This is the third post in my Microsoft partnership, and it’s all about numbers. The topic is crafting your financial forecast to include in your pitch. Bill Reichert, my partner at Garage Technology Ventures, created an Excel model and wrote this blog post. There’s a lesson in this too: Get the best person for the job. His grasp of financial models and how to present them exceeds mine by two orders of magnitude.
The Purpose of Financial Projections
When it comes to financial projections, there are two types of entrepreneurs: first, the “visionary entrepreneur” who considers financial projections silly, so she makes up numbers that look good to investors; second, the “intense entrepreneur” who develops an 10,000 cell spreadsheet that includes the number of licenses of Microsoft Office that he needs to buy in year five.
If you are the first type of entrepreneur, you run the risk that the investor won’t trust you with his or her money. This type of entrepreneur often alienates investors because of his cavalier attitude. If you are the second type of entrepreneur, you run the risk that the investor will think that you actually believe your projections.
When it comes to financial projections, however, there is only one type of investor: people who don’t believe your financial projections, whatever they are.
So what’s the right balance of vision versus detail? The point of financial projections is to tell a story with numbers—a story about opportunity, resource requirements, market forces, growth, milestone achievements, and profits. Your job is to create a numerical framework that complements and reinforces the vision you’ve painted with words.
The investor isn’t interested in the precision of the numbers, but he or she is interested in what the numbers say about the economics of your business, and what they say about your understanding of your business. The goal is to tell a credible, as well as exciting, story about what your business could become.
To be credible, your numbers have to make sense on the first review. If you are suggesting that your company will grow faster or be more profitable than any company in history, you will lose credibility. Your numbers must survive simple questioning:
- Do the capital requirements shown in your projections match the funding you are asking for?
- Do you know how many customers you have to land to generate the revenues you are projecting?
- Do you know how long it takes and how much it costs to acquire a customer?
- Do you know what resources will be required to support customers?
- Do you know how much you will have to spend to stay ahead of the competition with your product or service offering?
To view the template and to learn how to use it, click on this link: http://guykawasaki.com/how-to-create-an-enchanting-financial-forecast-officeandguyk/