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 â€“ 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 â€“ both of revenue and gross margin, is going to be important.
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.
(Brad has been an early stage investor and entrepreneur for over 20 years and is currently a managing director at Foundry Group.)
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