Recently I saw another one of the dreaded financial charts in a startup’s executive summary: $0 revenue today and $25 million in revenue in year three. Whenever I see this, I immediately know that the CEO either a) doesn’t have any startup experience or b) hasn’t done the appropriate homework. Can a company go from $0 to $25 million in three years from a cold start? Yes. Does it make the startup look credible in an executive summary? No.
Here are a few thoughts on financial projections for startups:
- Study the Inc. 500, especially technology companies. What does the revenue ramp look like there? These are some of the fastest growing companies in the country, and annual revenues like $1M to $4M to $10M are more the norm (and incredibly high growth).
- Build a bottom-up forecast based on number of leads generated, conversion from lead to opportunity, number of trained sales reps, average sales cycle, average sales price, and conversion from opportunity to close.
- Find a simple financial model online (e.g. here’s a SaaS metrics one) and adapt it (don’t build or use a super complicated financial model as it’s overkill without relevant operating history)
Every startup should build financial projections. Even if there are many unknowns, it’s important to see how things might work, how gross margins make the model viable (or don’t! — see HomeJoy), and what the major drivers are for the business.
What else? What are some more thoughts on financial projections for startups?