Note: This is the second guest post by Adam Hoeksema, founder of ExecutivePlan, which helps entrepreneurs write business plan executive summaries to raise capital. More of his information is at the bottom. We’re excited to have him on the blog:
According to the Angel Capital Education Foundation, only 1 to 4% of angel investor applicants successfully raise angel investment. I believe the primary cause for this is a lack of understanding when it comes to creating a realistic set of financial projections.
Related Post: 4 Deadly Financial Projection Mistakes
Related Podcast: ‘Why Venture Capitalists Won’t Back Your Business’
If you are preparing financial projections in order to raise capital from a potential investor, there are a few things to highlight that will stand out to investors in a positive way. Here are 3 of them:
Investors love to invest in businesses with traction. They want to see graphs that are going up and to the right. Whether that is number of users, revenue, or profits, investors like to put money behind businesses that have already demonstrated success.
Your financial projections should be built on assumptions based on your historic performance. If you are currently growing 100% month-over-month, then utilize that growth in your financial forecasts to project into the future.
If you have traction, flaunt it!
There are many examples of companies who have raised investment simply because they are growing fast. For example, Twitter did not generate substantial revenue for years, and yet investors poured millions into the business simply because it was growing so fast. It had traction, and that was enough.
2. 10x Potential
Investors are looking for companies that have the potential to provide a 10x return. Investing as an angel investor or venture capitalist is risky. There is no way an investor is going to put dollars at risk with a startup, if the best case scenario only doubles their money.
Since investors expect to lose their investment 50% of the time or more, they will not even consider investing in a company that has relatively low potential to provide a significant return on investment. Your financial projections must be realistic, but you also need to demonstrate that there is potential for a big pay day.
3. Scenario Analysis
Investors know that your financial projections are, for lack of a better word, CRAP.
The fact is that nobody can predict the future success or failure of a company. The purpose of your financial projections is to demonstrate a data-driven, bottom-up forecast of the next 3 years for your company.
Your goal is simply to show that you have put some thought into the process, but that you understand that things can change.
The best way to show investors what could happen is to prepare financial projections based on different scenarios. For example, show what would happen if you get that big contract with Wal-Mart, or how your financials would change if you reached the first page on Google for your targeted keywords. Walk your investors through various scenarios in order to show potential.
If you can’t demonstrate traction, that you have 10x potential, and that you have thought through various scenarios for your business, you probably are not ready to apply for investor funding. But if you keep these 3 things in mind, your financial projections will stand out from the crowd when presented to potential investors.
About the Author:
Adam Hoeksema is the Founder of ExecutivePlan and co-founder of StringHub. ExecutivePlan helps entrepreneurs and small business owners write powerful business plan executive summaries in order to raise capital. Adam is also the author of How to Create Financial Projections – A Step-by-Step Guide for Startups.