Cast the first stone… Yes, I did that mistake with my very first pitch in AgendaPet.
I had a management consulting + MBA background, and my relationship with Excel had always been better (and more fruitful) than with some close relatives; and I have a really nice family! So, on my pitch to “Sua Ideia Vale 1 Milhão” competition I decided to share the flawless projections I had prepared. Well, I have to say that we didn’t spend 15 seconds on that slide! Later on, with other companies I noticed a similar disdain… until I put it all together the 5 conclusions below:
1) If your an early stage startup, they just won’t believe in you!
Yeah, no matter if you made a very solid projection (and I recommend that you do it), your numbers will lack a reality check. To investors, it will be much more important, at this stage, to have a deeper understanding of your addressable market and unit economics (CPA, ticket, margin, conversion…).
During the MBA, a professor at Columbia Business School, who was also partner of a major VC fund, told us that whenever he got projections from startups he would, without much thinking, “cut revenues in half and double the costs”; if the numbers still made sense, then he would look into.
Acknowledging that fact, though, most entrepreneurs tweak their spreadsheets so revenues are twice as big, and costs are the half, of what they really expect. It’s a disturbing “cat and mice” kind of cycle.
2) If you’re not that early on, results will be your best advocate
If you’re a little bit later down the road, well, actual results (specially growth rate!) will give a better indication of your capability to deliver.
In addition, odds are that 80% of your future revenues will come from markets/ products/ verticals you’re not addressing yet. That’s normal, since you’re probably starting small. That happened with a couple startups I advised. They were addressing the B2C market, with solid results, growing 3x a year. However, B2B was 20x bigger, and, on their projections, as expected, it dominated their future revenues.
Sharing projections (without being asked) would only point that most of future value would come from an area they didn’t dominate, nor had the skills for yet. That would throw away the amazing job and growth on B2C they had been doing to date.
3) Projections drive away attention from what really matters: problem + solution
What really matters in your pitch is the problem you are solving and how you’re doing that. Those are the “must-have” of any pitch. Exploring the business model (how you make money), team, and traction, will support that picture. That said, going through your projections will only divert attention. It’s just not productive.
4) Explaining your numbers would consume a lot of time (which you don’t have)
Startup projections are not straightforward. You have several disclaimers and caveats; you need to go through the rationale behind the numbers and your assumptions. You need also to go thorough some sensitivity analysis, to demonstrate it’s solid enough. Presenting it all would consume a lot of time to be properly done; and if you don’t do it properly, people will find gaps, putting your entire presentation (and credibility) in check.
5) That’s VC’s job, so let them feel smarter!
After writing this I believe my chances of ever raising VC money for AgendaPet or any other startup I’m involved with will be blown away…
Fact: VC guys love math. They’re proud of making complex calculation in their heads, just for “fun” (side note: though I can, I prefer to save my “CPU” for something more important). So, when you share your projections with them, they will be mentally crunching data to “control check” your numbers; and I bet they will spot issues pretty easy. I have already played that role, and can tell you always find gaps.
I suggest that you to trick them! Instead of sharing your projections, give them all the elements to get to the numbers you want: addressable market, conversion, average ticket, conversion/ CPA, gross margin and voilà, there’s a P&L. They will be happy to get to the numbers themselves and, in doing so, will have wasted time and “CPU” doing the math, rather than finding holes in your assumptions. Jokes aside, that’s pure psychology: if they get to the number themselves, they’ll have to believe in them!
I said “not to share without being asked”… that doesn’t mean you shouldn’t have a solid financial projection
After raising all the previous points, I risk “feeding” a bad startup mentality: “financial projections are useless and, as such, I shouldn’t spend time on it”. I feel sorry whenever I hear something like that…
Making projections is crucial to a proper planning; and planning (against some misguided entrepreneurs love to claim) is critical for any company, no matter its size. It forces you to put, in writing and in objective terms, all expectations and ideas, compare them with reality, and prioritize things.
I believe that the reason behind such aversion to projections is based on wrong expectations: people feel frustrated when actual results are very different from plans; they shouldn’t! To me projections are decision-making tools. They help me see the direct and indirect impacts of business levers. For example, if your acquisition costs are higher than expected, it gives you a framework to understand what’s wrong and what you need to do (raise price, reduce churn…) not to go broke.
All in all, in a pitch, time is your most important asset. Dedicating time to your projections would be just a bad investment. Making smart investments should be your top skill as a successful entrepreneur!