Why Financial Projections Matter
Investors don't expect your projections to be accurate—they know startups are unpredictable. What they're really evaluating is:
- Your understanding of the business model - Do you know what drives revenue and costs?
- Your critical thinking - Can you identify key assumptions and risks?
- Your credibility - Are your assumptions realistic or fantasy?
- The potential size - Is this business worth their time?
The #1 Mistake: Top-Down Projections
The fastest way to lose investor credibility:
❌ Wrong: "The market is $50 billion. If we capture just 1%, we'll make $500 million."
This is called "top-down" projecting, and every investor has seen it a thousand times. It shows you haven't thought through how you'll actually acquire customers.
✅ Right: "We can acquire 100 customers/month at $150 CAC through paid ads. At $500 LTV, that's $50K MRR by month 12."
This "bottom-up" approach shows you understand unit economics and have a realistic path to growth.
What Investors Want to See
1. Three Financial Statements
- Income Statement (P&L) - Revenue, costs, profit over time
- Cash Flow Statement - When money comes in and goes out
- Balance Sheet - Assets, liabilities, equity
2. Key Metrics
| Metric | What It Shows | What Investors Look For |
|---|---|---|
| MRR/ARR | Recurring revenue | Growth rate, predictability |
| CAC | Cost to acquire customer | CAC payback < 12 months |
| LTV | Customer lifetime value | LTV:CAC > 3:1 |
| Gross Margin | Scalability | 60%+ for SaaS, 40%+ for others |
| Burn Rate | Cash consumption | Runway > 18 months post-funding |
| Revenue Growth | Trajectory | 2-3x YoY for early-stage |
3. Clear Assumptions
Every number should have a documented assumption. Investors will challenge them.
| Projection | Assumption | Source/Validation |
|---|---|---|
| 100 new customers/month | $15K ad spend at $150 CAC | Based on 3-month pilot campaign |
| 5% monthly churn | Industry average for B2B SaaS | Source: Pacific Crest Survey |
| $500 ARPU | Mid-tier pricing, 20% on premium | Based on 50 customer interviews |
Building Your Financial Model
Step 1: Start with Unit Economics
Before projecting revenue, understand the economics of a single customer:
- How much does it cost to acquire them? (CAC)
- What do they pay? (ARPU)
- How long do they stay? (1/churn rate)
- What's their lifetime value? (ARPU × months)
- What's your gross margin per customer?
Step 2: Model Customer Acquisition
Project how you'll acquire customers each month:
- Marketing spend × conversion rate
- Sales team × deals/rep/month
- Organic/viral growth rate
Step 3: Project Revenue
Revenue = Customers × ARPU
Include:
- New customer revenue
- Recurring revenue from existing customers
- Churn (customers leaving)
- Expansion revenue (upsells)
Step 4: Project Costs
Be detailed and realistic:
- COGS: Direct costs to deliver product/service
- Sales & Marketing: CAC, salaries, ads
- R&D: Engineering, product development
- G&A: Admin, legal, accounting, office
Step 5: Create Three Scenarios
- Base Case: Realistic, achievable projections
- Bull Case: Everything goes right (20-30% higher)
- Bear Case: Conservative, things go wrong (30-40% lower)
Common Projection Mistakes
- "Hockey stick" with no explanation - Why does growth suddenly explode in Year 2?
- Underestimating costs - Salaries, benefits, legal, unexpected expenses
- Linear customer growth - Growth is never perfectly linear
- Ignoring churn - Every business loses customers
- Unrealistic margins - If you're projecting 80% net margin, explain why
- No hiring plan - Revenue requires people. Show the headcount plan
- Missing cash flow timing - Revenue ≠ cash. Account for payment terms
Projection Red Flags Investors Watch For
| Red Flag | Why It's a Problem |
|---|---|
| $100M+ revenue in Year 5 | Less than 0.1% of startups achieve this |
| No negative months | Every startup has setbacks |
| Expenses flat while revenue grows | Growth requires investment |
| 0% churn | Impossible for any business |
| No competitor response | Competition always reacts |
| Hiring 200 people in Year 2 | That's a full-time job just to hire |
What "Good" Projections Look Like
Year 1-2: Validation Phase
- Focus on product-market fit metrics
- Revenue growing but still small ($100K-$1M ARR)
- High burn rate as you invest in product
- Negative cash flow (expected)
Year 3-4: Growth Phase
- Revenue scaling 2-3x per year
- Unit economics proven (LTV:CAC > 3)
- Gross margins improving
- Still investing in growth (may be unprofitable)
Year 5: Path to Profitability
- Clear path to profitability visible
- Growth rate may slow (but still healthy)
- Operating leverage showing
- Cash flow approaching breakeven
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Start Free →Final Checklist
- ☐ Bottom-up, not top-down projections
- ☐ Clear, documented assumptions
- ☐ 3-5 year projections (monthly for Y1, quarterly for Y2, annual after)
- ☐ Three scenarios (base, bull, bear)
- ☐ Unit economics clearly shown
- ☐ Cash flow and runway calculated
- ☐ Key metrics match industry benchmarks
- ☐ Hiring plan aligned with growth
- ☐ Use of funds clearly mapped
- ☐ Sensitivity analysis on key assumptions