Presenting Financials to Venture Capitalists
What’s the best way to present financials to venture capitalists?
You don’t want to pitch VCs with full-blown financial models. Venture capitalists assume your financials are pulled from your backside, totally fabricated, and based on wild assumptions. On top of that, you’ll probably tell them that your financial projections are “extremely conservative” which they’ve heard a hundred times over.
My new startup, Standout Jobs is in the process of seeking financing. It’s not the first time I’ve been involved in raising money, but it is the first time I’ve been this actively involved, and the learning curve is significant. Much of my breakdown below is based on the processes we’re going through now alongside our advisors.
1. Develop a Financial Model
If you’re raising $10,000 from friends & family this isn’t necessary, although it’s a good exercise to go through no matter what. Building out a financial model gives you the chance to really think about the details of budgeting, costs, revenues, etc. It will also help set expectations, brainstorm new product ideas, and set milestones and goals.
You’re not going to show the VCs your financial model, but it serves as the backdrop for what you will pitch them.
2. Set a Revenue Target
Give VCs a revenue target, at least for the next 1-2 years. Beyond that is basically a black hole, except that you hope revenues skyrocket!
Don’t tell them it’s extremely conservative. Don’t tell them you only need 1% of the market. Do tell them how you arrived at that number.
3. Explain Your Assumptions
You’ve set your 1 and 2 year revenue targets. Now it’s time to explain to the VCs how you’re going to get there. And this is really the key. It’s at this point where you’re going to justify your revenue target and your business model.
Try breaking down your revenue targets into smaller and smaller chunks. Ask yourself questions like:
- To hit our revenue target, how many clients do we need?
- To get that many clients, how many prospects will we have to reach?
- What will our conversion rate be from the free beta to paying system?
- What will our retention rate be for customers from year to year?
The questions you ask will depend on your product/service and business model, but the goal is to get deeper and deeper into the details, as if you’re peeling an onion. The inside of the onion is really the heart of things and it reveals a lot.
You don’t have to present all of these numbers ad infinitum to the venture capitalists, but going through this exercise of taking a single revenue number and breaking it down will help.
4. Show VCs You’re Thinking About The Right Things
Venture capitalists don’t expect you to have all the answers. They know you don’t. But they do want to see that you’re thinking about a few critical things, namely: Business Model, Sales and Marketing.
Going through the steps above will help you demonstrate to VCs that you are thinking about these things. If you have a solid assumption for your conversion rate from free beta to paying customer, and you know how many paying customers you need, you know how many beta customers you need. Once you know how many beta customers you need, you can start to build a plan for getting them. Maybe that involves direct sales; contacting targeted customers to get them signed-up. If that’s the case, you can figure out what your conversion rate will be on sales calls and figure out how many people you have to call to sign up the right number of beta customers to convert to paying customers to hit your revenue targets. Phew.
Again, all of this is too much detail for a VC pitch, but going through this detailed thinking exercise will help.
Lots of technology companies have a “build it and they will come” approach. Heck, it can work. It’s still working today. But I wouldn’t hang my hat on it. And if you go to VCs with that model they have much less information and foundation off which to judge your pitch.
Remember: Your financials don’t have to be pulled from your arse.
Presenting financials is hard. If you can bring in more experienced entrepreneurs and advisors, do it. First-time entrepereneurs will have little or no experience with financial modeling or even tackling tough questions on how they’re going to market & sell their product. But the more you can tackle this stuff up front the better your pitch (and business) will be.
I would add that it is important to consider the “road-show”, as a series of iterations, and not only one presentation to all of the VCs. In other words, test and learn! Your first one will be full of errors/doubts, you will improve.
Leo - there's no question. Practice makes perfect. And in fact in a previous post I talked about the fact that you need to know the VCs you're pitching; know what works and doesn't for each one and tailor your pitch accordingly.
Thanks for stopping by and commenting!
