Understand the cash you need to prove model and achieve next stage.
Investor, Entrepreneur, Board Member
For seed stage, financial projections should not go beyond 3-years.
Where is your revenue coming from today, tomorrow, next year, and three years from now?
Lesson: Fundraising Series Seed with Jenny Lefcourt
Step #5 Money: Understand the cash you need to prove model and achieve next stage
I think entrepreneurs need to have a very clear idea of about how much they’re raising, how they’re going to deploy it, and how, what if, that is going to prove out. What is that milestone? And then, make sure that they’re buffered, because everything takes longer and costs a little bit more than we all think that it does.
So, that’s what investor’s look at to make sure that an entrepreneur has a good handle on that. If there’s anything that an entrepreneur’s going to work hard and long on beyond their story and all the other stuff, I mean, when you talk about financials, is understanding “cash burn.” How much am I going to have to spend to prove what I need to prove, to get the next stage?
As much speculation as you want is okay, you don’t have another choice. None of us have crystal balls. So all you can do is let them know that given what you’re doing, and pick your favorite pattern of similar businesses or what’s happened in the industry that you’re in, this is what you expect to do in time. I mean, you don’t have a choice but to speculate.
Now, you don’t want to speculate on facts. There is a size of a market. There are certain things that are factual. But when you talk about your new way of doing things and how much people are going to be willing to pay, unless you’ve actually tested it, you don’t know.
So you have to speculate. You do have to be thoughtful. And if you’re really uncomfortable, because some of you put numbers in and it’s like, “Yes, we’ll be billion dollars next year.” Its like, “Okay well, that doesn’t work.” So I think you want to look at it from bottoms up and top down and say, “Does that feel right? Does that make sense?” But there’s not an investor who won’t know that it’s all speculation. So you have to kind of get over that.
At seed stage with financials, I think it’s best to explain where you think your sources of revenue are coming from tomorrow, a year from now, five years from now and then the drivers of those revenue streams. Then, have some estimates. You can even do low and high of, “Okay, if we were able to get 'blank,' this is what it would mean, assuming we had this many accounts.”
So it’s a little bit more about getting into the entrepreneur’s head of, where is the money and what’s going to drive sort of the unlocks of all those revenue streams, more than saying, “Well, you told me it’s going to be 30 million dollars in three years.” It’s not about the end number. It’s about how you think you’re going to build this business and what’s going to drive that business.
Every time I fund raise, it was different, because you start 16 years ago, then you do it 10 years ago. Then I did it last year and the market changed and the types of investors changed and what people are looking for changed. In the earlier days, we really had a very strong Excel spreadsheet and we had very detailed financials. And that was a key part of getting, there was no Series C. You went straight to the A and they needed to see that. We put a ton of energy into that.
Fast forward to now, I think what people are looking for is, is the industry big enough? What are the key drivers? Does this look interesting? Does it look like it scales? But I certainly wouldn’t go beyond three years and I’m not even sure how much detail you’re going to need for beyond the next year.
Investors at seed stage are most concerned with, “What are you burning?” “How much cash do you need to prove what you need to prove?” So that you meet that milestone and for us, the next milestone is Series A. So, you want to really put your efforts into knowing that you know what amount of money you need to bring in, so that you can make that happen. That’s what people care about the most.
However, you also want to show that you are a business minded person and that you know there is money here and what you can expect this business to produce. Once again, I wouldn’t go beyond three years.