Epic Fail in Fundraising – Financial Assumptions

Epic Fail in Fundraising – Financial Assumptions

I took a call a few weeks ago that was a referral from a friend. It was a “great new startup” with some young first-time entrepreneurs. I took the call, but with some hesitation. I try to do these first calls on the phone, not in a coffee or other meeting… here’s why.

I’ll avoid the discussing the type of business or details given the loose “handshake NDA” I extended at the start of the call. But to set the context, they were going to compete against some very large tech companies. So after listening to the pitch for a painfully long 10 minutes I asked about their forecast. “well, we expect to be a billion dollars in four years”.

I’ll admit I chuckled out loud. To which his response was: “you haven’t seen the spreadsheet”. Thankfully, he was correct, I hadn’t seen the spreadsheet! I had already done similar spreadsheet earlier in my career.

So here’s a list of epic fails for entrepreneurs with Financial Assumptions:

  • Billion dollar in revenue in year five or less
    • Investors won’t buy it even if you do…
  • Top down vs. bottom up revenue modeling
    • “1% of China is all we need to be $1B”
    • Likewise attaining a large percentage of your Total Addressable Market (TAM) isn’t a good option either
  • Not ramping or flat-lining your expenses as a percent of sales
    • Shows that you’re not paying attention to the expenses of the business or just don’t know the details
  • Not connecting your financial model to your plan narrative
    • Let’s say an investor starts reading your documents at the back of the plan and see that you have a web sales model, then gets to your go-to-market in your plan and you have a web sales model and no reference to sales people..
  • Not using Accounting Terms or Formats
    • If you starting from a blank spreadsheet make sure you use the right terms and layout
  • Not knowing your key success metrics
    • You need to be able to articulate the drivers in your model, ideally, all of the assumptions should be on one page (not hard-coded into the model). The investor should be able to test your assumptions by adjusting the drivers without breaking the spreadsheet
      • Cost of customer acquisition
      • Pricing
      • Churn, etc…

If you don’t feel like you can do these things get some help. However, you can’t outsource this exercise. When you walk into an investors office and they drill down on the details – you have to know where the details are in the spreadsheet – even if you have a CFO.

Every investor you show your financial model knows that it’s wrong. The question is just how wrong – in orders of magnitude. But doing a financial model shows that you have the general concepts down and implies that you have some moniker of financial discipline after you raise your round of funding.

What are some of your Epic Fails in Fundraising?

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