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Will your startup really make more money per employee than Apple? Maybe! One problem we have as entrepreneurs is that VCs look at a ton of startup financial projections...but we pretty much only look at our own. That creates a huge information disadvantage for us. How can we confidently present our startup financials to someone who's looks at a thousand of them each year? Won't they be able to sniff out unrealistic assumptions at a glance? We want to make our financial model as realistic as possible (for ourselves and our employees too—not just for potential investors). Is there a way to sanity check our assumptions? Yes! There are several methods that I use (including starting with a professional startup financial projection template). Here's a quick walk-through of the revenue per employee concept: One of my sanity-checking secrets is revenue per employee. This also gives us the superpower of knowing about how many people to hire each year! Let's see how... The math is simple: take total earnings for the year and divide it by the number of employees. Notice that when we say "Average Revenue per Employee" what we really mean is "Average Revenue per Employee per Year." Here’s an example for a tech company: Year 1 revenue = $2 million, headcount at end of year = 22 Year 2 revenue = $8 million, headcount at end of year = 25 Year 3 revenue = $24 million, headcount at end of year = 30 So revenue per employee is as follows: Year 1 = $91k average revenue per employee Year 2 = $320k average revenue per employee Year 3 = $800k average revenue per employee Is it Realistic? Do I think this is believable? I use $200k per employee as a starting point for reasonable assumptions—meaning five employees per every million dollars in revenue—so I suspect that year 3 is unrealistic. Let’s compare with established tech companies (source: Business Insider with what I think are numbers from 2014): IBM = $244k average revenue per employee Amazon = $577k average revenue per employee Microsoft = $732k average revenue per employee Google = $1,155k average revenue per employee Apple = $1,865 average revenue per employee Tim Cook enjoying the fact that Apple earns so much revenue per employee $800k revenue per employee in year 3 puts this company past Microsoft and on their way to Google. Is this realistic? Maybe…I do know a ten-employee business that does nine figures…but is it likely? Looking at this makes me think that this company may have to hire more people in year 3. The same is true in reverse. If year 3 revenue per employee is $50k, I wonder why this business isn’t more efficient. Have they hired too many people? It's okay for startups that are raising money to have low revenue per employee in the first few years—that's why they're raising the money. Eventually, though, they need to figure out how to become efficient in terms of revenue per employee. That's why I like to target $200k to $600k revenue per employee in year 3. Our New Superpower: We Know How Many People to Hire One of the questions I get most often at Rocket Pro Forma is, "How many people should I hire?" First, you can check out my article on your startup hiring plan made simple. Second, we can use the information we have to reverse-engineer how many people to hire each year. Let's use this example: We can see that we're below our $200k minimum in year 1, but that's okay if we're raising money. In years 2 and 3 we can see that average revenue per employee rockets past Microsoft and Apple. Is that realistic? If anything, startups that raise money would have artificially low revenue per employee numbers (because they're using investor money to hire more people than they could otherwise afford). How can we fix this? Let's target $300k per employee in year 2. If we take our year 2 revenue of $6.840 million and divide it by $300k we get 22.8 employees. But we can't hire .8 of a person, so we round up to 23. We then divide $6.840 million by 23 employees to get $297k. Like magic we now know how many people to hire in year 2! Now let's assume that we get more efficient, so let's target $400k per employee in year 3. If we take our year 3 revenue of $12.588 million and divide it by $400k we get 31.5 employees. But we can't hire .5 of a person, so we round up to 32. We then divide $12.588 million by 32 employees to get $393k. Here's our new hiring plan—which has been sanity-checked for both ourselves and potential investors: Additional Information Headcount is a moving target so I like to just use the number of employees at the end of the year. This is inaccurate (we should technically divide by the average number of employees over the course of the year) but it has the advantage of being easy to compare with info from publicly traded companies. Also, it is possible to hire .8 of a person if we include Full-Time Equivalents (FTEs). The gig economy has blurred the lines between who exactly is an employee, and how we calculate revenue per employee. We might find revenue per FTE to be more accurate for certain businesses. You can Google the norms for your industry, and here’s a deeper dive by both industries and specific companies. In Summary I do give startups the benefit of the doubt in the first few years—when revenue may be low compared to headcount, especially if they are raising money—but I expect to see things normalize. Don't let anything I say discourage you from thinking big. I do know a few entrepreneurs who have beaten Apple's average revenue per employee numbers (and they have very nice houses). It's definitely possible. I do wonder if I need to adjust my $200k to $600k average revenue per employee per year range upward as we move toward more automation. Join our free workshop if you have questions or want a quick sanity-check of your numbers. ### Mike Lingle is obsessed with helping founders grow their businesses. He's a serial entrepreneur, mentor, and executive in residence at Babson College and Founder Institute. Check out Rocket Pro Forma if you want to quickly create your financial projections.

I’ve been working on an easy yet powerful financial template for startups at Rocket Pro Forma, and one of the tabs is your startup Hiring Plan. The main expense for many startups is salaries. It's also a huge responsibility to hire people! You're making a promise that you'll have enough money to keep them employed. That's why it's so important to be able to look into the future and plan your cash flow. I messed this up early in my career and ended up having to fire some terrific people. Trust me when I tell you that I still feel awful about it 20 years later. So let's plan our hiring properly and responsibly. Today I’m going to share my simple spreadsheet so you can plan your hiring for the next three years (and click to grab your own copy of the Hiring Plan tool). Here’s a quick video walkthrough: Here’s what the hiring plan tool looks like: Instructions for Creating Your Hiring Plan Only fill out the cells shaded in blue. Everything else is calculated for you. Change job titles as needed. You can also write people’s actual names in where appropriate. Enter the annual salary in thousands, so type 75 if you mean $75,000. Skipping the extra zeros keeps your hiring plan easier to read at a glance. Enter a start month between 1 and 36 (three years)—or leave the start month zero to not hire that position. You can change the Cost Type if needed (but don’t tell anyone I let you edit something that wasn’t blue). You’ll see the monthly cost displayed as a green line for each filled position. This lets you scan your hiring plan at a glance like this: Wow that’s tiny! I like to do my hiring plans on a large monitor, which makes it easier to zoom out. But you can see the green horizontal lines that show where you’re hiring people. Grab the Startup Hiring Plan tool Scroll down to the bottom of the sheet and you’ll see totals for salary and headcount broken out by cost type (COGS = Cost of Goods Sold, S&M = Sales & Marketing, R&D = Research & Development, G&A = General & Administrative). Then I can start doing sanity checks: Are we trying to hire too many people at once? If you’re currently two people and you’re trying to interview and onboard four new team members in a month, that’s simply not realistic. Take a moment to spread your hiring out over multiple months. See how in the picture above I’m trying to hire four people in month 15 (month 3 of year 2)? That may be too aggressive, in which case I can move two of them to the following month. Are we budgeting realistic salaries? Founders often underestimate what they need to pay to hire people, especially in 2021. It's true that startups can use equity / stock options to reduce the salaries of key team members, but everyone needs to eat and pay their rent. Check out these free resources to look up salaries by job title and location: Robert Half Salary Calculator - Scroll down to the Salary Calculator section. Leapros 2021 Interactive Salary Guide - Includes both location and company size. QuickBooks Employee Cost Calculator - Estimate how much employees cost beyond base salary. I also think that it's important as entrepreneurs to get in the habit of paying ourselves, even if it's a small amount at first. We can then figure out how to grow our salaries over time. But if we don't start paying ourselves at first we often go too long without paying ourselves—because we build the opposite habit. And if we're not paying ourselves we're actually creating an expensive hobby or weird charity instead of a business. Remember that we improve what we measure. And paying ourselves even a small salary is a form of measurement. Are we hiring the right number of people? What if we've never managed a team of people before: How do we know how many people to hire? One of my favorite metrics (which I've built into my free Financial Projections Canvas) is Average Annual Revenue per Employee. To calculate it, we divide the Annual Revenue by the Number of Employees at the end of the year. For example, if we're expecting to have $1 million in annual revenue and 10 employees in month 12, that would give us $100,000 in Average Annual Revenue per Employee. If we're expecting to have $2 million in annual revenue and 10 employees in month 12, that would give us $200,000 in Average Annual Revenue per Employee. I expect most companies to eventually fall into the $200k to $500k range for Average Annual Revenue per Employee. Don't worry so much about year 1, especially if you're raising money to hire more people than you could otherwise afford. But by year 3 of your startup financial projections you may want to fall into the target range of $200k to $500k. This is a powerful tool that allows us to figure out how many employees we should have at the end of each year. If we think we'll make $1 million in revenue and we target $250k Average Annual Revenue per Employee, we'll need to end that year with 4 employees. If we think we'll make $3 million in revenue and we target $300k Average Annual Revenue per Employee, we'll need to end that year with 10 employees. Hugely profitable companies (think Apple and Google) do over $1 million in Average Annual Revenue per Employee. Check out my deeper dive on Average Annual Revenue per Employee. Are we hiring the right roles? How do we know which people to hire? I've included some job title suggestions in the Hiring Plan, but specific recommendations are beyond the scope of this article. In short, we need to hire for: Sales & Marketing Product Development Customer Service and possibly Onboarding / Fulfillment Management, Operations, Finance Legal and Human Resources (HR), especially as you get bigger Find people who have done this before—in your industry—and ask them who to hire. Have them sanity-check your hiring plan. Next Steps Grab the Startup Hiring Plan tool and let me know how it goes! And email me with your questions. As always, it's best to spend an hour putting in something. Don't worry about whether your answers are exactly correct. The first job is to connect the dots in your head, and this will tell you which questions you need to be asking. From there, you can start to research the correct answers. ### Mike Lingle is obsessed with helping founders grow their businesses. He's a serial entrepreneur, mentor, and executive in residence at Babson College and Founder Institute. Check out Rocket Pro Forma if you want to quickly create your financial projections. Cover Photo by Israel Andrade on Unsplash

