Key Questions
- Do I really need to do financial projections? I have no idea how quickly we’ll grow.
- Why do investors ask for financial projections if we all know they will be wrong?
- What types of financial projections are needed at different startup stages?
- What are the components of a good set of projections?
- Should I create multiple scenarios?
- Should I create realistic, optimistic or pessimistic projections?
- How detailed should my projections need to be?
- Can I hire someone to do my projections for me?
- How often should financial projections be updated?
- How can I communicate the inherent uncertainty around my projections?
Start Here
Mike Lingle: My Best Financial Projections for Startups Pitch Deck Slide
(7 min video.) Lingle explains the best financial projection slide for startup pitch decks, emphasizing its importance during investor pitches. He acknowledges that financial projections can be intimidating, but breaks them down step-by-step. Starting with the income statement, he explains revenue, expenses, and profit or loss. Lingle advises simplifying figures by using thousands instead of decimals. He suggests adding KPIs like sales, subscribers, and recurring revenue, as well as headcount metrics such as full-time equivalents (FTEs). Highlighting the limitations of the income statement, he incorporates a cash flow statement to show true cash needs. Lingle’s template includes monthly, quarterly, and annual summaries to provide a comprehensive financial overview. He recommends using this detailed yet straightforward approach to impress investors.
Andrew Chen: The Most Common Mistake When Forecasting Growth for New Products (And How to Fix It)
(3 min read.) Chen emphasizes that forecasting growth for new products is challenging and often flawed. The most common mistake is creating projections based on lagging indicators like active users, leading to unrealistic hockey stick growth curves. This approach disconnects necessary actions from their outcomes and assumes success without accounting for the complexities of growth. Chen suggests a better method: focus on leading indicators specific to your product, start with inputs like marketing efforts or sales leads, and show how these inputs drive growth. By emphasizing controllable inputs and identifying potential bottlenecks, entrepreneurs can create more realistic and actionable forecasts.
Learn More
Phil Nadel: If Financial Projections Are Never Accurate, Why Prepare Them?
(3 min read.) Nadel argues that although financial projections from startups are rarely accurate, they are still crucial for investors. He likens them to a window into the company’s soul, providing insights into the principals’ thinking and the company’s strategy. Financial projections reveal key details about future growth drivers, product and revenue mix, marketing channels, pricing, staffing, customer acquisition costs, churn rates, and runway. Investors use these projections to assess the realism and achievability of assumptions, reflecting on the company’s performance and industry metrics. Nadel advises founders to prepare projections thoughtfully, as the process itself can clarify goals, align visions, and identify potential misalignments. Ultimately, well-prepared projections serve as valuable planning tools, aiding in company self-reflection and decision-making.
Walt Duflock: Startup Fundraising Decks – Financial Model Template for Sales & Marketing Part 1 (and Part 2)
(8 min read.) Startups often struggle with financial projections, particularly aligning revenue estimates with sales strategies. A common issue is unrealistic revenue projections that fail to reflect necessary expenses. Effective models should distinguish between new and renewal customer revenues and incorporate sales and marketing expenses. Founders must understand their sales team’s dynamics, including compensation structures, to create credible financial forecasts that attract investor interest.
Brett Fox: The Secret to Presenting Your Pitch Deck Financials
(15 min video.) Brett emphasizes the importance of presenting financial projections correctly in startup pitch decks. Key elements to include are revenue, gross margins, profitability, cash position, investment needs, headcount, and relevant KPIs. Common mistakes include omitting financials entirely or showing unrealistic “hockey stick” growth. Properly presenting financials can significantly improve chances of securing investment by providing a comprehensive view of the company’s financial health and potential.
Bill Reichert: The Art of Startup Finance: Financial Budgeting – Your Long-Term Forecast
(5 min video.) A long-term financial forecast helps investors understand the company’s future and the assumptions behind it. While a five-year projection might seem daunting, it’s essential to personally create it to reflect the business model and growth plans. This involves building up revenue and expense estimates month by month, quarter by quarter, and year by year.
Kenji Farre: Build a Startup Financial Model
(15 min video.) Kenji guides viewers on creating a financial model for an e-commerce startup. It covers making revenue and cost assumptions, building a 12-month income statement, and creating visual charts. Key steps include estimating traffic sources, conversion rates, average order values, and distinguishing between fixed and variable costs to determine the startup’s profitability. A free template is provided.
Jose Cayasso: What Startups Get Wrong About Financial Modeling
(37 min video.) The video discusses common mistakes in financial modeling for startups, emphasizing the need for practical, driver-based models over simplistic growth-based ones. Key errors include treating models as mere investor requirements and using overly complex variables. The video also introduces a financial model template to aid informed decision-making, stressing the importance of understanding revenue drivers and maintaining simplicity for effective use.
