and another trying to hit $50M. That’s important not so much for the raw numbers — many times the $2M one is even more likely to get to $2M than the $50M one — as for what it tells us about founders.
Unrealistic projections don’t convince investors to invest; they tip investors off to inexperience. For example, just yesterday I just looked at four business plans projecting 70%, 49%, 48%, and 34% profits to sales in five years. That’s absolutely absurd. Although all four of them show naivete and inexperience, the 34% projection is way better than the 70% projection.
True story: I was present at a presentation where the founder proclaimed, at the beginning, “everybody knows financial forecasts are just BS … so we don’t have one.” Every investor in the room stopped listening at that point. None of them was going to touch that deal, ever.
But there is a silver lining
And, finally, a silver lining: Some fellow investors would disagree with me, but I am quite sure that bad financials are not a reason not to invest in a startup that has the more important factors such as a good team, a strong market, some way to differentiate, and ability to scale. I’ve said several times, in group discussions, that bad financials are the easiest flaw to fix. It exposes a gap in the team, and a weakness; but it doesn’t mean rejection. That is, as long as the founders are willing to acknowledge, learn, and fill that gap.
I wish I had read this 18 months ago. I got funded on a startup even though my projections were absurdly high. And taking that money is the worst business decision I’ve ever made.
I don’t know who is dumber, the investors for putting up 1.5+ million, or me for accepting their money. Having investors is an overrated, unpleasant, and high anxiety experience.
Now I spend my nights trying to figure out an ethical way to walk away.
Jaims, thanks for the addition. There’s nothing like a real true story to bring this home. You’ll probably also like ‘10 good reasons not to seek investors for your startup‘ also on this blog. But I try to keep an open mind and see both sides, because I’ve been an active angel investor too, and I took investment in my company as well (although I bought them out later). Your experience is important.