As a startup founder, it’s your job to bring in those first accounts. First of all, most of us don’t have the resources to hire a sales team when we’re starting out. Second, we learn a lot by talking to our potential customers face-to-face: how they think, the language they use, what their pain points are, and what makes them say yes or no to our offer. Third, it’s only once we understand a process thoroughly that we can teach other people how to do it. Finally, it’s only by understanding what works that we know who to hire for our sales team. Jason Lemkin, serial startup founder and venture capitalist, thinks it’s crucial for founders to close the first batch of B2B deals themselves “The CEO/founder should close at least the first 10 (or 20 or whatever) customers. That way, she knows. She knows the process, what works, what doesn't. It's OK if you are 'terrible' at it. What matters i that somehow, someway, you still get those 10 paying customers closed." Fortunately, you can iterate a sales process over time just like your product. What’s important is that you put a basic sales system in place to bring some money in the door and use your early users to improve the product. Start by putting a basic sales system in place to bring some money in the door, and then use feedback from your early users to improve your product. Here’s a simple sales process for B2B sales to get you started: Determine Your Value Proposition Identify Your Targets Set up a CRM Generate Leads Qualify Your Leads Take the Meeting Close the Deal Iterate Your Product Don't Give up Need some tools to project your revenue and/or raise money? Click Here. 1. Determine Your Value Proposition Your first step is to figure out why people should buy your product in the first place. It may seem obvious to you, but many of the people you talk to won’t understand right away. They’re used to doing things a certain way, and you’ll have to convince them to get out of their comfort zone. Many startup founders include their value proposition in their elevator pitch. This language will influence the rest of your sales process. There are three main types of value propositions, and you may be able to combine more than one. Increase revenue Reduce cost Improved productivity Here's a template for your elevator pitch: “We solve [problem] by providing [advantage], to help [type of customer] accomplish [customer’s goal]. Here are [metrics that prove our claims].” If you have multiple customer segments (more on this in a minute), it helps to have unique value propositions that address each segment’s specific pain points. However, don’t make this too complicated. Your value proposition should be clear and simple so prospects understand it immediately. For example, Rocket Pro Forma is useful to two customer segments with different value propositions: Startups who need to quickly and confidently create their financial projections Accelerator programs that need to provide financial education and support to their startups. I use different language, offers, and landing pages to speak with each group. Big companies are under increasing threat of disruption. It can be powerful to explain how the landscape is changing, and your potential customer will be left behind if they don’t get with the times. Check out my article on how teaching works better than sales, and then read The Challenger Sale book. For best results, quantify your benefit as accurately as possible. Saying “Our tool increases your team’s productivity” isn’t enough. Your prospects want to hear something more concrete like “Our tool increases your team’s productivity by 30% in the first 30 days by automating 8 of your daily tasks.” Keep these 10 characteristics from Strategyzer in mind when you create your value proposition: You probably don’t need to mention competitors unless you’re asked, but make sure you’re ready to explain why your product is better for your customers. Get granular if you have to, like “We boost your productivity in 30 days, which is 90 days faster than Competitor X.” 2. Identify Your Targets Next, determine who needs your product. Start at the organizational level. What type of company would get the most value from your product’s benefits over a long period? Real estate firms? Law offices? Retail stores? Universities? Other startups? Next, narrow your scope as much as possible to these types of businesses. Remember: You don’t just want customers. You want customers who pay year-after-year, forever. For instance, instead of targeting a broad group of “real estate firms,” you might target “commercial real estate firms that specialize in deals with 10+ year leases with extensive remodeling.” Finally, identify the type of person in that organization to sell to. This can be tricky. Ideally, you want to sell to the person who directly experiences the pain your problem solves, but that person isn’t always the one who makes purchasing decisions: “There are five groups of people you have to pay attention to in any B2B sales situation: The Financial Influencer(s) The User Influencers The Gatekeeper(s) The Champion or Sponsor The Researcher(s) Each of these people, or groups, is influenced by how your product or service will affect them personally in their job. They are also looking at how your product or service affects their company. You have to convince so many people in a B2B sale, which is the reason the selling cycle takes so long.” For example, Bob is a human resources (HR) manager for a Fortune 500 company. He’s frustrated every day because he’s stuck using multiple tools and a series of Excel spreadsheets to handle his HR tasks. Bob’s life would be easier if he had a comprehensive HR tool, but he doesn’t have the authority to purchase one. He needs approval from Stan, the HR Director. But Stan isn’t involved in the human resources department’s’s day-to-day work. He doesn’t feel Bob’s frustration. How you sell your product depends on the person: if you’re talking to Bob, you have to sympathize with his frustrations and get him to advocate for you to Stan. That’s a tough hand-off, so you’ll probably also need to talk to Stan and frame your benefits in a way that directly help him. You’ll often end up having multiple meetings at the same company during a B2B sale. In fact, more meetings are a sign that your sales process is working. Also, many of the sales conversations happen behind your back! Bob and Stan may have a conversation that determines the success of your sale—without inviting you or even letting you know. This is the hardest part of B2B selling. You need to constantly be influencing an entire group of people, even when you're not in the room. Keep your messaging short and targeted for each type of person. Feed them sound bites and compelling data that they can use to sell you to their colleagues. Give them useful info that makes them look smart to the people they work with. Build a buyer persona for each target. A buyer persona is a composite of each customer segment; an avatar of the person you want to sell to. They help you focus on the needs of only the people who would buy your product. Fill each persona with important information about their demographics, psychographics, problems/pains, wants, interests, etc. For more on putting together your buyer personas, check out this post: How to Get in the Mind of B2B SaaS Customers. 3. Set up a CRM Every sales process needs a customer relationship management (CRM) tool to organize the sales workflow. First, it helps you track the (hopefully) many conversations you’re about to have. Second, the good ones can track email opens and even website pages visited, so you get a full picture of how interested a person or group actually is. Finally, CRMs help your team stay on the same page and share information smoothly. There are many CRMs to choose from. Most have a free tier, which can be great for starting out. Your CRM should integrate with whichever system you use to capture online leads, as well as the tool you use for email marketing. Your CRM contains a deal pipeline for qualified leads, which move through each phase of your workflow. Here’s an example of HubSpot’s CRM. Qualified leads start in the far left column, and then they’re moved through each phase toward the right until the deal is closed or lost. I would only add qualified leads (see below) to your deal pipeline, otherwise you'll end up with too much clutter. You want to focus only on those leads that only have a good chance of purchasing from you. Source: nectafy.com You can assign a percentage chance of success to each stage of your pipeline. When you combine that with an estimated dollar value for each deal, you can get a back-of-the-napkin estimate of how much revenue your pipeline will turn into. A CRM organizes your contacts so nothing is lost and you’re reminded to follow up on every lead. It’s a useful way to keep track of your sales workflow without trying to remember everything—which you can’t. As you refine your sales process—and especially when you hire a sales team—your workflow will become more complex. Your CRM will give you a way to track progress and share leads with each other. 