What Is The Appropriate Time Horizon Of A Financial Model for VC’s?

Q: When building a financial projection model for a pitch to VC’s, should you include future rounds of funding in the model or simply show what measurable goal you are trying to achieve with the current round you are seeking?

A (Brad): It depends on the stage of the company. But first, it’s important to understand how a VC is going to look at your projections in the first place.

  • Early and pre-revenue: Investors are going to be most interested in your near term burn rate and how long their money is going to last. Focus on putting this information front and center – don’t hide it. Recognize that your revenue is totally speculative so the “base case” is going to be zero revenue.
  • First product in the market, < $100k / month of revenue: Revenue matters here and the projections out into the second and third year will give a good indication of how you are thinking about the ramp of your business. However, if your revenue is modest, a smart investor is going to look at your gross margin also. If you are a recurring revenue business, the month-over-month growth – both of revenue and gross margin, is going to be important.
  • Meaningful revenue, > $1m / quarter: You have entered the zone in which you have a real business and likely can have a credible growth plan out three or more years.

Now, in every case, a VC is going to be interested in how long the current round of financing is going to last. In early cases, they are going to focus on cash / monthly-burn-rate. In later cases, they will factor in some amount of revenue and gross margin projection, but likely discount both, viewing you as being overly optimistic on revenue as well as the gross margin percentage.

Then, building off of this, they will be interested in how much additional money you think you will need to get cash flow positive. They’ll calibrate this against whatever your current plan is. The earlier the life of your company, the more skeptical the VC will be of any projections of revenue, and any time horizon greater than one year.

Update: I just noticed a twitter comment that said “I would suggest that it should take you up to their expected exit as that is most definitely their primary concern.” While some investors may ask for this, it’s the exception as most rational investors will want to understand what it takes to be cash flow positive. It’s impossible to predict the exit as there are too many variables at play, including the notion that you can’t force an exit. However, you can run a business indefinitely without additional financing if you are cash flow positive. So I’d assert that showing the plan getting to cash flow positive is much more important than showing the plan getting to an exit.

  • MichaelRattner

    It would seem as if the early stage revenue model doesn’t really exist as a planning document, more than a few months out. If a startup could predict its revenue a couple years out, there would be many more successful startups. What the early stage financial model does is assumptions testing – figuring out order of magnitude pricing and volume requirements and then looking at them versus reality and if they don’t show a real chance of success, plans have to be changed. A section of the rest of the business plan should then provide some justification for these assumptions.

    The other thing a good model can do is provide sensitivity information, such as what happens if we have to cut prices by 10% but can’t cut costs.

    Founders seem to often sit in a room on one very long night coming up with the financial model and then, once it’s done, they believe it. And that’s a path to disappointment.

  • Peter Adams Rockies Venture Cl

    From an Angel Investor point of view, we want to see what the entrepreneur’s plans are for future rounds of funding for three reasons:

    1) It shows us that they are thinking ahead and have calculated their burn rate and have plans for the next raise.

    2) We can calculate the likelihood of their actually raising that next round and what risks there are if the next round does not get raised.

    3) Angels are always looking at their risk of being diluted in future rounds and need to understand what the future rounds will be so that they can set their expectations appropriately.

    • What if the current raise is considered an “A” round, but the company is already producing substantial revenue and looking for growth? In other words, what if there is less of a likelihood of requiring future rounds?

      For example, in our seed round we expected the need for a future round and discussed the possibility from the beginning. Now that we are entering our A round, we do not necessarily see the need for future dollars to be raised, and if it turns out that assumption is wrong, the funding procured from the current round would give us ample time to pivot and appropriately seek supplemental dollars without a great deal (if any) dilution. At that point, would an Angel in your shoes still want to see a “possibility” slide?

  • Debarati

    Very informative article. We are a Ruby on Rails development company with a mission to help start-up entrepreneurs realize their technological dreams.

  • As a valuation specialist my view of almost all start-up forecasts as too optimistic. I realize that it is important to be positive about your business, but when your numbers are 10 times of what’s achievable that impairs decision making process. If your revenue are going from $1M to $10M in one year, you have to get to the level of detail where you know the number of calls your inside sales have to make to sell that much. It also helps to look at how long it took other companies to grow and why. The forecast have to show not just how do you get to the next level, but also, whether it is all worth it, even if there is a market for it.

    • Raymond

      I have a question if I may. I do agree that most forecasts are too optimistic however I have heard of some suggestions saying that if the forecast is too conservative then VCs will say that you are not aggresive enough. Whats your opinion on this? Thanks.

      • danny k

        I think this is one of those “if they like you and your business, they won’t worry about your early stage models. As long as you did them and they aren’t too ridiculous” – some random entrepreneur

    • Brandon McNaughton

      Good point! As you pointed out, I think a key purpose is to determine whether or not it is all worth it. I agree that they are often super optimistic. On the other hand, assuming that a product has strong differentiation and is what customers are looking for, company do occasionally experience the hockey stick. At a minimum, forecasts help establish whether or not there is any chance of a nice return.

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  • Marius Esser

    Thank you for this short overview. I really enjoyed to read this article. In my opinion it would be really exciting to underline your seperation with examples. I can follow this steps, but I think, it would be nice to illustrate it with concrete examples. That could be explain your boarders between the steps. At this point it looks a little bit arbitrarily.



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  • We fall somewhere between the second and third categories as far as projections are concerned. We are in conversations with a couple of VCs about a Series A or Seed round (depending upon who you talk to its called something different). I’m reading “Venture Deals” and I’m at the Liquidation Preference section near the beginning. You very clearly spell out the common scenarios with X preference and participating vs. non-participating. At one point in that chapter you say “In early stage financings, it’s actually in the best interest of both the investor and the entrepreneur to have a simple liquidation preference and no participation.” I like this conceptually and it’s clear how this is in the best interest of the entrepreneur but I’m not sure how it’s in the best interest of the VC. On p 44 and 45 where you walk us through the different liquidation cases, I’m seeing that in the Case 2 scenarios the VC always makes out better with 1X preference + participation. How do I argue that non-participating is better for the VC? BTW really enjoying the book and learning lots, thanks for writing it.