Financial Projections for Startups Hurt More Than They Help

Last week I received an executive summary from an entrepreneur and it showed financial projections for the next four years. Guess what the projected revenues were for year four? $3 million? Nope. $100 million? Nope. Projected revenues for the fourth year of operations were almost $1 billion — I’m not making this stuff up.

I’m not a fan of financial projections for idea stage startups. Yes, I like big round numbers to see if a financial model generally makes sense, but I’ve found that they hurt more than they help. If you put tiny numbers, which is much more realistic, you turn off some investor’s imagination as to how big the idea can become one day. If you put massive numbers, you show you don’t know how startups progress, even if they are successful.

Here are the ballpark revenues for the first four years of Pardot:

  • Year 1 – Under $50k
  • Year 2 – ~$400,000
  • Year 3 – ~$1.1 million
  • Year 4 – ~$3.2 million

I consider those Pardot numbers to be exceptionally high, and not the norm for Software-as-a-Service startups. Now, if it’s a consulting business or something with small gross margins, those could appear to be small numbers. The next time an entrepreneur includes financial projections for their idea stage startup, compare them to this simple example of Pardot’s numbers and ask if they hurt more than they help.

What else? What are your thoughts on financial projections for startups hurting more than they help?

2 thoughts on “Financial Projections for Startups Hurt More Than They Help

  1. You are dead on! In 2003, i was raising a series A round and went all over town trying to raise money. Our company showed $8 million in revenue in year 5 and one investor, without hesitating, said I’ll invest “$50,000 right now”. And we replied: “you haven’t even heard all of our pitch”. And he replied: “you are the first company in a long time that has shown me realistic expectations”.

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