4. Generate Leads Here are the main ways to find potential customers: Inbound marketing: Create content for potential customers to find. You can also run events or speak at other people’s events. The goal is to either convert them into customers on the spot OR convert them into leads (in person by asking for their business card or on the Web by collecting their email address) and then building a relationship with them that first turns them into a qualified lead (see below), and then eventually turns them into a sale. Outbound marketing: Cold-calling, cold emailing, connecting over LinkedIn, etc. Word of mouth: Do such a great job that people refer you every chance they get. You can also ask your customers for referrals. Ask your friends who they know: One approach is to ask them for advice, and get their feedback on your product. You’ll learn a lot, and hopefully they’ll either buy or refer you to other potential customers. The closer these contacts are to your ideal user, the better information and referrals you’ll receive. Short and Sweet Deals If your average sale is less than $5,000/year, you’ll want to work towards a zero-touch, self-service model. Customers should find your website, learn whatever they need, decide to buy, pay, log in, and use the application without a salesperson’s involvement. In a perfect world you want an individual employee to be able to purchase without having to ask anyone else in their company. You might offer a free version that allows your product to spread through an organization until they reach critical mass and need to buy the paid version. Successful examples of this strategy are Slack and Dropbox. That said, in the beginning you must close deals in-person to understand how to qualify leads and make sales—even if you’re getting people to try something for free. These personal interactions are too valuable to skip. Only then will you understand what they’re thinking and why they buy—and only then will you be able to automate your sales process. As venture capitalist and founder of Y Combinator Paul Graham says: “[At first] do things that don't scale" Eventually you’ll need to bring your customer acquisition cost down to below your customer lifetime value, otherwise you can easily spend more money capturing the customer than you earn. One way to cut your costs is to eliminate as many sales meetings as you can—just make sure you still make the sales! The Valley of Death If you have a long sales cycle and your product costs between $5,000/year and $30,000/year, you’re in a tricky spot. This zone is called the “valley of death” because it’s easy for customer acquisition costs to exceed the customer’s lifetime value. If your product sits in this zone, take any steps you can to shorten your sales cycle (the average length of time it takes to make each sale), limit face-to-face meetings, and reduce your overall sales costs. It also helps to create as many upsell opportunities as possible—to increase the lifetime value of your customer. When It’s Worth It If your product costs more than $100,000/year, you’re in the high touch zone. Sales have longer cycles and you’ll need a customer success manager assigned to the account to ensure the customer stays happy after they buy. Your margins should be high enough to afford an aggressive strategy of researching and reaching out to potential buyers, and you may have one or more dedicated “inside sales reps” or ”sales development reps” (SDRs) who’s only job is to find and qualify leads. At this level, an inbound system could work, but customers don’t sign up unassisted. You’ll need to schedule a sales meeting as soon as you qualify the customer, and expect to have multiple meetings with multiple stakeholders before you close each deal. 5. Qualify Your Leads Qualifying leads means evaluating if each potential customer is worth your time as quickly as possible. You don’t want to spend hours on phone calls and meetings with someone only to realize they’re never going to buy. You also don’t want to waste other people’s time, so it’s win/win every time you disqualify someone. Generally, you qualify leads in two ways: Doing research before you reach out. Asking them for info on your landing page, via email, or over the phone. You’ll at least want to know who they are, what their job title is, why they’re interested, what their timeline is to make the decision, when they’ll have the money budgeted, and who else is involved in the decision. Filter out anyone who can’t afford your product, doesn’t need it, wouldn’t stick around long enough for you to recover whatever you spend on the sales process, won’t let you talk to the actual decision maker, or otherwise doesn’t fit into the buyer personas you created earlier. It's a big world out there, so don't worry about letting people go. Take the time now to learn how to find your true customers. 6. Take the Meeting Once you’ve qualified the prospect and you’re comfortable they’re in a position to buy, set up a face-to-face meeting (in-person or over video chat). Don’t dive into the same generic sales pitch for all prospects. In fact, don’t even open with an overview of your SaaS. Instead, start by asking about their problems and how they buy software products. There’s nothing worse than a sales person who does all the talking. As Dr. Stephen Covey says in 7 Habits of Highly Effective People: “Seek first to understand, and then be understood.” For instance, you could ask… Why are you looking for a new tool? What’s the hardest part of your job? How significant is this problem you’re trying to solve? What happens if you don’t do anything about this problem? What are you doing now to solve the problem, and why isn’t that working? Do you have authority to buy a product? Who else is involved in this decision? Do you have a budget for this? What’s your timeline to make a decision? Do you have a particular purchasing process you have to follow? What alternative products have you considered? Once you have some specific information, go through your demo and tailor your pitch to match their needs. For instance, if you learn that their budget won’t support your Super Mega Enterprise Plan, you could focus on the benefits of your Small Business Mid-Level Plan. 7. Close the Deal Prepare your contract in advance. Yes it can be expensive to hire a lawyer, but it’s worth it so you can control the conversation around deal terms. Self-service apps like Slack usually provide an end-user license agreement (EULA) that customers accept as-is when they sign up. For large high-touch deals, startups usually provide an enterprise agreement and often a service-level agreement (SLA). Expect negotiations around an enterprise agreement to take weeks or even months, and you may end up talking to your customer’s legal or purchasing department. The job of the purchasing department is to get a better deal from you, so wait until you’re talking to them before you cut your price. Otherwise you may end up cutting your price twice: once for your customer and then again a few weeks later for the purchasing department. Once the prospect becomes a customer, your only goal is to onboard them as effectively as possible in a way that helps them realize the value of the product quickly. It’s critical that you reward your users with immediate value for signing up. This can be tricky. Slack, for example, isn’t useful unless more than one person creates an account. So the question for Slack becomes how can they get that to happen as soon as possible. You’ll probably need to provide customer training and support if you’re selling an expensive, high-touch product. “Every time I talk to a low-touch, self-service SaaS company experiencing massive drop-off it is always an onboarding issue. When I talk to Enterprise, high-touch SaaS companies that experience a lot of churn or non-renewals, aside from misleading sales practices, the main culprit is the customer onboarding process. Whether the Time to First Value is too long, the experience is painful, or expectations are simply mismanaged, those 'seeds of churn' can be traced back to onboarding." —Lincoln Murphy, Customer Success Consultant 8. Iterate Your Product Sales interactions are valuable tools to help you build a better product, even if you don’t gain a customer. In fact, rejection is often the best teacher. You can learn what customers want and expect, why they didn’t choose your product, and how you can improve it. You also learn the language they use. One of the most valuable—and underused—sources of information is your sales prospects who didn't buy. Find out why and solve those issues for your next sales prospect. Alan Gleeson, B2B tech marketing consultant and founder of SaaS Resources, recommends using early sales attempts to refine your application: “While some of these initial conversations may translate into genuine sales prospects, you will be better served in the long run if these are viewed more as collaborators," he says. "Offering free access to some of these early contacts in return for social proof (case studies/testimonials/logos) is a useful way to get people using the application so future development decisions can be based on observed data rather than hypotheses." Support calls are also hugely valuable for learning how to improve your customer’s experience (plus it’s great that you have customers). 9. Don't Give Up As a founder, you don’t want to stay the number one sales person forever. Someday you’ll have a team of people—led by a VP of Sales— to free you up to grow the company in other ways. But in the short term, it’s up to you to bring in those first accounts. Sales isn’t easy—no one likes to be told “no” over and over again—but it’s critical for growth. Keep your chin up, follow this process, and you’ll get there. And remember, the answer to most sales problems is to go find more qualified leads. Sales is a numbers game. The more people you talk to, the more sales you will eventually make. Good luck! ### Mike Lingle is obsessed with helping founders grow their businesses. He's a serial entrepreneur, mentor, and executive in residence at Babson College and Founder Institute. Check out Rocket Pro Forma if you want to quickly create your financial projections.

We Finally Did It! In 2009 we raised $2 million in venture capital for SlideRocket. We had been building the business for over a year and had been talking to potential investors for almost as long. I got to meet amazing people like Fred Wilson and Tim Draper along the way—most of whom said no. What makes some investors say yes? I’ve learned to focus on 8 different areas to grab people’s attention. Today, I’m going to share some of the most effective ones with you using examples from actual pitch decks. The Eight Key Drivers for Your Investor Pitch Traction Team Business Model Go-To-Market Strategy Rational Financials Growth Opportunity Defensibility The Ask Bonus Suggestion Check out my free topics and templates for your investor pitch deck, as well as the Rocket Pro Forma financial projections template, at RocketProForma.com/resources. Here's a quick video walkthrough of what makes a great startup pitch deck: People read about venture capital and to think it will be easy—but many startups find out that it’s not. Raising money takes a smart strategy and a ton of effort. Here was Buffer’s experience: “The law of averages really comes into play with raising investment. Overall, we probably attempted to get in contact with somewhere around 200 investors. Of those, we perhaps had meetings with about 50. In the end, we closed a $450k seed round from 18 investors. Perhaps the most important part of our success in closing that round was that Leo and I would sit down in coffee shops together and encourage each other to keep pushing forward, to send that next email asking for an intro or a meeting. In many ways, the law of averages is the perfect argument that persistence is a crucial trait of a founder.” Can I guarantee that you’ll be able to raise money? Probably not. But can you increase your chances significantly? Absolutely. The Main Takeaway The most effective strategy is to take your pitch out of the realm of “I think” and into the realm of “I know.” Two magical things happen once you do this: You’ll be able to raise money You may not need to raise money. I’ve compiled all 8 areas into an easy-to-reference training guide with specific examples that you can download and follow as you develop your own pitch deck. What Are Investors Looking For? Peter Livingston is a professional angel investor based in Miami who looks at 60 to 80 pitch decks per month. That’s close to 1,000 every year. He’ll invest in maybe 20 startups this year, which is around 2%. You have to be the best of