By Randall Bolten, author of PAINTING WITH NUMBERS: Presenting Financials and Other Numbers So People Will Understand You.
Here’s a curious fact – in almost all startup business plans and investor pitches given to venture investors, the financial section shows exactly the same results: Year 5 outlook revenues of US$80-100 million and operating margins of 30% or more. This sameness is well-known to the people in the VC community; in fact, it’s a source of humor.
But if the financials all show the same results, how meaningful are these numbers? And why are they a requirement when you go out to raise money?
In truth, the financial results themselves are of secondary importance. When you present a financial model as part of your investor pitch, what the audience is really looking for is not really the results you’re predicting, but what it says about your thought process and how you think your business model is actually going to work.
The financial model you present needs to provide insight into other questions, such as:
- Is there a revenue model? Do you seem to understand how your products ought to be priced, and how much customers will pay?
- Do you understand the relationship between the revenues you’re predicting and the expense activities – engineering, marketing, sales, pre- and post-sales support – required to generate those revenues?
- Do you understand the timing lag between your expense activities and the revenue that those activities will generate?
- Do you understand the difference between financial results presented in accordance with GAAP (or IFRS) and cash flow? Are you properly focused on each?
- Do you have a positive, proactive, yet realistic sense of how your business can grow?
- Do you have a flexible, constructive, imaginative response when the audience challenges your underlying assumptions?
- Can you stand up in front of an audience and coherently explain financial results?
All of these questions can be addressed by a well-crafted financial model succinctly explained to an audience – investors rarely want to see more than two or three pages of financials, and they also want to hear what you have to say about your financial expectations.
You don’t need to address each of these points explicitly, but if you’ve built a robust model and explained it coherently, your audience will come away with answers to the above questions.
Anyone with a spreadsheet can make it say anything. A spreadsheet can’t “prove” that you will reach US$100 million in immensely profitable revenues, any more than you can cause an earthquake by jostling a seismograph. It may seem ironic, but the section of your investor pitch that has the greatest emphasis on the numbers, is also the section that is your greatest test as a communicator.
Randall’s experience includes nearly 20 years as a CFO of public and private software companies in Silicon Valley. Click here for more information.