Q: How do you go about making financial projections for tech startups? We’re prelaunch and trying to attract investors.
– Jess Smith
A: Making financial projections before your product is launched is more of an art than a science. Investors understand this and don’t expect your projections to be 100 percent accurate. They just want to get a sense of the opportunity and trajectory that you’re envisioning.
Your goal is to convince VCs that the market opportunity for your company warrants an investment, and that you are reasonable in your expectations for the growth of the company.
Here are four tips for making financial projections:
1. Balance reality with ambition. You want to create a projection that demonstrates both your ambition for creating a large and profitable company and your ability to be realistic about the likely trajectory. It’s always good to show a hockey stick, but just make sure you can reasonably justify the numbers you’re showing.
2. Start bottom-up. Starting from the bottom can help make the numbers easier to grasp mentally, and also ensures that your forecast reflects the product you are building. Just start with the basics: number of sales multiplied by price, month over month. Depending on your product, of course, getting to “number of sales” will likely involve a few assumptions and other estimates, like number of users who download your app and percent of users who convert to paying customers, for example. Make sure each assumption and estimate you make is justifiable.
3. Sanity check top-down. Once you have your bottom-up forecast, verify how reasonable it is by doing another forecast from the top-down. This is done by estimating the total market size for your industry, along with your expected share of the pie. You can sometimes gauge this by looking at how competitors, or comparable companies in similar industries, are performing.
4. Re-adjust regularly. Your first financial projection will almost certainly be wrong. That’s okay. As you get more real-life data about your business, plug that back into your model so that your projection gains accuracy over time.
How did you come up with financial projections for your startup? Share your tips in the comments section below.
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