8 Principles to Build Attractive, Realistic Financial Projections for Startups

Financial Projections for Startups

All investors want to know where your business is headed and how their investment will help you get there. You should present attractive yet realistic financial projections when raising capital. The important thing is to approach it like you are telling a growth story about your business and make sure you can back up that story with data and analysis drawn from your financial statements. Build your projections based on the following principles, and you will be on your way to telling a solid financial story.

How to Present Financial Projections when Raising Capital

1. Use Your Historical Data as a Baseline

Historical dataTypically, investors would like to see 2-3 years of historical financials, if available, to ground them on where your business stands today. If your company is younger than that, use everything you’ve got.

Historical financials are important because they convey what you have accomplished thus far and set a foundation for the scale and efficiencies you will reach in the future. Additionally, if you have a multi-year track record, historical financials can illustrate how you manage your business and prior investments.

With historical data in hand, you can begin telling your growth story on the P&L with revenue. By building up from your most basic elements — units sold and pricing by channel — you can derive gross revenues. A deep understanding of unit economics is key to be able to plan for the future.

2. Show All Associated Expenses Required to Achieve Projected Revenue Growth

Associated expensesIs your gross margin declining over time? Are your incremental expenses decreasing with scale? Is your net margin increasing to align with mature comparable companies in your industry? If your revenue is projected to triple year-over-year while you’ve only doubled your fixed costs, you can really start demonstrating a path to profitability.

Top line growth is always attractive, but without gaining efficiencies down the P&L a business cannot be sustainable over the long run.

3. Connect the Dots

Connect the dotsAfter you’ve set the stage by creating an attractive growth story on your P&L, the next step is to connect the dots through your balance sheet by first determining what investments you need to make to achieve your growth targets. Should you:

  • Expand your sales team?
  • Grow your back office staff?
  • Invest in additional product development?
  • Hire additional key executives?
  • Pay for a significant marketing push?
  • Invest in infrastructure, fixed assets or significant amounts of inventory?
  • Raise additional equity?
  • Try to obtain debt financing?
  • Raise equity and debt to maintain a strong balance sheet?

Answering these questions will help you determine the investments that need to be made to fuel your growth and should be a key part of your projections so an investor understands the commitment needed to catalyze growth. Show a judicial cash management approach — as they say, “treat every dollar as if it were your last.” Do this by showing a responsible cash burn and controlled spending in your projections.

Answering these questions will help you determine the investments that need to be made to fuel your growth and guide you towards the type of capital you need to raise.

4. Be Aggressive but Realistic

Aggressive but realisticIt’s important to remember that all investors are going to discount your projections, so be aggressive with your numbers. Of course, being too aggressive could potentially jeopardize your credibility with investors – so a combination of aggression and reality is the way to go. Show that your business has significant potential to scale and generate attractive profits, but do so in a manner grounded in realistic fundamentals.

Start with a realistic base case and include an upside case that shows the potential if all the stars align. Make the projections achievable for both your company and prospective investors – all parties want to be aligned and it pays off to show new investment capital leading to scalability across the business in a relatively short period of time. Showing numbers that have a reasonable likelihood of being achieved in a reasonable scenario can be a good story to tell relative to only showing a story that shoots for the moon with numbers that could never be realistically reached.

Create a realistic baseline by diligently gathering your historical information. Attention to detail and keeping clean books from day one gives investors confidence in your future prospects. Your monthly projections should provide the granularity needed to see how you are spending investments and converting dollars into profits. If it makes sense – don’t forget to adjust for seasonality.

5. Do Your Homework and Show Your Expertise

Show your expertiseUse your industry experience to show that you are an expert in your business. By demonstrating a clear strategy around unit pricing, sales team structure, and operating efficiencies you will demonstrate your deep knowledge in the space.

Do your market research so you have comparables on metrics – investors will often have evaluated peer companies in your industry. So if, for example, the average gross margins of a mature company are 70 percent and you’re showing 80 percent margins in year two, questions may arise.

6. Iterate Until You Get It Right

Iterate until you get it rightCreating financial projections is generally a bottom-up exercise, so know that it might take a few iterations to create the story you want to tell. Start from the basic components of your business and build up to generate top line projections. If the story doesn’t tie to the one in your head, go back and adjust the individual pieces to create the path you seek to achieve.

In the process, you will see how different investments and business initiatives pay off or don’t pay off — which is exactly what an investor will ask. Precise record keeping, granular projections based on unit economics, and thoughtful analysis will help you tremendously in your fundraising effort, as well as make you a more savvy and informed entrepreneur capable of operating a sustainable business over the long term.

7. Create Solid Milestones

Create milestonesAs part of creating sound financial projections you will need to map out the major milestones you are expecting to hit or achieve with your new investment capital – such as hiring new employees, developing a new product or feature, increasing sales by a certain amount, or capturing a certain percentage of your market share.

8. Investors Require Milestones

Investor milestonesLast but not lest, it’s important to remember that investors require milestones that:

  • Have a discreet outcome and deadline, such as “Develop new app by month 6,” or “Hire a VP of Marketing by month 9,” or “Double sales by month 12.”
  • Are achievable and will affect the company’s bottom line.
  • Significantly increase a business’s value and put you in a good position to raise the next round of funding at favorable terms.

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