I would add that it is important to consider the “road-show”, as a series of iterations, and not only one presentation to all of the VCs. In other words, test and learn! Your first one will be full of errors/doubts, you will improve.
Leo - there’s no question. Practice makes perfect. And in fact in a previous post I talked about the fact that you need to know the VCs you’re pitching; know what works and doesn’t for each one and tailor your pitch accordingly.
Thanks for stopping by and commenting!
Very Nice article.
How do we handle any new competitors who eat into the sales/revenue projection/forecast?
Regards,
Hari
Very Nice article.
How do we handle any new competitors who eat into the sales/revenue projection/forecast?
Regards,
Hari
Hari - Any good (or great) idea is going to have competition. You should expect it. It probably already exists. If you don't have / get competition you have to ask whether the idea is valid or not.
So I wouldn't focus too much on competition, and I'm not sure you can anticipate / model how competition will eat into your own sales and revenue.
I would probably not think about this at all. If you're the leader + innovator then you're always one step ahead of the competition right? Plus you can't model what you do vs. what the competition does because you don't know what they'll do…
Hari - Any good (or great) idea is going to have competition. You should expect it. It probably already exists. If you don’t have / get competition you have to ask whether the idea is valid or not.
So I wouldn’t focus too much on competition, and I’m not sure you can anticipate / model how competition will eat into your own sales and revenue.
I would probably not think about this at all. If you’re the leader + innovator then you’re always one step ahead of the competition right? Plus you can’t model what you do vs. what the competition does because you don’t know what they’ll do…
Great post. I agree the before doing something, we need to plan every situation and show it to them. Setting our target and explaining assumptions are indeed necessary
Ben,
Many a times, a lot of firms will be trying to come up with a solution for a problem. A case in point is rootkit (a type of malware)detection and cleaning.If one firm comes up with a good solution, then another may follow suit with a similar/better solution, a month or so down the line.Any attempt to forecast may fail miserably, given the fact that the competition has been neglected.
In fact, the first firm's solution may be very attractive and very saleable, at first impression. But its going to be very difficult to come up with a realistic sales forecast, given the total lack of knowledge of what the competition can do.
I do agree that you can't model the competition.But if you cannot, it may perhaps be wise/appropriate to forecast them rather conservatively, in this situation.
Another example: Me and another guy once wrote a software( a v1.0 product).This product bested a product released by another firm (let us call it “XYZ”)in terms of technology and malware cleaning.Any sales forecast on the part of this “XYZ” would have been off target, given the fact that our solution was better and better marketed.Also, it was not a very common problem either.Only our firm and the firm “XYZ” offers a product in this problem domain.Given this, it makes it even more difficult for “xyz” to quantitatively assess the competitor's threat.
Tell me, what you think!
Regards,
Hari
Great post. I agree the before doing something, we need to plan every situation and show it to them. Setting our target and explaining assumptions are indeed necessary
Ben,
Many a times, a lot of firms will be trying to come up with a solution for a problem. A case in point is rootkit (a type of malware)detection and cleaning.If one firm comes up with a good solution, then another may follow suit with a similar/better solution, a month or so down the line.Any attempt to forecast may fail miserably, given the fact that the competition has been neglected.
In fact, the first firm’s solution may be very attractive and very saleable, at first impression. But its going to be very difficult to come up with a realistic sales forecast, given the total lack of knowledge of what the competition can do.
I do agree that you can’t model the competition.But if you cannot, it may perhaps be wise/appropriate to forecast them rather conservatively, in this situation.
Another example: Me and another guy once wrote a software( a v1.0 product).This product bested a product released by another firm (let us call it “XYZ”)in terms of technology and malware cleaning.Any sales forecast on the part of this “XYZ” would have been off target, given the fact that our solution was better and better marketed.Also, it was not a very common problem either.Only our firm and the firm “XYZ” offers a product in this problem domain.Given this, it makes it even more difficult for “xyz” to quantitatively assess the competitor’s threat.
