A couple of weeks ago, I retweeted a Brad Feld post titled “Startup Cost Projections for First-Time Entrepreneurs.” The passage that interested me the most was:
The biggest mistake first time entrepreneurs make is that they fall prey to the idea that they need to put together a five year P&L forecast and cash flow projection. I can guarantee – with 100% certainty – that this model will be wrong. As an investor, I don’t really care about this; rather I want to see how you are thinking about getting to “the next stage” of your business. You get to define the next stage, what it’ll cost you to get there, and what things will look like when you get there.
I think this is critical advice every entrepreneur needs to follow. And the post reminded me of some of the things potential clients send me.
About once a month, a startup founder will send me a “5-year business plan” with a cap table that anticipates 4+ rounds of funding. Typically, the future cap table will estimate what each founder’s future ownership will be down to the 1/100th of a percent.
I suspect that the majority of these 5-year business plans come from entrepreneurs with corporate/consulting/finance backgrounds. These new entrepreneurs are quite skilled at producing such documents and are eager to use these skills at their startup. While such skills are an asset, their importance is minimal in the early stages of a startup.
As an attorney, I really don’t need to see multiple excel worksheets of projections. And an entrepreneur, regardless of their background, does not need to be creating a projected cap table with four rounds of funding. If you do this, you are spending time working on something that will be incorrect.
As Brad mentions in his article, work on the implementation of your idea. How is your startup going to reach the next stage? How are you going to sell, etc.?
Don’t oversmart your business startup’s plan. Figure out the answers to these shorter-term questions and the long-term numbers and cap tables will work themselves out.