the best to get his attention. Wow. How do you make sure that you stand out in the crowd? First of all, here’s what not to do. At least half of the decks I see basically say, “Give me your money and I’ll figure it out.” Yuck. This may work if you’re raising money from friends, family, and fools who believe in you (thank you, Mark Volchek, for that term). If you’re talking to a professional investor like Peter, however, you’ll need to put the “plan” in “business plan.” Investors often look for traction, team, and who else is investing before they even consider the what you're working on. Your idea, and the specifics of your product or service, are actually the least important part of your pitch deck. There are millions of good ideas out there, but only a few people who can actually make them work. Here's a walkthrough of the main things investors want to see in your startup pitch deck, along with actual examples of slides, 1) Traction This is where the rubber meets the road. Investors hear a ton of people claiming to know what will happen (“I think”), so you stand out by proving that you’re already making it happen (“I know and here’s the data”). Traction is a measure of how close you are to reality—i.e. making money. Leo Widrich, one of the founders of Buffer, says it best: “We quickly realized that as first time founders, this was probably our only way to raise any money: by focusing everything on the traction slide.” Here’s an example of a traction slide that sucks. The total number of signups is the kind of “vanity metric” that Eric Ries talks about in The Lean Startup, because the chart will only ever go up and to the right. You will keep getting signups, so it doesn’t mean anything. You will go out of business getting signups if no one sticks around to use your product. The only thing that matters is how many people come back and use your product or service repeatedly. Now look at this great slide from Buffer. They are showing a 1.5% conversion rate from free to paid (800 paying users out of 55,000 total users) so you can see that this is a real business that’s growing. You can also see that they have a handle on their finances because they know their run rate and margins. This is what makes people want to invest! Here’s another example from a company called Blinq that’s seeing 60% daily active users out of their total installed base, and people are using the app 5 times per day. So that tells us the usage, which is what’s actually important. Check out Fred Wilson’s excellent blog post on the atomic unit of your product / service, where he explains how to think about engagement. Show investors that your audience is engaging in your atomic unit. 2) Team Have you done this before or is this your first time? It’s certainly helpful if at least one of your founders has crushed it with a previous company or two. Blinq has founders with maybe an exit or two (but it’s not totally clear what “2 scale businesses” and “2 successful startups” mean) and one of them is a bestselling author. These are things that make me trust the team more. It doesn’t mean they’re necessarily going to succeed, but it works in their favor. But what If you don’t have those kind of credentials? You still need to prove that you’re the right people for the job. Here’s an effective slide from Buffer. The two founders don’t have previous exits, so instead they talk about what they’ve already done for Buffer. The first guy took it from idea to revenue in seven weeks—wow that’s impressive! And the second guy grew Buffer from 200 to 55,000 users, so okay I believe. Plus they have some fantastic advisors involved. So it seems like there’s a good chance this team will succeed, even without previous exits or a bestselling book. 3) Business Model First you need to clearly explain what you do. You’d be amazed by how many CEOs make this look hard! Sometimes I walk out of a meeting not really understanding the entrepreneur’s vision. Ugh. Practice explaining your business to non-technical people. They should be able to understand what you do in 30 seconds or less. Airbnb’s pitch deck starts with a summary, “Book rooms with locals, rather than hotels.” The slides lay out the problem and their solution. Now I have a clear mental and visual picture of what Airbnb does, who they’re appealing to, and the value to their customer. Airbnb also included some product shots: Does your company have a way to make money? Yes, I know that Facebook delayed making money while they built an audience, but it was always pretty clear how their business model would work. Can you clearly articulate how you’ll make money? Our job as entrepreneurs is to create a working business model. Instead we as entrepreneurs tend to fall in love with our product or service—but that’s only one part of the equation. Unfortunately I talk to many entrepreneurs who are very excited about their product or service, but haven’t really thought through who the customer is, how they’re going to reach that customer, how they’re going to extract value from that customer, and how they’re going to stay alive as a working business. In this slide from Airbnb’s pitch deck they explain that 10.6 million trips have been planned on their service and they take a 10% commission. It makes complete sense. What if your startup doesn’t have 10.6 million transactions yet? Here’s a slide from Buffer where they talk about their business model. They have a freemium version and they’re showing 2% conversion from free to paid. They have 5% churn. They know the lifetime value of their customer. And they know how much they can pay to acquire a user. These are all real numbers supported by data, which brings us back to traction. There Are 5 More Key Drivers for Your Pitch Deck Okay this post has already gone longer than usual, and we still have five more areas to focus on. Grab my walkthrough of all 8 areas—including practical examples—that you can refer to when creating your own pitch deck. If you can only do one thing, focus on traction. Show that people are using your product or service, and hopefully that they’re paying for it. Joel Gascoigne of Buffer says, “My advice for first time founders who want to raise funding is almost always to put that thought aside until you have good traction. Focus on product/market fit. When you have good traction, it becomes much easier to raise funding.” Here’s a quick reminder of the 8 areas that interest investors. Every company has a different balance. Traction Team Business model Marketing Plan Rational financials Growth opportunity Defensibility The ask Mike Lingle is obsessed with helping founders grow their businesses. I'm a serial entrepreneur, mentor, and executive in residence at Babson College. Check out Rocket Pro Forma if you want to quickly create your financial projections.

Work your way up to your dream investors. I was a DJ in New York City for over a decade. I would sit home and work on my skills and I got really good. But there were some things I couldn’t practice by myself: I felt a lot more pressure when I had an audience. Songs I thought would work sometimes fell flat in the club. I had to learn to keep giving the crowd what they wanted, even before they asked. It was easy to concentrate at home—but in the club there was always someone talking to me (and they were usually drunk). So guess what? Even though I practiced a lot, my first few live performances were…choppy. What does this have to do with raising money? I look at a lot of pitch decks. A few are great, and most of them need work. I go to a lot of investor meetings and I watch entrepreneurs trip over the same things that I did while DJing: They have to learn to play to the audience People are always interrupting and asking unexpected questions There’s a lot more pressure. So what’s a founder to do? Simple: figure out a way to start with audiences that don’t matter as much. Learn from them. Make your pitch better every time. Sometimes this is as easy as changing some text on a slide. Sometimes we have to do some homework to make our startups stronger. We pitched 30 to 40 investors when we were raising our Series A—and all of them said no. Then, all of a sudden, we received three term sheets all at once. Did we get lucky? No! We got much better at pitching at the same time we were working on our business. We finally crossed the threshold where we were attractive to investors. Three of them wanted to write us a check! Here’s a strategy I call the Reverse Investor List (check out the video walkthrough at the bottom of this post): Start by rehearsing your pitch deck often. You don’t get to skip this step. Next, make a list of all the potential investors you want to pitch. I like use a combination of my personal contacts, LinkedIn, AngelList, and Crunchbase for this. Look for people who have invested in startups in your space. Don’t worry if you don’t know each investor (I’ll write another article about getting personal introductions). Prioritize the list. I like to use two factors: how much I want them to invest, and how likely they are to invest. Reverse sort the list, so that your least likely suspects are at the top. Start pitching to your least likely suspects first. Learn from each meeting and update your pitch deck and financial projections as needed. Work your way to your most dream investors. By the time you get to them your pitch will be strong! Here’s the video walkthrough: Your first audiences will be tough because they won’t like your idea and they won’t want to invest. And that’s what you need at first. Let them watch you stumble over your words! Let them ask you the tough questions! Let them tell you why your business doesn’t have a chance of succeeding! Ask them as many questions as you can. Ask them what it would take for them to be excited about investing in your startup. Then go back to your desk and update your pitch deck. Proactively answer the toughest questions in the first few slides. Take their suggestions to find a co-founder, or get some customers, or test your marketing, or whatever. And then go pitch the next potential investor. What happens is that you get better each time. It’s painful at first, but it gets easier. And if you’re working on your business at the same time you’re working on your pitch deck the whole thing becomes much more compelling. Your pitch gets stronger and stronger. So by the time you get to your best and most likely investors you’re on fire. Your pitch deck is awesome, you know it cold, you’ve done the work to strengthen your business model, and you’re answering people’s questions before they even ask them. And you get funded. Pro tip: Once you’re happy with your pitch and you’re focusing on your most attractive investors, First Round Capital suggests that you “group them in batches to better evaluate and select them,” because “you want to maximize not only the number of offers, but also the chance they’ll come to you in a similar time period.” Smart. Featured Download: Grab my Reverse Investor List template to quickly rank your investors. This strategy gives you the best chance of raising money from the people you want most. ps- This trick also works for refining your sales pitch to potential customers. Mike Lingle is obsessed with helping founders grow their businesses. I’m a serial entrepreneur, mentor, and executive in residence at Babson College and Founder Institute. Check out Rocket Pro Forma if you want to quickly create your startup financial projections.

