Financial projections are often an Achilles heel for founders and something to be dreaded. Why is that the case? And why is it critical to address this weakness?

In a past newsletter article, I described how an ideal founder team includes three key competencies: Sales/Marketing, Product Development/Technology, and Operations/Finance. After getting to know hundreds of founder teams from my role with the HV Startup Fund and GCSEN Foundation, one observation is that most original founders are either from the Sales/Marketing or Product Development/Tech side. Therefore, financial models are often not a strength and are often dreaded. 

From an investor perspective, it is a red flag and can be a “quick no” if the founder team is lacking the Operations/Financial role. So this role is commonly brought on later as the startup begins to raise its Seed Round funding. It can be a precondition for closing a significant lead investor. Even in that case, the person can be more of an operations, manufacturing, or logistics person and not a Chief Financial Officer (CFO) type. One way to solve that problem is to engage a part-time or fractional CFO. 

Addressing this weakness goes beyond successful fundraising; it is a Critical Success Factor (CSF) in every business. A CSF is so critical that without it, the business is likely to die a premature or long-protracted death. Either way, it is business suicide. 

The above addresses the two questions posed at the outset: Why are financial projections a weakness and dreaded? And why is it critical to address this weakness? But it still begs the question why do financial projections matter that much?

I’m reminded of the Hedgehog Concept popularized by Jim Collins in his book Good to Great. Founders are often driven by a passion they deeply care about and by the unique talent they bring to that passion to solve a high-value problem in a differentiated way. But notice the third critical question: What drives your economic engine? That is the business model. The business model is brought to life in the financial model. 

The financial model tells the story of how the business will make money and become profitable in a sustainable and growing way over time. It is financial storytelling! It tells the story of all your business strategies and assumptions underlying those strategies, not in a business plan document, but in a spreadsheet full of numbers. 

A story with logic gaps and disconnects will make for a pretty lousy story. Same for your financial story. If it is full of logic gaps and disconnects it makes for a pretty lousy financial model and financial story. It might take a bit more time in the due diligence process, but a savvy investor will find these gaps and disconnects. The founder team’s credibility will be damaged, perhaps beyond repair, leading to a “pass” on an investment. 

Storytelling can be a fun and compelling way of communicating. Although it may seem counterintuitive, the same is actually true of financial storytelling. If the founding team approaches it with that mindset, they will be more successful in fundraising and in the overall success of the business. 

_____

Tony DiMarco, Founding Manager, HV Startup Fund. Tony has been educating startup entrepreneurs since 2016 in his role at GCSEN Foundation. Co-founder of the HV Venture Hub. Founder of Natural Roles, LLC, a career coaching company, and author of The Perfect-Fit Career. Executive Producer of Veteran’s Playbook, a TV show featuring the stories of veteran entrepreneurs (Season One aired on Destination America Fall 2023).