When you go out to raise capital for your startup, the big question on every investor's mind will be, "Where is your business is headed and how my investment will help you get there?" Your best chance to win them over, along with their investment, is to present attractive yet realistic financial projections.
The best way to approach this is by telling a growth story about your business and to make sure you can back up that story with data and analysis drawn from your financial statements.
Build your financial projections based on the following principles, and you will have productive investment conversation with the best possible outcome.
How to Present Financial Projections When Raising Capital
1. Use your historical data as a baseline
Typically, investors 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 from revenue on your P&L. You can derive gross revenues by building up from your most basic elements, such as units sold and pricing by channel. You'll also want to have a deep understanding of unit economics, which will in turn help you plan for the future.
2. Show all associated expenses required to achieve projected revenue growth
Is 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
After 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, by “treating every dollar as if it were your last.” Your financial projections will reflect this if they show responsible cash burn and controlled spending.
Answering the questions above will help you not only determine the investments that need to be made to fuel your growth but also guide you towards the type of capital that's best to raise.
Guide: Raising Capital for Tech Startups
Learn the vital components of successful fundraising and get tips on strategies and tactics. Make sure you’re equipped to land the deal you need for the future you deserve.
4. Be aggressive but realistic
It’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, so aim for somewhere in between aggressive and reality. You want to show that your business has significant potential to scale and generate attractive profits but make sure your projections are grounded in realistic data and financial fundamentals.
Pair a realistic base case with an upside case that shows your BIG 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.
Start by diligently gathering your historical information to create a realistic baseline. 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 will spend investments and convert dollars into profits. If it makes sense for your business, don’t forget to adjust for seasonality.
5. Do your homework and show off your expertise
Use 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 own market research so you have data on metrics from peer companies – investors will often evaluate you against comparables in your industry. 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
Creating 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 efforts. You'll also emerge a savvy and informed entrepreneur, capable of growing a sustainable business over the long term.
7. Map out milestones for your capital investment
As part of creating sound financial projections you will need to map out the growth strategies and major milestones you are expecting to hit or achieve with your capital investment, 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. Create milestones that meet investor expectations
Last but not least, it’s important to remember that investors require milestones that have the following characteristics:
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 the business’s value and put you in a good position to raise the next round of funding at favorable terms.
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