When we are meeting with entrepreneurs, we often see a wide variety of proformas and projections. Sometimes entrepreneurs spend too much time on building out a complex model and in other situations, the projections look like they were thrown together in 15 minutes. We believe the appropriate approach is somewhere in the middle.
What do we like to see? A proforma that is built out one to three years. If you are an early staged company, especially pre-revenue, it is nearly impossible to project out to year 4 and year 5. Just prove that the model works, the market is big enough to scale, and it is rational. With a startup, revenues are hard to forecast and expenses such as sales or development usually vary based on the changes in the revenue.
A common mistake – Sometimes people back into the numbers that investors want to see. This is a problem because it takes focus away from where you need to be in 30 days, 60 days, or six months. Let your customer acquisition formula and marketing channels drive the top line. Make sure it is reasonable and you account for acquisition as well as retention and churn.
The Burn Rate – As an investor, we want to see that you are responsibly spending the cash that we have invested in you and your team. If we see that only 3% of sales projections are being spent on marketing and 10% are being spent on food or other side benefits, we have a problem. Understand your cash position and where your balance will be at each month. Then, you will know your burn rate and when/if you need to raise additional capital.
Make it Dynamic – You always provide the most likely case to your investors and advisors, but always have the worst case and best case scenarios ready. It helps us get through it quicker. Allow your projections to be changed by simply changing drivers such as the sales price, conversions, or general growth rates.
Your proforma will never be exactly the same as what actually happens. It should be used as a baseline so that you have a mark to shoot for each month. Do not make unrealistic projections but never be comfortable with your projections. If you are easily hitting projections each month, it is time to bump them up.
Forecasting is an art not a science. Make it logical and reasonable, but be confident that the projections are attainable.