The Startup Station is committed to helping you put together credible financials for your early-stage venture. And yet, most early-stage investors say that they don’t consider pro-forma projections for pre-revenue companies as part of their investment decision. So am I just wasting your time when I teach you how to properly formulate assumptions, how to translate your business plan into a financial plan, or how to evaluate the financial feasibility of your business model?
The answer is “NO”, and in this article and corresponding video, we uncover the real reason behind the investors’ actions and what this means for you and your fundraising process.
What value do financials provide?
Financials provide a robust framework for business model analysis as well as serve as a management tool to measure the effectiveness of your strategy. They are a quantitative roadmap you can follow as you begin launching and then scaling your product. Further, they can help you determine faster if you need to pivot.
Well, why then would investors ignore such a valuable source of data, especially when it should help them evaluate the financial feasibility of their prospective investment?
The real reason behind investors’ actions
The reason is simple - the financial data is valuable only if it is credible, and very few founders have the necessary financial knowledge to put together pro-forma projections properly.
Financials that don’t have carefully thought-through assumptions, don’t tie revenue projections to the company’s go-to-market strategy, don’t fully reflect your business model or don’t consider all the costs are worthless. In fact, instead of helping you, they weaken your investment potential because they clearly demonstrate to investors that you are unfit to conduct the financial analysis required to make your venture successful and to know how to react to market feedback in a timely manner.
Why is it so hard to build pro-forma projections for pre-revenue companies?
Your business plan may change and may change drastically as you learn more about your customer base and what product they may actually want. Because of that, all initial numbers carry the risk of not being relevant in a few years.
However, just because the numbers may change DOES NOT mean you should not put together any numbers at all. Having an initial plan allows you to objectively evaluate if this plan is working and to decide when you need to change course. You do so by setting and monitoring key performance metrics.
The presence of financials gives comfort to investors
Furthermore, if you have robust financials, it gives comfort to investors that you will be disciplined when executing your strategy and will apply rigorous financial analysis when assessing various future strategic options.
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