Over the years I’ve had to put together projections dozens of times for different audiences including management, angel investors, VC and potential acquirers but the process has always bugged me.  Not because I find it difficult or that I don’t think financial modeling is a valuable exercise for early stage startups, but because different audiences have very different expectations when viewing projections.  Sometimes these expectations don’t exactly mesh with reality and you can find yourself being penalized for trying to be realistic.  

The whole of an early state startup (particularly one that is pre-revenue) doing five year projections is one of these areas.  Think about how quickly the online space has changed, five years ago Facebook and Twitter didn’t even exist. Simply the idea that a startup with so many things outside of their direct control, can project with even a sliver of accuracy over those types of time frames is almost humorous.  This is an exercise in refuse to engage in and feel that if an investor expects this of me at an early stage, they are not an investor I want to be working with.  

Sure, I still need to be able to do the basic napkin math to validate the potential market:

15M potential customers x 10% market share x $25 service fee = $37.5M revenue

Another aspect that can be confusing is with how different audiences will interpret projections.  For example some VC’s will make a lot of investments hoping for the home run while most of their investments will be failures.  This causes them to expect to see numbers put in front of them, which represent the home run scenario.  The will then they’ll do their own analysis on what are your chances of hitting that home run.  

Angel investors on the other hand will invest in a relatively small number of ventures and due to lack of diversity, can’t go swinging for the fences, so they will view projections in a more conservative light.  Board members and management due to the fact they already have a vested interest are often more concerned with the most conservative scenarios, that may adversely effect them.  

To deal with these vastly different expectations, I like to create 3 sets of projections off of the same model with a different three different sets of assumptions (home run, optimistic and conservative).  I can then present different projections to different audiences, depending on the light they will view them in.  

I’m going to try to do a blog post tomorrow that shows some financial modeling I’ve been doing along with my thinking in building both the model and assumptions.