5 Projection Mistakes that Turn Off Angel Investors

Tips for preparing business projections to gain investor respect and confidence

Q.  How much attention do individual investors place on projections? Are there minimum targets for revenues and profitability that should be met in order to raise money successfully?

A.   Frequent readers of this column know that I love sports, not just for good competitive entertainment but for life lessons in tenacity and strategy. And in the same way that business writers borrow sports analogies to explain a point, venture investors use them to describe their venture-building pursuits.

Entrepreneurs who are in the process of preparing projections for venture capitalists or individual investors should add the phrase "hockey stick projections" to their venture-speak glossary. Within the venture community, hockey stick projections have become synonymous with overly optimistic, some might say wildly fantastic revenue projections.

Here's how it looks to investors. In business plans, entrepreneurs frequently present their projected growth in annual revenues and profits in the form of a chart. The graph of a young company's projected revenue growth line typically will be flat for some short period of time, and then rise sharply taking on the appearance of a hockey stick.

The fast growth rate looks impressive on the surface, but the entrepreneur's lack of restraint leaves the opposite impression with investors. The steeper the pitch of the hockey stick revenue line, the more investors will question the entrepreneur's business judgment.

So what else do investors think when they review business plan projections? I put this question to several members of the Puget Sound Venture Club. This long-running Seattle club scooped up early shares in Costco and Starbucks.

Here's a round up of their always candid, highly experienced opinions:

• Financial Targets: No, investors are not looking for specific revenue numbers or profit margin benchmarks. What they are looking for is a business strategy that makes good, practical sense. Angels would rather invest in a business with a reasonable shot of generating $20 million in sustainable revenues than the $100 million fantasy.
• Bad Math: Too often projections just don't add up – literally. Investors view sloppy work as a first sign of sloppy management. And finger pointers won't get funding either. Blaming poor presentations on hired bookkeepers says the CEO is not accountable for the company's accounts. [Think Enron disaster]
• Conservatism: Angels are realistic. They know startups will take much longer to achieve key operating goals than entrepreneurs ever imagine. One angel said bluntly, "At the start, I always cut projections in half." Another active angel said "I just don't believe the projections." Entrepreneurs that take the time to consider how much extra cash might be needed when operating milestones aren't met are more likely to gain angel attention than entrepreneurs who are oblivious to venture adversity.
• Thought Process: Projections reveal how entrepreneurs approach problems and how they anticipate the costs of commercializing their products. Most important, projections tell investors how their money will be spent. Here, investors are looking for a productive return on investment. They'd rather see money go into product development than trendy, expensive office space.
• Cash Flow: Well-prepared projections include a profit and loss statement ("P & L"), a balance sheet, and a "cash flow" statement. As one investor said about entrepreneurs who don't go to the trouble of preparing a cash flow projection, "I want to know when a company will reach cash flow breakeven. If the entrepreneur isn't driving to this point, then I'll pass."

And finally, one angel got it right when he said "I invest in management, not the hockey stick." This means that the people managing the startup matter much more than numbers on a page.

Take Command Action Step

Challenge your projection assumptions by cutting your revenue projections in half and doubling your projected expenses. Now how much money do you really need to reach cash flow breakeven? How much longer will it take your company to reach this critical operating milestone? Know your numbers. Angels will expect you to. You can do it!

Do you need time-saving tips to help fund and grow your business? Ask Susan How! Write to small business funding expert Susan Schreter at susan@takecommand.org