How to build seed projections that make sense (and money)
Financial projections come in all shapes and sizes. There’s one thing they all have in common: they’re usually wrong. Especially at the seed level: you barely have customers (if any), expenses are relatively substantial, and uncertainty is through the roof.
So, how do you start?
Our firm likes to see the next 3 years that your projections outline. However, we’re looking for something more important than the numbers: the assumptions you are making about your business, and the plan that you are going to execute. If your projections show that you’re going to go from zero revenue to billions over the next year, we’re going to ask why and how you think it’s possible.
It can feel like a catch-22 scenario: if you don’t ramp up the revenue like crazy, then investors aren’t going to think this business is venture-grade. There’s a way you can avoid this while still making a logical set of projections.
Here’s how.
Let’s assume that you‘re raising a $1M seed round. The goal for you and your prospective investors should be to get your company to its series A round in roughly 12/18-months. So by then, you should have the metrics required to secure a series A investor. Let’s say you’ll need to hit $100K in monthly revenue to do that (depending on the market that you’re in). Now you can work backward.
So over the next 12/18-months, your projections should reflect what it takes for you to at least reach that revenue (you should include a contingency with this). At this point you can determine how many sales positions you need to hire, clients you need to secure, and how much it costs to maintain operations and product development.
This shows your investors that you’ve got a tangible plan for securing your next funding round.
Points to keep in mind:
- A common flaw we see is the correlation between revenue growth and the staffing plan. With revenue growth comes extra team members (account managers, customer support/success, etc.) that need to be accounted for.
- Your pipeline, market, pricing, and business model, all tie together into the projections. If the projections don’t match the assumptions then you have to adjust the model.
- Your target market size needs to facilitate this high-growth, especially to the point where a large exit can occur. The target-market size threshold for VC is usually in the billions of dollars.
Let’s come back to the $1M round. You now know how many positions and customers that you need to raise our next round. But you only have $1M so you have to make sure you don’t inflate the burn-rate and run out of money too quickly. Another way to secure more run-way capital is leveraging. Leveraging is taking the funds you already have and using them to ‘leverage’ more from somewhere else. Having non-dilutive sources from government organizations is a great way to bolster your round through leveraging.
With your 12/18-months of runway set from the round, you can now forge your way towards the series A.
In a nutshell, your projections should show high-growth with a measure of capital efficiency. The projections don’t have to make billions immediately but they do have to make sense.