Tell me, what you think!
Regards,
Hari
Hari - You can't predict the future. You create your model and assumptions based on the current information you have. If someone builds a better mousetrap then you could be in trouble.
VCs understand risk. They know competition exists or will be forthcoming, and you'll want to hone in on and be clear about your competitive advantages. Again, you can't predict what someone does in the future, nor can you compete with the future. You do what you have to do to succeed. If you don't…well, you don't…that happens.
Hari - You can’t predict the future. You create your model and assumptions based on the current information you have. If someone builds a better mousetrap then you could be in trouble.
VCs understand risk. They know competition exists or will be forthcoming, and you’ll want to hone in on and be clear about your competitive advantages. Again, you can’t predict what someone does in the future, nor can you compete with the future. You do what you have to do to succeed. If you don’t…well, you don’t…that happens.
[...] Presenting Financials to Venture Capitalists by Ben Yoskovitz… If you have a startup company that is looking to get financing to go further in your business plan, Ben has some good thoughts on how to go about it. [...]
Nice Article.
Our success in persuading them depends on things that must be address clearly.
I agree that explaining to them our assumptions is one way of making it clear to them so that they will understand and be interested.
Nice Article.
Our success in persuading them depends on things that must be address clearly.
I agree that explaining to them our assumptions is one way of making it clear to them so that they will understand and be interested.
[...] Presenting financials to venture capitalists - Interesting and indepth look at dealing with venture capitalists. [...]
How do I find a good VC, and how do I know he is not going to steel my idea. I live in Florida don't know a lot about it. any help would be great
Thank You
Moti
How do I find a good VC, and how do I know he is not going to steel my idea. I live in Florida don’t know a lot about it. any help would be great
Thank You
Moti
Moti - You find good VCs by:
* Finding out who they've funded and talking to those companies
* Finding out what successes they've had
* Meeting them and evaluating them for yourself
VCs are not going to steal ideas. I suppose it could happen and probably has, but generally that's not their business. They don't have the time, resources or expertise.
They're there to fund companies and make money off you. So don't worry about your idea being stolen. Everyone has ideas. And everyone thinks their ideas are the best; so focus on getting your idea turned into reality without worrying about people stealing it.
Moti - You find good VCs by:
* Finding out who they’ve funded and talking to those companies
* Finding out what successes they’ve had
* Meeting them and evaluating them for yourself
VCs are not going to steal ideas. I suppose it could happen and probably has, but generally that’s not their business. They don’t have the time, resources or expertise.
They’re there to fund companies and make money off you. So don’t worry about your idea being stolen. Everyone has ideas. And everyone thinks their ideas are the best; so focus on getting your idea turned into reality without worrying about people stealing it.
[...] you look, the more comfortable investors will feel. This is especially true when it comes to presenting financials. Use a real financial model (not the back of a [...]
Along the lines of most of my VC comments - I think that financial modeling has real value to anyone in business, whether or not their going for funding.
Gotta be realistic, though, which is probably the hardest thing for most small business owners.
Along the lines of most of my VC comments - I think that financial modeling has real value to anyone in business, whether or not their going for funding.
Gotta be realistic, though, which is probably the hardest thing for most small business owners.
@Mason: I agree. There's no reason you can't and shouldn't do decent and detailed financial modeling, even if you're not pursuing financing.
Thanks for stopping by and commenting.
@Mason: I agree. There’s no reason you can’t and shouldn’t do decent and detailed financial modeling, even if you’re not pursuing financing.
Thanks for stopping by and commenting.
[...] you look, the more comfortable investors will feel. This is especially true when it comes to presenting financials. Use a real financial model (not the back of a [...]
[...] presentations leave the detailed financials to the end. Of course, investors want to know about your financial situation and projections, but [...]
[...] prepared, know your material inside out, etc. You want to be confident and prove that you’ve planned things out in considerable detail (even if everyone knows your plans are wrong.) But don’t be a [...]