As much as investors might be repelled by ridiculous numbers that don’t add up, they are also likely to pass on an opportunity that merely has modest returns. Investable entrepreneurs understand this and work hard to strike that balance in their forecasting before they step into a pitch.
There are three fundamentals that investors require you to demonstrate in your financial projections – growth, speed and exit. Each one helps to build the picture of how you intend to evolve the idea from start-up to scale-up and successful. Whatever your personal plans might be, never forget that most investors are looking at each opportunity as a five-year commitment. They want to know that when that time is up, they’re likely to make a profitable exit.
If you are asking investors to put their money into a high-risk business opportunity, you better be able to demonstrate large and sustained growth. It’s unlikely they’ll give you the time of day if you can’t achieve revenue upwards of £15 – £50 million.
While projecting growth in that region might feel daunting at this early stage, you need to understand that investors won’t be willing to risk their money for less. It doesn’t make financial sense to take a punt on something that might creep towards 20% year on year growth, not when other opportunities with higher growth are out there.
If you expect them to back you, you need to be playing in the big money ballpark. Your financial projections must showcase your strategy for growth and why investors would be wise to get involved now.
Given that investors are typically looking at investing for five years, they want to see a plan for growth that has momentum and speed. Your financial projections need to be credible, and that means demonstrating your strategy for moving from one stage to the next quickly.
When you are putting your figures together, you need to consider how much early-stage spending it will take to accelerate growth quickly. What investment is required to get your product or service onto the market, how fast can your business model start to generate profit, are you developing new products and services to improve upon your MVP? There is a myriad of ways that you can grow your business, and investors will want to see that you’ve got a solid strategy for moving onwards and upwards.
If you don’t mention an exit plan, you will be sunk. Investors aren’t emotionally involved in your business like you may be, they are thinking of this in terms of financial reward. The most important consideration for them is that, after five years or so, they can recoup their investment plus a tidy profit. Typically, they’ll be looking for a return that is 10 to 30 times what they invested, and they’ll want to see how you will get them there.
So, in your financial projections, you need to have an exit value calculation that is credible and enticing. The basic formula is this: Valuation = Profit x Multiple (sometimes profit is substituted for revenue). If you’ve never done this kind of calculation before, here’s what you need to know. The exit multiple in question is a variable figure and will be determined by an industry benchmark. Your underlying assets will impact this figure – either increasing or decreasing it based on tangible things like stock and equipment, or intangible things like brand, culture and systems.
When you make your calculation, you are making an educated guess, and investors understand that. Nothing is guaranteed, but with a well-thought-out, believable and credible forecast, you stand a better chance of winning their investment.