Seedrs Blog

Do you need financial projections when raising startup capital?

Do you need financial projections when raising startup capital?

1st August 2012 by Jeff Lynn

None of the the campaigns on Seedrs include financial projections. This was a conscious choice by us when we built the platform, and I thought I’d take a moment to explain why we made that decision.

Financial projections are always speculative. Even for the most well-established companies, saying what will happen in the future involves a substantial amount of guesswork.

Projections suit large companies

When the company has a meaningful operating history, financial projections can be useful, as they show how anticipated changes in internal or external factors are likely to cause variations from past performance. They still need to be taken with a grain of salt – the notion (common in public stock markets) that a company is a failure if they miss their predictions is ridiculous – but at least there is sufficient value in these projections to be a legitimate part of making an investment decision.

Projections don’t suit startups

For early-stage businesses, with little-to-no operating history, the story is very different. Financial projections become not an indicator of variance from the past, but instead a pie-in-the-sky dream of what might be. The only “hard” numbers available tend to be, at most, a few year’s worth of cost estimates, with later costs and early revenues being guesswork.

If you’ve ever sat with an entrepreneur who is trying to draft projections for a brand new business, then you’ll recognise this experience:

  • Start with year five, figure out how big you want the company to be by then, and
  • Then work backwards to show numbers that build towards that end-result (preferably in a hockey-stick pattern, so that growth becomes exponential in years four and 5).

It may sound ridiculous—and many people would prefer not to admit that this is how it’s done—but it is the reality, and it’s the reality because there is simply no sounder way of creating projections for a business at such an early stage.

Financial projections distract investors from what really matters

We think that financial projections for early-stage businesses are not only irrelevant but positively distracting for anyone trying to make an investment decision. When numbers are presented, investors tend to focus on them as a source of comfort, often to the detriment of all the other available information. We believe that projections take an investor’s attention away from what really does matter when evaluating an early-stage business: a rigorous evaluation of the idea, the market and the team.

More importantly, it leads investors to make decisions based on information that is inherently misleading, and that is a sure-fire way of causing them to suffer “investor regret” later on down the road. So if you see one of our campaigns and think to yourself, “Why can’t I see their net profit projections for year three?” the answer is that they don’t exist in any meaningful form.
 
The choice is to either see made-up numbers or not to see any numbers at all and instead focus on the genuine information that does exist about the business. We believe the latter is the better approach, and we don’t want to be a part of presenting inherently misleading information to investors. That is why we have excluded financial projections from Seedrs campaigns.

Jeff Lynn

Jeff Lynn

I'm Executive Chairman and Co-Founder of Seedrs.

Digital Agency Kent