I was then As an early-stage founder, I’m better off with the idea of creating a five- or three-year financial forecast of my business. I can promise you one thing: it will Dramatically wrong But as part of your fundraising, you should make them anyway, and there are some great reasons for that.
VCs also understand that you can’t predict the future. Hell, this isn’t just true for pre-seed stage companies; If entrepreneurs could predict the future, there would be less fear surrounding IPOs.
But remember that your investors aren’t asking you to predict to the nearest penny how your company will perform in 2030. They’re looking for two specific things: whether you understand how financial dynamics work in your business, and whether you’re venture-scale.
To venture-invest, you need to be “venture-scale.” That means if an investor puts $1 million into your business, you need to have a solid understanding of how you’re going to turn that $1 million investment into $10 million in revenue. Now, not every business does that, and it’s not easy for investors to predict which businesses are going to successfully deliver 10x returns.
I can guarantee you one thing, though: if financial projections show steady growth of 10% per year over the next decade, it might be a good lifestyle business, but it won’t yield 10x investment returns.
In other words: Yes, your financial projections should be “realistic,” meaning they show a logical progression from where you want to be 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 venture-scale. If your most optimistic, most aggressive growth trajectory falls short of this, you’re not going to have a good time as the founder of a VC-backed startup: it shows that you fundamentally misunderstand why investors should invest.
Understanding financial mechanics
When you’re raising money, you need to show your investors that you have clear plans for why you’re raising money. In other words: what are you going to do with the money?