I just wrapped up a webinar walking through finance basics for startups, pro forma financial projections, the three financial statements, cash vs. accrual (they work well together), we love COGS, and fun with business models. Here's what we covered in the webinar, and I've included the Q&A below: How can entrepreneurs present financial projections to investors and stakeholders after the model is conceived? I've also released my Rocket Pro Forma financial model spreadsheet that automatically creates a killer pitch deck slide. I've included a bunch of other resources for startups on the site as well. My goal is for you to be able to draft your financial model in an afternoon Yes, really! (and you can also grab only my financial projections slide template) I would either send your slide to investors in advance or give them a few minutes of silence to digest if you’re presenting live. People aren’t good at taking in a bunch of information while listening to you talk, so give them some space before continuing the conversation. I also love ending pitch decks with a milestones slide that shows how much you’re raising, how long it will last you, what you’ve already accomplished without this investor’s money, and a few key milestones you’ll reach once you have the funding. I like to leave the milestones slide up during discussions with investors because it frames the conversation you want to have (rather than ending on a Thank You slide that basically just wastes space). When is it the right time to raise capital? There's no right answer. In fact, some businesses succeed without ever raising money. The most common approaches I see are: Bootstrap to get the first customers with a minimum viable product, and then raise a bit of money ($250k to $1 million) Raise a smaller bit of money ($25k to $250k) and use that to get the first customers with a minimum viable product. Raise more money ($1+ million) to start the company. This is usually easiest for second-time entrepreneurs and rock star teams. Again, there’s no right answer. Please feel free to chart your own course. Depending on the business, is the cash method better than the accrual method when it comes to accounting? (For example, businesses in the food industry or hotel industry) You'll end up using both the cash and accrual method together. Accountants use three main financial statements for every business: Income Statement (usually on the accrual basis) Cash Flow Statement (on the cash basis) Balance Sheet (on the accrual basis) These three financial statements work together to give an accurate picture of your startup. Here's a quick walkthrough of cash and accrual, and how you'll use them for accounts receivable, accounts payable, and deferred revenue (a superpower of subscription business models): Does my pro forma need to capture historical financials up to the present day? If your business has historical financials, I would only share them with people who are actually interested in investing (i.e.- I would save them for a second, third, or fourth conversation—rather than emailing your historical financials to strangers and bringing them to a first meeting). I would also keep historical financials on a separate slide from your pro forma projections. First, this is just easier so you don't have to keep updating your pro forma. Second, I prefer to paint the picture of the future separately from the past. How far in the future should my pro forma go? I recommend projecting three years of financials. Why three years? The world is moving so quickly that it’s hard to plan even three years ahead. I used to do five-year projections, but switched a decade ago and haven’t looked back. If you're working in hardware or medical devices, investors may ask for 5-year projections because it takes so long to get to market. Which KPIs should we highlight? I would highlight the one or two key metrics that drive your business. These typically include number of sales / transactions, number of subscribers, monthly active users, and monthly or annual recurring revenue. What detail gives comfort to investors, and what overwhelms? Please see my pitch deck financials slide template for a walkthrough of specific recommendations on how much detail to show to potential investors up front: rebrand.ly/FinancialSlideTemplatesWX. Once you find investors who are interested, they’ll ask for more information over time. Professional investors will run your startup through a due diligence process after they give you a legally binding term sheet and before they invest. They’ll want to review your financials in detail along with contracts, they’ll ask to speak to your customers and employees, and they’ll request conversations with personal references. It’s a good idea for you to speak with other founders they’ve invested in to make sure there’s a good fit. I am interested in learning more regarding the investor's perspective on financial projections. Given the speculative nature of forecasts, what are investors looking for from entrepreneurs before deploying capital? Honestly, most professional investors want to see that you can grow big enough to make them rich. They understand that actual results may vary, but they want to hear your thought process. Their main criteria for investing is usually their confidence in you, so it’s important that you make them feel comfortable about both your vision and your management skills. I also recommend doing some work to reduce the speculation as much as possible. Can you quickly build a minimum viable product and sign up some customers? Can you run some tests on Facebook and Google Ads in order to better understand your customer acquisition costs? Etc. Where can I find benchmark data for SaaS Companies, including how much they spend on COGS, sales and marketing, etc. Also How they finance their working capital and what interest rates they have. Check out annual reports of publicly traded companies in your industry, which are available for free in the Investor Relations section of their websites. For SaaS you could check out Salesforce and Zoom. You can look up industry-specific Gross Margin percentages (start here and here), and you can also check out the income statements of publicly traded companies in your industry. How do you use forward-looking financials, monitor performance of key indicators, then refine the predictions to make them more accurate. i.e. we have found ourselves (especially on the revenue side) predicting some sales ramp, not achieving it, then re-predicting a new growth projection. I figure this is normal, but how do we "teach" the model so that we can have more confidence in the new projections than the old? You’re not alone! The hard truth for many startups is that expenses are real—but revenue is imaginary. This is really a question about building a predictable sales pipeline. I suspect that you need to do some more work around customer validation, marketing, and pricing. I recommend spending a lot more time listening to potential customers and truly learning to understand their needs. I also suggest reading Predictable Revenue and checking out this free World Domination eBook from Sales Hacker. From the investor side; what are some good questions to ask founders/CFOs to understand if they have good financial model practices (as above) and gain confidence in their model and process. First, I think you want to see that the founders have thought through the finances for themselves. They should be able to explain their assumptions to you. They should be able to adjust their model as the business evolves. I don’t think you necessarily get there in your first conversation, so keep diving deeper every time you speak with the entrepreneurs you’re interested in working with. How do you think startups should adjust their projections during the pandemic? I would reduce spending now in order to conserve cash, at least until there’s a clearer timeline of what comes next. I think this may go on for a while. Even once we’re out of our homes, it may be a long time before everyone’s comfortable taking their family to a restaurant, a movie, an airport, an amusement park, or even the grocery store. Some industries have benefited from so many people being home and online, so adjust your approach accordingly. Do you have any templates you might suggest? Please grab my Rocket Pro Forma financial projections spreadsheet plus other resources at RocketProForma.com. Mike Lingle is obsessed with helping founders grow their businesses. I'm a serial entrepreneur, mentor, and executive in residence at Babson College. Check out Rocket Pro Forma if you want to quickly create your startup financial projections.

“I feel like I’m pulling numbers out of thin air. It's still unclear to me how to ‘project’ and build believable financial assumptions.” — Liz Good news: everyone feels this way and it's totally normal! Many entrepreneurs worry when it comes to their numbers. I almost drove my first company into the ground. That’s what it took for me to decide to learn enough startup finance to be successful. Start by filling your brain with questions, not answers The important thing is to start building your mental map. Don’t worry about getting the numbers exactly right, or even close. No one can accurately predict the future (ahem, Covid) so don’t worry about precision yet. Here’s how powerful this is: “I’ve worked through the Rocket Pro Forma hiring plan and realized how much $$ gets spent on salaries. Thus, I am focusing on key positions (salaried) in these early years, and using independent contractors in budgets for projects or consulting, hourly for fulfillment, and interns where needed (they can be wonderful help!).” — Liz again What an incredible confidence boost in just a few days! Liz put together a first draft of her pro forma projections, realized she didn’t like it, and created a version she likes better. Best of all, she can now explain to anyone—including an investor—why she’s taking this approach. Just get started and keep moving. The answers will come to you as you fill your brain with questions. You’ll learn in stages: Pulling ideas out of thin air Researching likely answers Adjusting as you run your business Mastery based on experience & data You may only need to get to stage 2 to raise money, although many investors respond better at stage 3. Stage 1: Pulling ideas out of thin air Here’s what this sounds like: “I have been gathering exact data for operating expenses, too, and made advances in product development which is a big part of COGS [cost of goods sold]. I still have to work out the revenue model. I am clear how it works conceptually but am unsure how to translate into the model and actual numbers.” We can actually watch the learning happening here. Find a good pro forma template for startups and work your way through it. Think of your startup’s pro forma financial projection as a living document that will evolve over time (exactly the same as your pitch deck, except that you’ll keep using—and improving—your pro forma projections even after you raise the money). The goal of the first time through is to build the mental map of how money flows through your startup, so don’t worry about the quality of your answers yet. You’ll learn to find better answers later. Stage 2: Researching likely answers You’re not the first person to start a company, no matter how unique your idea is. There are standards and industry averages that investors expect to see in your startup’s financial projections. These aren’t mysteries, and they’re easy to find once you start looking for them. For example: You can look up industry-specific Gross Margin percentages (start here and here), and you can also check out the income statements of publicly traded companies in your industry. I recommend aiming for annual revenue per employee of $200k to $500k by year three of your pro forma financial projections. Anything less makes you look inefficient, and anything more starts to make you look unrealistic. Here's my deeper dive on revenue per employee. Your conversion rate (CVR) is what percentage of visitors to your website purchase and/or take some other action like email registration. A good starting guess is 2%, meaning that for every 100 visitors to your site, 2 people will take the action. You may get better over time and converting visitors, so a good financial model template will let you adjust your numbers for each year. The subscription lifetime is how many months your subscribers stick around before canceling your service. A good starting point is usually 18 to 24 months. Again, you may get better at retaining subscribers, so a good financial model template will let you adjust your numbers for each year. Etc. You can do a little research on any metric—ask Google and/or the mentors you work with—to find a good starting point. I find it’s best to get several opinions and decide from there because no