When I was a young founder, I was a bit sceptical about the idea of preparing an even three-year projection of my company. I can assure you of one thing: It’ll be completely incorrect. However, as one of the ways to raise money efforts, you should do them anyway and there are some great reasons to do so.
VCs know just as they cannot forecast the future. This isn’t only an issue for businesses at the pre-seed stage. If founders were able to anticipate the future it wouldn’t take as anxiety surrounding IPOs.
It’s important to keep in mind that investors don’t expect you to forecast to the penny on the way your business will to do in the year 2030. They’re seeking two distinct factors: whether you know the financial aspects of your company work, and if you’re a venture-scale company.
For a venture to be considered a viable investment it is necessary to meet the criteria of “venture-scale.” That means that if a potential investor invests one million dollars into the venture it is essential to be in a good grasp of how you’ll convert that $1 million investment into a 10 million profit. It’s true that not every business will be able to achieve that obviously and it’s hard to determine which companies can offer investors a return of 10x.
I’m going to tell you one thing that if the financial projections indicate steady growth of 10% year-on-year for the next ten years It could be a great business for a lifestyle but it’s not likely provide a 10-fold investment return.
Also, yes your financial projections have to appear “realistic,” in the sense that they prove that there is a rational path from where you are towards where you’d like to be. However, you must demonstrate, using charts and figures that you have a chance of becoming venture-scale. When your most hopeful and forward-looking growth strategy does not meet this standard then you won’t enjoy a great time as a startup with VC backing founder. This indicates that you’ve completely not understood why investors invest.