This blog post was written by Alec Miller, Manager, Measured Innovation at TechAlliance.
The Advisory Services team here at TechAlliance works with all kinds of entreprenuers, and after reviewing even just a handful of business plans or pitches, it’s not hard to start recognizing some common patterns. Granted, no two start-ups are identical, but when it comes to financial projections and pitching to investors, many entrepreneurs make easily preventable errors.
So, when I came across the Top 10 Fundraising Fails infographic published by The Founder Institute, I found myself nodding in agreement. The fundraising mistakes that the infographic touches on are common to many of the startups that we’ve worked with, and so I thought it would be a good idea to re-post them here.
- Not using charts, graphs, or tables in pitch materials
- Hard coding numbers into your spreadsheet
- Not using a bottom up analysis
- Not connecting the financial model to the narrative
- Not knowing your Total Addressable Market (*TAM) or your Serviceable Addressable Market (*SAM)
- Not using Generally Accepted Accounting Principles (GAAP)
- Not doing a cash flow analysis
- Underestimating your variable expenses
- Not knowing your comparable market metrics
- Project $1B in Revenues for Year 5
These fundraising pitfalls can be lumped into categories such as presentation, usability, sophistication, coherence, and realism. I’ll say a few words about each category and make a few suggestions on how startups can avoid them.
Presentation – Financial projections often contain a lot of data, so the trick is to present these data in an easily digestible, visual format. Charts, graphs and tables are a great way to do this. Although there are new analytical tools and business planning apps popping up all the time, Microsoft Excel is still the most widely used software for financial modelling. Time spent learning how to use MS Excel properly will likely be time well-spent.
Usability – Beyond using simple and clear visuals, an investor will often want to look under the hood of your financial model to identify what are the key assumptions and drivers of the business. The problem with ‘hard-coding’ numbers into a spreadsheet is that it doesn’t allow an investor to easily ask “what-if” types of questions. “What if we double or halve the selling price? What happens if the cost of a critical input is 25% higher than assumed?” With hard-coded numbers, rather than changing one variable which then cascades throughout the entire model, each individual cell needs to be changed whenever a user wants to ask a “what-if” question. So, from a usability standpoint, make it easy for your audience to look under the hood of your financial projections and play around with different scenarios.
Sophistication – Investors hear pitches all the time, whereas entrepreneurs may only get one or two opportunities to make their case. As a consequence, investors often hear clichés that entrepreneurs don’t even realize they’re making. Avoiding these clichés helps an entrepreneur improve their credibility and differentiate them from the countless others who are competing for the same resources. Here’s a funny yet informative Youtube video that will help familiarize you with some of the more well known clichés.
Coherence – We’ve all known that person who can’t help but point out why a movie wasn’t as good as the book, or how there were gaping holes the story line. Pitching to investors isn’t much different. They want to know that a startups’ story is coherent and that there aren’t major inconsistencies or assumptions that contradict each other. Be sure to go through your business plan with a fine toothed comb, and to make sure that your financial projections reflect that narrative. Given how fast things evolve in the early stages of a start-up, maintaining coherence can be tricky, but the benefits are well worth it when it comes to communicating to outside parties.
Realism – Most of us have a tendency to be optimistic about the future, but entrepreneurs especially so. Rapid growth rates, massive market sizes, and underestimated costs are hallmarks of most business plans. Shikhar Ghosh from Harvard Business School presents statistics showing that 90-95% of the predictions made by entrepreneurs are never realized. So the question becomes, how do you present a scenario that is actually realistic? A few tips – use up-to-date market research where available, build bottom-up revenue forecasts, and be explicit about what assumptions you are making. Approaching a startup as if it were a scientific experiment, complete with falsifiable hypotheses (aka the lean startup approach) is an effective method for making realistic projections.