one has all of the answers, especially when it comes to your business. Stage 3: Adjusting as you run your business Magic happens when you find your first paying customer—and your second, your third, and beyond. You haven’t created a business unless you have both revenue and expenses (without revenue it’s just an expensive hobby—or an unofficial charity). As you start spending and making money, you’ll be able to adjust the assumptions in your startup's financial projections based on actual results. For example, founders often ask me what their conversion rate (CVR) and cost to acquire a customer (CAC) should be. There is no "should." There is only the individual answer for your startup—which no one else can answer. Here’s how I started answering this question when I launched Rocket Pro Forma: For CVR (conversion rate) I compare weekly unique visitors tracked in Google Analytics with the number of weekly purchases. My CVR hovers between 3.8% and 4.2% each week. For CAC (cost to acquire a customer) I first need to know what it costs to get a complete stranger to look at the RocketProForma.com website. I ran a test on Facebook Ads that cost me $64.67 to learn that my cost per click averages around 60 cents: Now I can calculate my CAC as ( CPC divided by CVR ). In my case this is ( $0.60 / 4% ) so my CAC = $15 per customer. I can compare this to the $44 to $99 that my customer spend per purchase. So my revenue per customer is 3x to 7x my cost to acquire each customer. I should be able to build a healthy business off of these numbers. And it cost me $64.67 to figure it out. Stage 4: Mastery based on experience & data Not only does your skill with financial projections improve over time, your data gets better as you run your company. You’ll also start adding to your management team as you grow, so you’ll have help. Possibly even from seasoned executives who have done this before. You’ll never achieve perfection, but you’ll learn to come closer each time. Here’s what I don’t recommend One big benefit of using a pro forma template for your startup’s financial projections is that you get to see the complete map. One company I spoke with decided to skip the template and build their own. They showed me what they created—but they had left out key items like the hiring plan, cost of goods sold, the cash flow statement, and the balance sheet. This often leads to worse decision making and awkward conversations with investors. In fact, I made this mistake with my first business and nearly drove it into the ground. I’ve been in meetings where the VC has asked: “Can I see your cash flow statement?” “Can I see your balance sheet?” “What is your cost of goods sold?” "Can you walk me through your hiring plan?" Do you want your answer to be that you decided to skip those things? Was it because you didn't understand them, because you didn't think they were important, or because they seemed like too much work? Look for a complete financial projections template and take the time to work through it. Answer all of the questions in order to start building the mental map. Your future self will thank you! Think of it this way: you'd use a map to take a road trip—especially the first time. Once you've done the drive a few times you can start to look for shortcuts and create your own route. Questions and answers Here are some questions from entrepreneurs I’m working with. How accurate do my assumptions have to be? Are we talking exact prices and COGS? What if there are changes? Your first goal is to work through the model, answering all of the questions without worrying about whether they’re correct. Think of your startup financial projections as a living document that you will definitely change, especially as you gather feedback from advisors and investors. Which KPIs are critical for our business, and how do I identify and learn about them? Let me demystify this for you. This is from an actual business plan: The proposed innovation will contribute to our company’s overall revenue goals by significantly improving the product mix. Our estimated revenues for the next three years include $1.2m for 2020, $4.7m for 2021, and $10.4m for 2022. These projections are based on the assumptions of a 0.40 viral coefficient, a 5% increase in advertising monthly starting with buying 2,000 users at a $2.94 customer acquisition cost in November 2020, a 12-month lifetime, 12% conversion rate during freemium, $12 monthly subscription, and $0.14 monthly advertising revenue per user. These assumptions are all based on industry medians from the games and education industries, where needed. Did that freak you out? Don’t worry, you’ll get there—just like you’ve learned everything else in your life. And you don’t actually have to become an expert. The most important sentence is “These assumptions are all based on industry medians from the games and education industries, where needed.” Most of what you just read are assumptions you would put into a financial model—meaning that these are things that you will figure out as you grow your business. The only outputs from the model are, “Our estimated revenues for the next three years include $5.3m for 2017, $7.7m for 2019, and $12.4m for 2020.” The model doesn’t give you all the answers. Instead, your job is to get better at knowing what to put into the model in order to get the most accurate predictions back out. How do I learn how to read the Income Statement, Cash Flow Statement, and Balance Sheet? I need a remedial course in understanding these three things. Short story: I think that accountants make this more difficult than it needs to be. I feel so strongly about this that I’ve created a free pitch deck financials slide template that combines the income statement and cash flow statement—because it’s easier if we can see these two items together: Long story: You don’t need to be an accountant in order to understand the three financial statements, but you do need to understand cash vs. accrual accounting (you'll use both). Here are what the three financial statements do: Income Statement (also called Profit & Loss Statement, or P&L)—Shows your company’s revenue, cost of goods sold, and operating expenses, along with items like interest, taxes, and depreciation. This is the document that your company submits to the IRS when paying taxes. The income statement uses the accrual basis and does not provide an accurate picture of the cash available to the company at any given time. Cash Flow Statement—Exactly what it sounds like. Solves the problem that the income statement doesn’t accurately reflect cash. Calculated on the cash basis. Balance Sheet—Shows the net worth of your company at any given time. The basic formula is (Assets minus Liabilities equals Shareholder Value). If you’re WeWork your shareholder value might be negative: (It took me 2 minutes to grab this from WeWork’s public documents on the SEC’s website. I simply Googled “wework financial statements,” clicked into the first link, and then searched for “balance sheet.”) If I am asking for $1.5M as a pre-seed, pre-valuation raise, is it showing how I invest those funds to generate X and get to the next round in 18-24 months? Exactly! A good pro forma template should help you figure out: How much money you need How long that money will last (this is called your runway) What you’ll be able to accomplish with that money I recommend putting this into your Milestones Slide when you’re pitching investors. Why/how even do projections past your first round? How can you even show profitability at any early stage? We raised a $2 million Series A round for one of my startups, and I asked our VC how they decide which companies to invest in. He told me that they have to believe a startup can IPO. That means they want to see that you have a plan to grow exponentially larger as quickly as possible, which is likely to cost more money than you’re raising in the first round. That being said, it’s certainly possible to raise money from angel investors who won’t be as obsessed with exponential growth. If you're building the business with VC money, then growth is often the priority over profitability. Otherwise if you're building the business for yourself, you'll want to focus on profitability sooner. First decide the business you want to build and the size you’re aiming for. Then go out and find the right investors to help make that happen. ### Mike Lingle is obsessed with helping founders grow their businesses. He's a serial entrepreneur, mentor, and executive in residence at Babson College and Founder Institute. Check out Rocket Pro Forma if you want to quickly create your financial projections.

My 3-year financial projection template for startups Today I’m going to give you my killer financial projections slide for your pitch deck. It’s exactly what investors want to see, and you can grab it here. My formula is: One or two key metrics (KPIs) Income statement (Profit and Loss or P&L) Headcount Cash This format gives both you and your potential investors everything you need to see to understand your startup's financials at a glance. It shows you everything you need at a glance, tells a complete story, makes you look smart, and helps you impress investors. It's also great for running your business—even if you're not raising money. Here's a video walkthrough of my financial projections slide template: When you're raising money it's important to have a financial plan to present to investors. They want to see that you've thought about your costs and your growth. They want to be able to talk with you about your numbers and the assumptions behind them—even though they understand that reality will turn out to be different than what you're projecting. Imagine that you're the investor and you're about to hand thousands—or millions—of dollars to a startup. Would you want them to have a handle on their financials? The good news is that you don't have to become a financial whiz or a math expert! You just need to understand the basics and be able to present them to investors. This article will help you get there. The Best Financial Projections Slides for Your Pitch Deck Here’s my favorite financial slide template. This is for a subscription (SaaS or “software-as-a-service”) company, and I'm using condensed version of the slide, which is my favorite simplified format to impress investors: Some founders push back that this looks too complicated, but I find it’s exactly what investors want to see. Believe it or not, I simplified this from a version I used to use with all twelve months broken out for the first year. You can grab the pitch deck financial slide template here, and I've included a few different versions: Condensed Version (quarterly in the first year) or Full Version (monthly in the first year) Presentation Slide or Spreadsheet Tab Want the full spreadsheet template for your financial projections that automatically creates this pitch deck slide for you? Check out Rocket Pro Forma. What If You're Not Raising Money? Even if you’re not raising money, it’s important to get in the habit of creating and sticking to a budget for your company. Successful startups know how to manage their cash flow. You'll get better at making predictions the more you practice. Wait, you say you’re working on your product for the next few months? It’s still important to start thinking about cash management now. You’ll thank yourself later for being prepared before things start moving more quickly. The first time I sat down to write out my business plan (yes I’m that old lol) I didn’t know how to do the “Pro Forma Financial Projections” so I just left it out. I didn’t even know what “Pro Forma” meant. Since then I’ve helped raise millions of dollars for both my own and other founders’ startups. I’ve put together hundreds of pitch decks—and I’ve reviewed thousands more. In this article I’ll make it easy for you to create killer financial projections by sharing what I’ve learned. Oh, and in the startup world, “Pro Forma Financials” mean forward-looking financials based on assumptions. They’re your best estimate of your future results. Finance Is the Language of Business Indeed, writing, when it first developed in ancient Sumer, was invented for financial contracting and accounting. — William N. ::, Yale School of Management Some of the entrepreneurs I talk to are great with numbers. This is always refreshing, and it gives me confidence in their ability to execute. Other entrepreneurs either don’t how to create their financial projections or they don’t know how to present their pro forma in their pitch deck. It’s crucial for founders to either understand their numbers or find a co-founder who does (and even then you’ll want to learn what’s going on). We’re going to tackle both issues, and I’ll give you my favorite financial slide template for your pitch deck. Problem solved! What to Expect Yes we all understand that these financial projections are a guess. It’s important, however, that they’re your best guess. Your job as an entrepreneur is to make your best prediction…and then go out into the world and prove yourself either right or wrong. Then come back and update your best guesses based on what you’ve learned. One major benefit is that you'll build a mental map of how your business works in terms of revenue, costs, and cash flow. You'll identify a ton of questions you need to start finding answers to. That's okay because it's part of the process. Take the time to put something together that you think can work. Don’t worry that it’s not perfect. You’ll improve it as you move forward, both from what you learn as you try to hit your numbers and from the feedback you receive from investors. I was talking to an entrepreneur who said he was embarrassed by the first financial projections he put together. So was I! I told him that’s what’s supposed to happen. We all learn by doing so just get started. Keep at it, ask for help, and don’t get discouraged. It took me a few tries and several years before I truly started understanding financial projections (and that was while I was already running my startup). But don’t worry because I’m giving you a huge head start. How Do I Make Money and How Much Does It Cost Me? These are the two main questions in every investors mind, and this slide tells them exactly what to expect. It’s important to provide more detail in the first year. I used to do every month, but now I like starting with the first three months followed by the next three quarters. Sometimes investors ask to see every month of the first year, which is why I built my Rocket Pro Forma financial projections template to automatically create both slide versions. Revenue is imaginary while expenses are real—until you prove otherwise in the real world. I then show year 1 in summary as well, followed by summaries for years 2 and 3. I used to build. 