I have learned that I can usually believe precisely one thing about a set of financial projections that an entrepreneur shows me, and that is that they are wrong. In almost every case, they are way too optimistic.

Every once in a while, an entrepreneur crushes it and actually does better than their projections. Joany (formerly Impact Health) founders Christine Carrillo and Helen Lee put together a set of optimistic financial projections for our seed investment. I distinctly remember that, after they pitched us (and Christine hung up), my partners and I confidently said to each other that there was no way they’d hit that plan but even partial execution would be compelling for a Series A. Well, as Christine likes to illustrate about herself via her social media handles, “Impossible is my favorite.” They beat those projections by A LOT. When she announced the $13M Series A led by Foundry & Tech Stars Ventures, Christine explained:

“In the last 12 months, we have exceeded each of our projections, servicing 69,000 customers and growing our revenue by 2,353%.”

While I’d love to say that every investment works out as well as Joany has, the reality is that even our successful investments end up missing some of their projections. So why worry about financial projections at all?

In my opinion, what’s most interesting about a set of financial projections is the key underlying assumptions that drive them. Financial projections provide a window into how the entrepreneur thinks about scaling their business and what KPIs are most important to him or her.

For example, do they think about growing paid accounts through an enterprise sales force? In that case, how many accounts do they add per month and how many accounts can one account executive support? How are they going to generate qualified leads and how many do they need to generate each month to hit their numbers?

Or, in the case of a freemium offering, what percent of accounts do they think will convert from free to premium? Why do they believe in that assumption? How are they going to attract those free users?

Understanding what an entrepreneur believes about the key assumptions that underpin their financial projections often leads to great discussions about their business.

One caution on this question is to make sure you’ve thoroughly thought through all of your assumptions. While it’s certainly fair to say that one or more of your assumptions are not yet validated and may require an investor to take a “leap of faith”, that’s different than an assumption being mathematically impossible. For example, if you are targeting a specific type of SMB customer and there are 10,000 of those businesses in the US, don’t show me a projection with 30,000 of that customer type in three years with no rationale for why the market will grow orders of magnitude in that time. Even 5,000 customers in the above example would be a ridiculously optimistic projection. Remember that, even in “winner take all” markets, you don’t typically capture a majority of the total addressable market in the first few years.