Financial Plans for early stage investors

October 30, 2013

This is a follow up to my prior post ‘Do you need a Financial Plan to Raise Seed Capital?’

I had a number of entrepreneurs ask me what I meant when I described investors wanting to see that the entrepreneur understands the levers of their business. Specifically, people have asked about the “levers” of your business. Simply put, the “levers” are the critical factors that make your business run.

In an Internet media or SaaS company, they might be:

  • Arrivals (consumers or B2B prospects who land on your web site)
  • Conversions (number of people who sign up for your site)
  • MAU, DAU (Monthly active users, Daily active users)
  • Monetization- How do you (plan to) make money from your users? advertising (CPM, sponsorship), premium subscriptions (% who subscribe, price point). What are the assumptions here? Are they reasonable given other similar businesses?
  • Churn- how many users leave the service
  • Marketing Costs- how do you get users to know about you? Paid advertising? SEO? Social media? Costs of development? Costs of advertising?
  • Sales expense- If you’re a SaaS business, do you plan to use sales people or are you freemium? If you use sales people, what will you pay them? How long will they take to ramp up? What quota will they carry? Will you upsell these customers? David Skok of Matrix Partners has written some great, in-depth blog posts about SaaS scaling here.

There can be a ton of complexity if you allow it. To reiterate a point from the prior post, the point is NOT that you have a complex 5 year financial model. It will certainly be wrong, and investors know this. The point is that you have a handle on the KEY metrics that will allow your business to grow rapidly.

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Do you need a financial plan to raise seed capital?

October 16, 2013

In addition to working in growth companies, I also mentor a number of entrepreneurs. One question I am asked often is “Do I need a detailed financial plan to raise seed capital?”

It’s an interesting question and one I will answer, but it’s actually not the right question. The right question is “Do I need to understand the financial levers in my business, and my current planned business model (or a few variants) when I talk to investors?”

The answer to that question is unequivocally “yes.” Investors, even seed investors who are investing in you and your crazy idea, want to know how you are thinking about turning your idea into a business. 

So to answer the first question, the answer is no you don’t need one. It’s probably a waste of time to have a complex financial model by month with multiple tabs. (I had a detailed model, but that’s because I’m an analytical person and I wanted to be sure I knew how we might be successful.)

Many entrepreneurs I speak with don’t have a detailed five year projection. They do, however, have a good sense of where the seed money is going to go (something almost every investor wants to know).

I think most early-stage investors know that projections are BS. But they do want to see:

-how you think about the business

-if you understand various levers for generating revenue, AND eventually generating profit

-your level of financial acumen

So you probably can skip the 5 year projection, but don’t skip the spreadsheet altogether. It’s the thinking behind the model that may help convince your prospective investors.