5-year financial projections but no one seems to be able to predict that far ahead anymore. Investors are looking to sanity-check what the entrepreneur is telling them, so we’ll give them enough info to do this at a glance. It’s best for both your startup and your investors if you err on the conservative side, so that any surprises happen on the upside rather than the downside. Startups have a habit of underestimating their revenue while also underestimating their expenses. Remember that revenue is imaginary while expenses are real—until you prove otherwise in the real world. The Anatomy of an Income Statement I find that financial projections work best when constructed as an income statement (also called a profit and loss statement) with a little bit of extra info at the top (key metrics) and bottom (headcount and cash flow). Let's do a quick review of the income statement. The basic formula is Total Revenue minus Cost of Sales (COGS) equals Gross Profit, which is the money you have left to pay your Operating Expenses. From here, Gross Margin % equals Gross Profit divided by Total Revenue. Subtract Operating Expenses (Sales & Marketing plus Research & Development plus General & Administrative) from Gross Profit to arrive at EBITDA (you may also hear some startups call this EBIT, although technically EBITDA is different than EBIT). Here’s the formula for the income statement: + Revenue – Cost of Good Sold (COGS or sometimes Cost of Sales in an online business) _______________ = Gross Profit – Expenses Sales & Marketing Expenses (S&M) Research & Development Expenses (R&D) General & Administrative Expenses (G&A) _______________ = EBITDA Here are a few things to keep in mind: The Income Statement lies about cash! Your startup can have a healthy income statement and still get into financial trouble. I actually made this mistake early in my career. That's why I include a cash line at the bottom of my 3-year pitch deck financials slide. The Income Statements is also called the Profit and Loss Statement (or P&L for short). Also, I remove the decimals and show the revenue numbers in thousands (because hopefully I’ll be generating enough revenue that all of the zeros will make my financial projections look crowded). This means that I divide the dollar amounts by 1000—so $6,000 becomes $6 and $23,000,000 becomes $23,000. The Key Ingredients of Your Pitch Deck Financials Slide Here’s what investors want to see in your financial projections: One or two key metrics (KPIs) Income Statement / P&L (Revenue, Cost of Goods Sold / Cost of Sales, Gross Profit, Operating Expenses, EBITDA) Headcount Cash Position It's important to provide enough detail that investors can understand your business model, but not so much detail that your financial projections slide becomes confusing. If an investor is interested you’ll have the opportunity to provide more detail, so don’t worry too much if you’re leaving some of the complexity of your business model out of this top-level slide. A Walkthrough of the Financial Projections Template Let’s review each component of the financial projections slide template individually: 1. One or Two Key Metrics (KPIs) This should be whatever your key metric is that drives growth. This goal is to give investors a quick glance at how many subscriptions, products, or services are you planning to sell. You’ll want to tailor this to your business model. In this case we’re using Paid Subscribers, since that’s the key revenue driver for this startup. If you’re not going to have revenue for a while then this should be the key growth metric that drives the eventual success of your business—which in Facebook’s case might be Daily Active Users. Investors want to see growth somewhere, either in revenue or in usage. Keep this section as simple as possible. It's fine if it's just one metric. Here are some examples of KPIs (key performance indicators) you might use: # of Sales per Period Current # of Paid Subscribers # of Active Users $ ARR (annual recurring revenue) or $ MRR (monthly recurring revenue) 2. Income Statement / P&L The Income Statement is also called the Profit and Loss Statement or P&L for short. Here we include the main elements of the Income Statement that investors care about in the first few years of your startup's growth: Revenue Revenue is a key driver for the income statement, and every business must eventually make money in order to survive. I recommend including a line for "Revenue Growth %" to show how quickly your sales will ramp. Investors can use these numbers to sanity-check your projections, especially if they know your industry well. Revenue growth also gets investors excited. For example, if you’re selling an IoT (Internet of Things) product like the Nest Camera you might have revenue streams from both unit sales and monthly subscriptions. Here you can see separate KPIs for Unit Sales and Paid Subscribers, along with separate revenue lines for both businesses: If you want to simplify further, it’s okay to combine multiple revenue streams into a single line here. You can always dive into a detailed breakdown for investors who are interested. Cost of Goods Sold (COGS or Cost of Sales) Investopedia defines Cost of Goods Sold as “the direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good.” This traditionally means: Raw materials Labor costs for turning raw materials into sale-able goods Factory overhead Shipping of manufactured inventory to your warehouse or distribution center (but usually not shipping to your customers). Many of the business I've worked with sell software or other virtual products, in which case I like the term Cost of Sales (because there aren't any goods being sold). For a software-as-a-service company the Cost of Sales typically includes: Web hosting and other costs to run your production environment Salaries for customer support and training (but not your sales and marketing expenses) Apps and subscriptions used by support and training teams Cost of any third-party data or technology that is included in your delivered subscription What’s not included in Cost of Sales is credit card fees or sales commissions. I know it sounds weird to say that sales commissions aren’t included in Cost of Sales, but they’re not because sales commissions aren’t part of the shipping product. Remember that this section originally came from businesses with physical inventory. Same thing with Credit Card fees, which are usually viewed as optional. You can’t make money in your business as a whole if you’re not making money on each unit you sell, so your gross margin should pretty much always be positive. Otherwise you’re literally losing money on every sale—and you won’t be able to make it up on volume. This is a place where many startups get themselves into trouble. Uber, for example, built a global business that loses money on each ride. Most of Uber's founders and investors have done well, but it remains to be seen if they'll ever turn a profit. Gross Profit Gross Profit is calculated by subtracting COGS from Revenue. It’s the money you actually have left over to pay your operating expenses, after covering all your costs of creating the product or service you’re selling. The key here is the Gross Margin %, which is calculated by dividing Gross Profit by Revenue. Different industries have different Gross Margin %s, and you should aim for yours to be in the right neighborhood by year 3. Investors tend to focus on specific industries, which means they know what the typical Gross Margin %s are for those industries. You can look up industry-specific Gross Margin percentages (start here and here), and you can also check out the income statements of publicly traded companies in your industry. If an investor is looking at a SaaS business, for example, they’re usually expecting to see a Gross Margin % between 70% and 90%. If your Gross Margin is above 90% then investors may view it as overly optimistic and therefore unrealistic. Operating Expenses Your operating expenses (sometimes called “OpEx”) make up the day-to-day costs of running your business. These are things like most salaries, rent, insurance, legal fees, meals and entertainment, etc. Operating expenses are typically divided into three categories: Sales & Marketing (S&M) Research & Development (R&D) General & Administrative (G&A) As an investor I eventually want to see the breakdown—but for the financial projections slide it’s fine to just show a single line for all of your operating expenses. This is where startups typically spend more than they make in the early years. Please note that purchases of land, buildings, office build-outs, and expensive equipment are handled differently. These are capital expenditures (often called “CapEx”) and they don't appear on the income statement. This is one way in which the Income Statement can lie about cash—which is why I include a cash section at the bottom of my financial projection template for startups. “If the asset’s useful life extends more than a year, then the CapEx is recorded as an asset in the balance sheet and is expensed using depreciation to spread the cost of the asset over its designated useful life as determined by tax regulations.” —Investopedia Most software startups don’t have CapEx, but other businesses do. Internet of Things (IoT) companies, for example, might purchase molds for manufacturing their hardware that degrade over 200,000 units. The purchase is recorded as CapEx and the expense is allocated proportionally to the COGS for each unit as it is produced. If the molds are $100,000 of CapEx that means the COGS for each unit produced increases by fifty cents ($100,000 CapEx / 200,000 units). You'll need to pay to create new molds after you manufacture 200,000 units, which will be another CapEx expense. CapEx typically doesn’t appear on the income statement, which is confusing when we’re trying to figure out how much money a startup needs. For startups that have intensive CapEx, I'll sometimes add a CapEx line to the cash section of the pitch deck financials slide—to separate it from the regular operating expenses (OpEx). “Depreciation” is simply reducing the value of a physical asset over its useful lifetime in accordance with tax regulations. When you buy a $10,000 piece of equipment for example, you record it as a Capital Expense (CapEx) and then depreciate its value over the number of years specified by the IRS. You may also run into "Amortization," which is reducing the value of an intangible asset over its useful lifetime. If you produce a Netflix show, for example, you might record the production costs as CapEx and then amortize them over the number of years specified by the IRS. EBITDA (sometimes EBIT) EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization . EBIT stands for Earnings Before Interest and Taxes. For early-stage startups they’re pretty much the same (unless you have CapEx). You calculate them by subtracting your Expenses from your Gross Profit. And for our purposes, EBITDA