Raising money for your startup Step 8: Creating a fantastic financial forecast
Numbers often speak louder than words when it comes to introducing investors to the financial aspects and potential of your business.
Up to this point in your pitch, you have been trying to sell investors on the story and potential of your startup; this is where you build your numbers in a way that is consistent with the story you are telling. The financial side of your pitch also needs to be compelling enough to get people excited.
When raising money for your business, a financial forecast is one of the most important pieces of information you can show to potential investors which they can use to assess your stability, prior to making their investment decision.
This is why it is essential you create realistic financial documents which are based in fact, where appropriate and possible.
Key things investors want to know:
- How much investment you need
- How much equity you are releasing
- How you intend to deploy the capital you raise
How to work out your post-money valuation
How to work out your pre-money valuation
Minus the amount you are raising from your post-money valuation.
Eg £1,000,000 - £100,000 = £900,000
The three articles you’ll find here are full of fantastic tips on how to build a strong, realistic, and attractive financial forecast as you approach investors when raising money.
As startups are generally pre-revenue generating, it is perhaps more difficult for them than more established businesses to create realistic financial forecasts as they don’t have any previous figures to draw from. Taking this into account, this post suggests tips tailored specifically towards businesses at this growth stage. One great tip is to put down expenses first, not revenues, as Craig writes that you have a lot more control over expenditure than income at this point. He suggests starting by building a list of common categories of expenses, including the following:
- Legal/Insurance fees
- Postage Costs
- Office Rent
- Utility Bills
- Phone Bills/Mobile Phone/ Internet Costs
- Advertising & Marketing
- Cost of Goods Sold
- Direct Labour Costs
“As a mentor, I see so many entrepreneurs complain that building forecasts with any degree of accuracy takes too long. Some see this as a waste of their time and that this time could be better spent developing or selling their product.
Also as an experienced entrepreneur, I can tell you that without investing some time in this, means that your new shiny business stands little chance of success and you will not find any investors willing to put money into your business unless you can provide them with forecasts.” Darren Craig
This post raised a lot of interesting points, but the one which stood out most for me was that investors know it is impossible for you to accurately predict the next five years of your business’ success, and they are perhaps more interested in your approach to a financial forecast as it demonstrates your attitude and personality.
Many potential investors view your financials as a tool which indicates to them your market knowledge, research, and how you believe you will disrupt it. The argument here is that if you fail to produce a forecast because it is too difficult, or you don’t see the point in it, this will flag up a warning to potential investors that you may not be able to deal with challenges your business faces in the future.
In this article, Kiska suggests that businesses raising seed capital perhaps shouldn’t “bother with complicated [financial] models” but should be able to clearly demonstrate:
-how much investment they are looking to raise,
-what that investment will be used for
-they are attacking a large, ideally multi-billion dollar [/pound] market.
Evidence of numbers, in whatever form, is absolutely essential to your business plan when pitching to investors.
It’s essential to build trust and credibility between yourself (your business) and potential investors. This is done through the story you tell and then backed up with financial evidence. However, you start to lose credibility if you make grandiose claims, such as growing faster or being more profitable than any company in the history of business
Silicon Valley-based entrepreneurial expert, Guy Kawasaki, suggests that your numbers must survive simple questioning, like the following:
- Do the capital requirements shown in your projections match the funding you are asking for?
- Do you know how many customers you have to land to generate the revenues you are projecting?
- Do you know how long it takes and how much it costs to acquire a customer?
- Do you know what resources will be required to support customers?
- Do you know how much you will have to spend to stay ahead of the competition with your product or service offering?
Kawasaki has provided an Excel template for you to download. Whilst this template isn’t the only way in which you can present your financials, it is good for you to see how to build a strong financial forecast and has sections for presenting both twelve-month and five-year projections.
This post outlines the importance of backing up the rest of your business plan and investment pitch with some strong financials. In fact, Wasserman suggests that even if you are not raising money, having a forecast will help you steer your startup in the right direction.
For that reason, this article covers what information should be included in the financial section of your business plan and how it can be used to better manage your business, as well as attract investment.
Reading Wasserman’s take on the purpose of financials is interesting but this post goes into some great detail on what goes into a financial section.
The Components of a Financial Section
- Start with a sales forecast.
- Create an expenses budget.
- Develop a cash-flow statement.
- Income projections.
- Deal with assets and liabilities.
- Breakeven analysis.
Building a realistic and attractive set of financial documents can be a time-consuming and difficult process but it is essential to the success of your fundraising efforts and ultimately your business success. Whilst the numbers confirm earlier parts of your business plan and claims of potential, your financials also show more than you may realise. Investors want to get to know you, your business, your high growth potential, and the return on investment they can expect, and they can see evidence on all of these things in the forecasts you show, so make sure you get them right.
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