You know that slide. It’s the one near the end of your investor presentation showing revenue scaling from zero today to a zillion dollars in five years. The one with the hockey-stick shape that, when you beam it awkwardly onto the big screen, yields a few friendly nods and no feedback from potential investors. I had a slide like that in my very first investor presentation (for my first company, YouSendIt). I want you to find that slide and delete it because it’s one of the most dangerous things that you can show to an early stage investor. Here’s why:
1. Seasoned entrepreneurs (and investors) accept that there is very little you know about your business in the early days. You don’t know anything about your market, your customers or your product so trying to predict revenues based on early traction is futile. Showing off 5-year revenue projections should raise alarm bells; it tells investors that there is risk in the deal because they are dealing with someone who’s never done it before. The best compliment I received when raising money for my second company, PunchTab: “I like that you don’t have a revenue slide.” My answer: “Thanks, this isn’t my first rodeo.”
2. The help a very early stage company needs from investors is not about monetizing. It’s about building the team, making sure that your vision is as big as possible, and cracking the distribution nut. A focus on revenue before you get started can attract the wrong type of investor, one that’s focused more on value extraction than value creation. Build confidence instead in your founding team and how you’ve managed to execute together, identify a very large market, and created a learning engine. This is what your first investors should help you amplify. Whenever I was asked questions about the revenue plan for PunchTab I’d answer “Ask me again in 6 months.” If I was pressed I’d shut down the conversation by saying “Maybe there isn’t a good fit right now, let’s talk again when I have some meaningful revenue proof-points to share”. The currency of seed and Series A investments is distribution, not revenue. Make sure you find investors who understand this and are excited by the team and market opportunity.
3. One thing that puzzled me for a long time is why no potential venture investor ever explained to me why revenue projections are a waste of time in the early stages of a company. More often than not I’d get no reaction at all. Years later I realized that by proudly presenting an optimistic view of the future founders are negotiating against themselves. More than one young founder I’ve spoken to confirmed that shortly after raising a venture round these projections (based on no data) were used as an argument to bring in adult supervision. “Look, the numbers aren’t tracking so we need to bring in an operator.” is the usual reasoning. I’m not saying that this is the default case or that help is never needed but projecting unachievable revenues is the quickest way to let someone undermine your credibility. So don’t do it.
One gaping hole that this leaves is how to show that you’ve thought about the revenue potential of the company you’re building (you’ve thought about this, right?). A way to do this is to build revenue models (not projections) based on assumptions about market size, adoption, and any other variables that you know are core to the business. When I meet a first-time founder that’s all I’m looking for: can he identify the levers in the business and figure out what small, medium, and large outcomes could look like? If there are early thoughts on unit economics I’m giving high-fives!
So if you haven’t done it already go ahead and delete that early stage revenue slide. Spend more time telling the story of why you’re going after the market you’ve identified, how big the opportunity is and why you’re the team that’s going to win. There’s plenty of time to figure out your revenue trajectory once this is all squared away especially if you’ve noodled revenue models based on the levers in your business. Take it from me: last year I soundly beat my revenue plan of $0 and everyone around the table was overjoyed.
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