Startups and Three Year Financial Projections for Investors

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Casually, I’m helping out a local first-time entrepreneur that has been working full-time on his idea for the past two months and is now focusing on raising an angel round. Earlier today he sent over his investor slide deck that covers the executive summary information as well as product details and brief financials. There was only one glaring problem: he listed year three revenue at $50 million.

Now, this is a well educated guy with the best of intentions, but $50 million at year three based on organic growth in an unproven market is extremely suspect. Most companies don’t hit $1 million in year three let alone $50 million. Here are some thoughts on startup three year financial projections for investors:

  • Keep the financial projections reasonable and err on the conservative side
  • Investors want to see a path to an 8x – 10x return — they don’t need to see a 100x return
  • A solid year three revenue range for a technology startup with recurring revenues and high gross margins would be $7 – $15 million (the number would be higher for lower margin businesses)
  • Revenue growth from years one to three should be reasonable as well showing some acceleration (e.g. year 1 of $1M, year 2 of $4M, and year 3 of $10M)

Startup financial projections are simply educated guesses. They are meant to show investors that the entrepreneur has a decent understanding of the financial aspects of the business and that there will be a solid return on investment.

What else? What are your thoughts on startups and three year financial projections for investors?

4 thoughts on “Startups and Three Year Financial Projections for Investors

  1. We are being conservative on our startup (or perhaps realistic) with a year 3 projection of $1.2M and year 4 of $2.5M. At this stage, all numbers are a wild guess until you have enough data to calculate the estimated cost of acquiring a new customer.

    1. Depending on how much money you are raising, there’s a risk that that level of year three revenues is too low to entice investors.

  2. I am in the process of making financial projections for a loan application. I am working towards a startup tech company and need three year projections. How would you recommend I do this?

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