Stephane Nasser: Startup Financial Models – 12 Templates Compared
(25 min read.) Stephane compares 12 financial model templates for SaaS startups, evaluating them on 40+ criteria across five categories: financial statements, analysis capabilities, revenue modeling, cost modeling, and extra features. The article emphasizes the importance of using existing models rather than building from scratch. The comparison includes both free and paid options, spreadsheets and SaaS apps, to help founders choose the best tool for their financial projections.
David Sacks: The Gross Margin Problem: Lessons for Tech-Enabled Startups
(5 min read.) Sacks emphasizes that tech-enabled startups face unique challenges with unit economics and gross margins, unlike pure software companies. He advises these startups to master cost attribution, ensuring detailed knowledge of unit costs, and to set sustainable pricing to avoid false product-market fit. Prioritizing operational excellence and establishing positive unit economics at a small scale before expanding is crucial. Sacks notes that the public market’s scrutiny on companies like WeWork has tightened growth capital, making it essential for startups to demonstrate financial sustainability early to attract investors and avoid relying on endless funding.
Fred Wilson: The Finance Function: Looking back and Looking Forward
(2 min read.) Fred emphasizes the importance of a strong finance function in high-growth companies, distinguishing between the retrospective “looking back” tasks of accounting and the proactive “looking forward” tasks of financial planning. Essential accounting functions like paying bills, making payroll, and keeping accurate records are crucial for establishing a solid financial baseline. However, anticipating future financial needs and projecting cash flow is vital to avoid unexpected cash crises. Companies often require different skill sets for these roles; while accounting can be outsourced, financial planning and modeling demand specialized expertise. Fred concludes that companies should prioritize and reward talent adept at forward-looking financial analysis.
Lance Cottrell: Pre-revenue Financial Projections – Wow Angel Investors
(5 min read.) In this article, Lance provides guidance for early-stage pre-seed startups on creating financial projections to impress investors, even when pre-revenue. Investors expect to see financial projections that demonstrate both short-term cash management and long-term strategic planning. He encourages founders to present a plausible narrative of success, acknowledging the likelihood of needing to pivot while showing a viable market and growth strategy. Projections should include robust assumptions about unit economics, customer acquisition costs, and lifetime value. He argues that it’s crucial to convey how the current funding will propel the company forward, demonstrating adaptability for worst-case scenarios and ensuring financial durability for potential investor returns.
Scott Orn: How to Calculate Cash out Date
(3 min video.) In this video, Scott describes the “cash out date” as the day a startup runs out of money and can no longer operate. He says that it’s crucial for entrepreneurs to calculate this date and avoid getting too close to it. To calculate the cash out date, you need to determine your average cash burn rate, which can be calculated using your net income from your income statement or your operating and investing cash flows from your cash flow statement. Divide this average cash burn rate into your cash balance (excluding restricted cash) to get the number of months left. Ideally, you should aim for 12 months of cash on hand. If your cash on hand falls below six to nine months, you should start considering fundraising. Scott believes that startups should aim to raise 18 to 24 months of cash each time they raise funds, as market conditions can be unpredictable. Communicating your cash out date to investors monthly builds trust and avoids surprises that could damage your relationship with your board.
Scott Orn: Do You Know How Often You Should Be Revisiting Your Financial Forecast?
(3 min video.) In this video, Scott discusses the importance of regularly reviewing a startup’s financial forecasts. He recommends reviewing them twice a year, in December/January for annual planning and board approval, and again in the summer to assess progress and adjust assumptions for the year-end. Larger companies may benefit from quarterly reviews. Scott also emphasizes the need for due diligence readiness, which involves maintaining an updated financial model, especially when considering M&A opportunities or venture capital rounds. Finally, He encourages startups to regularly track actual performance against their budget, which helps identify areas for improvement and strengthens financial discipline.
Scott Orn: What Is AOP in Finance – Annual Operating Plan?
(7 min video.) Scott, in this video, explains the importance of an Annual Operating Plan (AOP) for startups, particularly in helping them determine their burn rate and fundraising timeline. The AOP serves as a roadmap, guiding decisions and ensuring alignment across the company. He recommends developing the AOP in the fall and presenting it to the board in November or December. A well-structured AOP involves a comprehensive financial model, driven by key performance indicators (KPIs), such as average selling price, customer acquisition, and churn. Involving the executive team in the process is crucial, as they have valuable insights into the business. Pre-presenting the AOP to the board for feedback ensures alignment with their expectations. Ultimately, the AOP provides a framework for evaluating progress, ensuring the startup remains on track towards its goals.