Building Financial Plans For Investors and Venture Capitalists
We hear it all of the time from investors and venture capitalists: Think strategically to grow your business, tell us where you can go with this thing!
Ok… so what does that even mean?
And if our venture capital partners are going to hold us to a budget, why do they seem to want a financial projection that shoots for the moon the stars and a whole other solar system?
There is a big range of types of investors, from conservative private equity investors looking for solid growth and dependable profitability to the shoot for the moon big venture capital company that is looking for you to be a $1 billion company in the next five years.
So why build shoot for the moon financial plans if the odds of being that billion-dollar unicorn are so low? It seems like it would be more practical to build a solid business model that gets you up to a 10 or hundred million dollar range.
Thinking Strategically for Your Investors
What investors are looking for in this pie in the sky projection is that you have thought about what it really takes to be big. They also want to know what market you are planning to address and that the way you’re planning to address it can actually scale. How many salespeople are you going to need to hire? How much are you going to need to spend upfront on marketing and key executives to scale? What team and improvements are you going to need to get your development platform ready to serve more customers? They aren’t actually looking for you to be 100% accurate here (that’s pretty much impossible anyway), but they are looking for you to think strategically about what it would take to get that big.
Many entrepreneurs at the seed or Series A level are thinking very hard about getting that first one hundred customers, the right pricing and figuring out how much capital they need to raise to get to repeatable product market fit. These are all incredibly important aspects of early-stage companies, do you have to have product-market fit before you can scale, after all?
Creating a Financial Projection for Venture Capitalists
For myself, I find I often get stuck in the onesie-twosie of “startup” mindset. I acquired X number of customers at whatever it took to get them to pay me money (whether that’s discounts or offering them 10x the service that is required) just to get them in the door and keep them happy so I can get the next customer. As a startup you may not have a fully built-out automated product in the early stages so you rely on over-the-top customer service and support to keep the business going and build a solid customer reputation.
It’s easy after months or years in this phase of our business to focus on just the next customer or just the next strategic partnership. I think you can grow a steady business this way. But if you take a step back, we realize that what we’re doing now is never going to get us to that $1 billion valuation. It isn’t scalable. Building out a financial projection takes you from where you are today to where you would want to (or need to) be a venture capital success and it creates a fundamental shift in your business mindset.
Deciding if You Can Scale Your Business for Investors and Venture Capitalists
Often the actions that you’re taking move the ball forward incrementally effectively and reliably, but in order to make the mental and often physical jump to 10x or 100x or 1000X current revenue, even if you’re providing the same fundamental products, you’re unlikely to be doing it the exact same way by the time you have $1 billion in valuation.
If I wanted to scale a CFO services firm to $1 billion valuation, my greatest challenge would be finding qualified CFOs to serve that many clients. There are some amazing CFOs out there, but many of them enjoy working full-time directly for a company and many of them are highly independent folks that like to run their own business and don’t want to work for a big corporation. Needless to say, there would be some serious personnel challenges if someone tried to grow $1 billion worth of revenue on CFO services (or really any skilled professional services business).
Developing a Financial Forecast for Fundraising
Every business, when thinking about scale, has to make a fundamental shift of mindset to picture themselves serving a much, MUCH larger audience. We call the CEOs who do this naturally and from the beginning visionaries because in a lot of ways they aren’t thinking about the practical aspects of running their business today. They are thinking about what is possible, they are building in their minds an image of a world where they conserve not just the first 100 customers, but their first 10,000 or one million.
That fundamental shift circles back to today and fundraising. What am I fundraising for? Usually, I’m fundraising to fundamentally shift my business, to take a major leap in my ability to serve my customer base. It doesn’t make sense to project your business based on what you’ve been doing before. It makes sense to think big and then strategize on how you would get from where you are to where you want to be. In a lot of ways, those pie in the sky financial forecasts are meant to give you a clear understanding of how and why continuing along the path you are on today without fundraising won’t get you where you want to go.