David Cummings on Startups

Financial Projections for Startups

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David Cummings

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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?

Comments

3 responses to “Financial Projections for Startups”

  1. telanon Avatar
    telanon

    A number of us in the ATDC Alpharetta Starup Circle have debated the role of financial projections for startups. For those that are still searching for product-market fit, and may even be pre-product, what is reasonable to provide potential investors about potential outcomes? We’ve seen advice from “detailed cost projections only” to “full multi-year financial projections with assumptions noted”. The latter seems intended to simply show the startup team’s ability to construct financial projections, rather than shed any light on their startup’s potential.

    Reply
  2. Brian Leach (@brianleach) Avatar
    Brian Leach (@brianleach)

    If it were a services based business, e.g. consulting, would utilization rate (percent of the team’s time that was billed) be important?

    Reply
  3. Adrian Rochofski Avatar
    Adrian Rochofski

    David,

    My experience absolutely aligns with your approach – simplification and transparency are key to a well thought through Financial Forecast.Especially for the Start Up environment.

    Another beneficial approach is to analyze the business environment from an financial perspective and differentiate – Internal / Controllable and External Financial Drivers – the result will be surprising and in most cases provides a starting base (bottom up) for a forecast –

    External Factors can mostly be influenced with large limitations.
    Internal / Controllable Factors can be highly influenced.

    Great Blog.

    Regards,

    Adrian Rochofski

    Reply

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