What they want: financial projections for investors

One of the most important decisions when setting up a company is what information you are going to present to potential investors.

When preparing “your Excel”, you’ll find tons of information, schools of thought and different personal criteria, even among your own colleagues, about what investors want to see. Your versions can be realistic, optimistic, inflated, modest, pessimistic, of slow and sustained growth, of explosive growth, projecting one or more rounds of financing of different amounts, credit financing and even subsidies!

I can assure that, if you browse the web a little, you’ll find literature that supports each of those versions with interesting arguments and which, in principle, seem to be coherent.

I’m not trying to tell you which one is true or what investors want. The truth is I don’t know, I don’t think anyone knows, and I don’t think that a manual can be written about this. Here are some conclusions drawn from our experience which may help if you decide to become an entrepreneur.

Each investor probably wants different things according to his/her investment profile, risk aversion, entry and exit type, investment period, amount, the product’s and company’s lifecycle, the entrepreneur who talks to him/her, etc.

Our first Excel version (we’re now on the fourth) showed explosive growth, with the company being worth hundreds of millions of euros in the fifth year (we’re in the third year after the idea arose in mid-2003). That version was endorsed by academic material from a professor from a prestigious US university. The only things we achieved were surprised looks, some initial contacts and a bit more name (very little in fact).

If Martín Varsavski or another entrepreneur with a long track record had been speaking or if we’d been in a country where there really is money for new businesses, the reactions would have been completely different.
The next version was realistic and provided more results than the first one, it was more in line with our profile of first-time entrepreneurs, and it was textbook proof. This is a major point. The “numbers” must have 3 conditions: they should close well (don’t cook the books…you’ll be found out), be coherent, and represent what you’re telling investors. For example, you can’t say that you’re going to grow based on a large sales force and not project that force or growth during time. You can’t say that you’re going to expand geographically and not show an increase in structural expenses.

Even if you try to show realistic projections, you’ll find that, in time, it is extremely difficult to be realistic in a start-up. What you write believing pessimistic may end up being an optimistic version in the future, and vice versa (rarely).

From where I stand, the best thing is always to tell the story honestly and modestly, acknowledging one’s own limitations and also the virtues and capacities of your team. The most sincere and loyal you are to what you believe, your situation and your company, the better you can defend it from anyone. The better you represent your own reality and the truth about the numbers, the fewer objections you’ll have. If things don’t turn out as you want, you haven’t deceived anyone. If things turn out as you want or even better…then, congratulations!

Our third version was a modification of the second version, to which we added more details, opening the planning from annual to monthly in the first two years: it wasn’t enough for one of our investors to know that we’d reach break even in the second year, he wanted to know which month, if the money was enough and if we needed a second round of financing to reach break even. Again, every investor will need specific information and you’ll have to be ready to meet that order.

Subsequently, we decided to work on a fourth version. This version is basically to say that “with the first round, we can set up the company but what would happen if we raised more money and tried to accelerate the project, increase sales, bring break even forward in time, etc.”

You will have to assess if the second round is strategically appropriate for you. Remember that each round is not free. It costs company shares. Your stake is diluted along the way. If you decide to go for it, you’ll have learned considerably from the first round to know where you’re treading.

It’s probably a long, hard journey, but there’s light at the end of the tunnel!

By Leandro Caldora
Saved in: Entrepreneurs, Venture Capital | 1 comment » | 5 July 2006

One comment in “What they want: financial projections for investors”

[...] We have set ourselves the task of raising €200,000 to finance the first stage of Negonation. When talking to potential investors, the pre-money valuation we ask for is €1,800,000. This means that the post-money valuation (after the €200,000 investment) of Negonation will be €2 million and we will deliver 10% of company shares. What are the reactions to that valuation? Most investors say that it’s high (no-one has yet said that it’s low ) although they are willing to talk. [...]

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