Entrepreneurs often expect VCs to react adversely to the projections that they include in their executive summary and business plan.  This expectation appears to give management teams a bit of anxiety because their projections at this early stage are based on a lot of assumptions.

The reality is that VCs don't put too much emphasis on your revenue and profit forecasts at this stage of the company.  There's good reason for this - before a company has significant revenue, the projections are essentially an educated guess. VCs know this.

This doesn't mean that early stage VCs don't care about the future growth of the business - they do. However, they don't rely on your projections to evaluate growth. VCs evaluate growth prospects based upon, among other things, the addressable market size and competitive positioning of the business. If the addressable market is huge, the company addresses a real pain point, and the business has an unfair competitive advantage (and high barriers), VCs assume that the company has the potential to grow rapidly.

This also doesn't mean that VCs don't want to see projections - they do. VCs are interested in projections for three reasons. First, they want to see that reasonable assumptions will lead to rapid growth, confirming expectations based on the addressable market, the value proposition and the competitive landscape. Second, they want to see the math behind your projections to both understand your revenue model and assess management's ability to logically think about the drivers of the business. Finally, the projections will give VCs a sense for your strategic plan (how you will build the company), enabling them to better evaluate your management capabilities.

Be prepared to talk about the key drivers and assumptions in your projections candidly. It's OK to admit that some numbers are estimates. Just do your best to have a good rationale for every number that you used, and try to be convincing that your team can make assumptions reality.

Comments

[JTreiber]

Forecasts are the biggest guessing game of the whole plan for most entrepreneurs. We have tons of assumptions in our model and are trying to tread the line between telling a compelling story and one that is clearly unrealistic. We view the financials as our best guess to profitability/growth but also see the forecast as a marketing tool for investors. We want it to be appealing yet realistic. How would you recommend a company attack the financials to cater to a VC crowd? Are there certain no-no's they're looking for?

Also, is it true that certain investors will simply cut revenues in half and double expenses to get a better idea of the model?

[Mark Davis]

JT--
I don't recommend that you 'cater' the financials to a VC crowd. Rather, I would simply illustrate the realistic upside scenario that you are aiming for. Show VCs what you see the financial opportunity to be. Help them get as excited as you are.

VCs have a 'spidey sense' for the reasonableness of projections. They see have a knack for figuring out what projections are realistic (they notice under-estimates too). As a result, there's not a simple rule for how they adjust projections in their head.

[Eric]

My two cents on this: 95% of all the business plans we see have a 5-year revenue number between $30M and $55M. The joke here is that entrepreneurs figure that if the 5-year number is less than $30M it's too small to get VCs interested and if it's much larger than $50M the VCs won't believe in the numbers, so essentially every plan has the same revenue ramp.

In reality, as you point out above, the focus should be the qualitative characteristics of your revenue build: Do the drivers make sense? Does your funding look sufficient to fuel the growth you project? Are you basing your ramp on a reasonable assessment of the market you address and your likely penetration thereof. Be able to answer these questions and chances are there won't be too much focus (at least at the first meeting) on your financial projections.