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Have you heard this before: “Can you produce another forecast for the balance of 2009 taking into account the fluctuation of the exchange rate in Indonesia, the current price of tea in China and the number of wildebeests that migrated across the Serengeti last month?” If a prospective VC investor says something like that to you, run. He doesn’t get it. And as the saying goes, “He’s just not that into you.”
I’ve seen thousands of financial plans for young startups. I can assure you--with 100 percent certainty--that they are never correct. A great entrepreneur can usually (but not always) manage the first year or two of the expense plan. However, I’ve never met an entrepreneur who can predict the revenue plan, especially in cases where he’s starting from a revenue base of zero.
A rational VC investor knows that an early stage financial plan is going to be wrong. He’s not looking for a correct number; rather, he’s looking to see how you think about your business. Your operating model and forecast should be structurally correct, contain the right elements of revenue and expenses, have a logical cash-flow model that is linked to the type of business you have, and put forth a clear set of assumptions that drive the growth of the business. However, the final numbers aren’t what counts--it’s your understanding of the different pieces and how they interact.
My favorite early stage entrepreneurs are the ones who can explain their business on a whiteboard. Read rest of story from Entrepreneur.com
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