The difference in thinking came up at a big tech conference panel that I spoke on. I was a new Venture Capitalist on stage with two prominent NYC based VCs in 2014. The question came up: what do you think of revenue/user forecasts when evaluating early stage startups? (Note: when i say early stage, i mean pre-seed and seed stage startups)
I said I did not care, my fellow panelists vehemently disagreed. This showed the difference in the tech VC scenes and attitudes of the east coast and west coast at large. But it did give me something to consider. Since then I have actually come around somewhat to their view. Not because these forecasts & projections are anything you can count on. Actually these forecasts are either lies or fantasies and any investor who invests based on projections is an idiot or amateur who needs to go back to later stage investing. No experienced or decent investor is going to hold you to these. (I stress the words “experienced” or “decent” investors).
But where the revenue projections are helpful is that it is a guide to better understanding how the founders think. Are they too aggressive or too conservative? Do they understand what the drivers of the business are? Are they detail oriented or not?
Also the financial projects help you understand the potential size of the business and key factors that could hold the business back. Like what the possible organization looks like, sales cycles, how many engineers you would need to hire to hit this growth.
So founders, make sure you spend some quality time on putting together a good basic revenue & financial forecast, usually 2–3 years out is my recommendation. If you have never done one before, go to a local top MBA program and rent a former I-Banker or Management Consultant who have extensive experience putting these together. The exercise itself is helpful for you to understand your business but it’s also a valuable tool for investors to understand you and what you are trying to build.
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