and EBIT are usually the same as “Operating Income,” which tells us your startup’s profit or loss. Investors like EBITDA and EBIT because they’re upstream from where most financial engineering can occur, but neither is a perfect metric. Companies may be acquired for a multiple of EBITDA once they’ve figured out how to turn a profit. Otherwise, if a startup is growing fast and attracting a ton of attention but still losing money, it may be purchased for a multiple of revenue, or a value assigned to its growth trajectory, or a dollar value per active user, or really whatever the buyer and seller can agree to. “Basically, high-growth web properties are being valued on growth, the ultimate utility of the base they are creating, and the valuation floor created by prior funding rounds (assuming they are in a position of strength).” —Quora EBITDA is the last part of the Income Statement. This financial projections slide template includes Headcount and Cash as well. 3. Headcount It takes people to run a successful business, and investors want to see how many you expect to hire. Even virtual companies need management, developers, marketing, sales, and customer support. Modern companies talk about full-time equivalents (FTEs) instead of employees, but you'll still have a headcount number combining both employees and full-time contractors. Here's how this financial projections template handles headcount: As revenue grows, investors expect to see both the expenses and the headcount increase: Cost of Sales (COGS) grows directly with the number of units / subscriptions sold. Operating Expenses (OpEx) also needs to grow with revenue, but the relationship may be indirect. You might be able to spend three years in the same office, for example, even if you have to cram in some extra desks. Headcount usually grows with revenue, because you need a larger team to sell and service your customers. Headcount that doesn’t grow with revenue is often a red flag for investors— unless you’re on the bleeding-edge of automation (and even then most startups still usually find that it takes more people to generate more revenue). Once we know the headcount we can calculate Revenue per Employee, which is one of my favorite sanity-checking metrics. Here was the Revenue per Employee for some major tech companies in 2015: Apple: $2,136k Facebook: $1,413k Google: $1,206k Amazon: $464k Twitter: $462k Yahoo: $450k Let's compare with traditional companies, also in 2015: Procter & Gamble: $693k Walmart: $221k Mattel: $184k So if you’re telling investors that your company is going to make more money per employee than Apple…they probably won’t believe you. Professional investors want to find reasons to say “no” to deals, and you may have just offered them an excuse with wildly optimistic projections for Revenue per Employee. Here's my deeper dive on revenue per employee. 4. Cash Position This doesn’t appear on a regular income statement, but it’s vital to the life of your startup. If you run out of cash you die. There are, in fact, many items that affect your cash position that don’t show up on a regular income statement: Starting Cash Position—How much money do you have in the bank right now? Investor Funding—Cash that you raise from investors either as equity or convertible note. Borrowed Money—Loans or lines of credit that you use to finance your business. Capital Expenditures (CapEx)—Purchases of property, buildings, office build-outs, and equipment with a useful life of more than one year. The security deposit for your new office lease. Accounts payable and accounts receivable. Deferred revenue from subscription customers who pay for one or more year in advance (this is a super power of companies that sell subscriptions, like SaaS apps and your local gym). I like to include two lines in the cash section of my pitch deck financials slide: Investment and Financing—The money you expect to raise from investors and/or loans. Cash Position at End of Period—How much is projected to remain in your bank account at the end of a particular month or year. The goal is to show investors how much cash you'll need to raise to run the business. It's fine if you show negative cash for the first two or three years (or the first ten years if you're Uber). After all, the reason you're pitching investors is that you're expecting to burn through cash on your way to profitability. Be careful about showing only positive cash in your pitch deck financials slide, because that can confuse investors by making it look like you don't need their money. That's why I include the "Investment and Financing" line, which shows how much you'll raise and provides context for a positive cash balance. This template ignores investment money and CAPEX. The Cash Position line shows you about how much you need to raise: The lowest negative number we can see is -$769k—and we should probably have at least a 20% buffer in case things don’t go as planned—so we might raise $900k (or more, depending on how confident you are in your projections). Some Common Mistakes With Financial Projections I never used to understand the story the financial projections were telling. It just looked like a bunch of numbers to me. It seemed complicated and made my brain freeze up. That’s how we all start out, and it’s frustrating because we don’t know what we don’t know. Then I started building my own financial projections. I started looking at other people’s projections. I learned some basic accounting and started paying attention to my company’s QuickBooks reports. Then I started doing my company's bookkeeping. I started creating budgets and running my business off of them. Finally I started to understand. Then I looked at a thousand more pitch decks and financial models. Now I can glance at a financial model and see the story it’s telling. I get a quick sense of how realistic it is, and how good the person is with numbers. Here are some of the quick sanity checks I do: Expenses don’t grow with revenue Headcount doesn’t grow with revenue Revenue per Employee is unrealistic Cost of Sales (COGS) Is out of line for the industry The founder is raising too much money... Let’s unpack each of these: Expenses Don’t Grow with Revenue The first sanity check I do with any startup financial projection is looking to see how COGS and Operating Expenses grow with revenue. COGS is directly tied to each unit or subscription sold, so it should grow along with revenue. Accountants use a concept called "matching" that ties COGS directly to revenue on the Income Statement, even when you've spent a bunch of upfront money on inventory (please note that your Income Statement lies about cash, which is why I include a cash line at the bottom of my financial projections template). Your Income Statement lies about cash. Operating Expenses will also need grow with revenue. You'll probably have to increase your sales and marketing budget in order to grow your sales. Headcount Doesn’t Grow with Revenue Another sanity check I do with any startup financial model is seeing whether headcount is growing in line with revenue. You'll probably have to hire more people (and get a bigger office) in order to massively increase your sales. If I see that headcount isn’t projected to grow with revenue I immediately become suspicious about how realistic your startup's financial projections are. Revenue per Employee is Unrealistic We talked about revenue per employee for big companies above. I’ve only seen one startup actually do more revenue per employee than Google. That CEO now has several beautiful houses. Everyone else who claims this—especially when they don’t have the data to back it up—sets off alarm bells in my head. COGS Is Out of Line for the Industry You can Google industry averages for COGS and gross margins (start here and here), as well as company-specific gross margin percentages. If I’m looking at financial projections for a SaaS (software-as-a-service) company and the COGS (perhaps Cost of Sales for SaaS) says 30%—vs. the 75% to 85% that I’m expecting—then I'll ask the founder to explain why. The Founder Is Raising Too Much Money… …relative to the stage of the company and the projected growth. I was looking at a pitch deck the other day where the founders are trying to raise $15 million on what appears to be $80k of revenue. Try to raise the right amount of money for your current stage. Then use the money to grow. Then come back for more money. It’s difficult to shortcut the process (but of course it can be done, especially if you're showing awesome growth in a key non-revenue metric). Some financial models make it look like the company is going to incinerate money. Be careful with this unless you have the growth numbers to back it up (I'm looking at you again, Uber). The other problem with raising a lot of money is that it’s difficult to exit. If I raise $15 million on a $50 million pre-money valuation, then my post-money valuation is $65 million (the $15 million in cash that I raised plus my $50 million pre). If my investors are looking for a 10x return, they now expect me to sell for $500 million or more. But it’s easier to find someone to buy your company for $50 million rather than $500 million. Keep your eye on your implied exit value as you raise money. Here's my deeper dive on valuing your startup. Optional Items to Include in Your Pitch Deck Financials Slide Her are some other things you might show in your financial projections slide. Be careful to strike a balance between giving enough info without overwhelming people. I recommend keeping it as simple as possible for the pitch deck. You'll have lots of follow-on conversations with investors who are interested, giving you time to cover all of your detailed information. Multiple Revenue Streams Categories of OpEx (operating expenses) Salaries Breakeven Other KPIs (Churn, CAC, LTV) CapEx (Capital Expenditures) Interest, Taxes, Depreciation, Amortization Let’s break each down individually: Multiple Revenue Streams Total revenue is key here, so if you absolutely must show multiple revenue streams then be sure to include a total revenue line as well. Your revenue section can look like this: This is a financial projections slide template for an Internet of Things (IoT) company with revenue from both unit sales and subscriptions (like Ring or Nest). We have one KPI (key performance indicator) for the number of hardware units sold and a separate KPI for the current number of paid subscribers. Together, these two KPIs describe the key metrics of both the IoT and the subscription lines of business. I would normally include MRR (monthly recurring revenue) for a subscription business, but that seemed like too many KPIs for this particular slide. I can always include MRR in my pitch deck or in my conversations with people who are interested. Investors love recurring revenue. They also realize how hard it is to sell to a customer for the first time, which is why they love adding a subscription to an IoT business. You make one sale and then continue to monetize it for years. I know an investor who put money into a late-stage IoT company purely because they were seeing a 90% renewal rate in their annual memberships. He didn’t care that much about how many hardware devices they were selling. He was much more interested in their evergreen subscription business. Categories of OpEx (Operating Expenses) The three categories of operating expenses are Sales & Marketing (S&M), Research and Development (R&D), and General and Administrative (G&A). I usually don't break these out separately in my pitch deck financials because it makes the slide look cluttered. Salaries Salaries are the biggest expense for most startups, so sometimes it makes sense to break the total out separately. If so, you may want to include this below the financial projections so that you don’t accidentally account for the expense twice. Remember that all of your salaries have already been subtracted as part of COGS and Operating Expenses (S&M, R&D, and G&A). I break out salaries and expenses for COGS plus all three categories of Operating Expenses in the pitch deck slide that Rocket Pro Forma automatically creates. I can then show or hide them as needed in my conversations with investors—or when I'm just running my company: Breakeven It’s helpful to calculate how many of your products or services you would have to sell in order to break even (which means earning as much money as you spend in that month or year). To calculate your Breakeven, divide your total Operating Expenses for the period (Sales & Marketing, Research & Development, and General & Administrative) by the Gross Profit for a single sale. For example, let’s say that you sell widgets for $10 and the COGS per unit is $3. This means that your Gross Profit for a single unit is $7 ($10 minus $3). Your total Operating Expenses are $535k. You would need to sell 76,429 widgets in order to break even ($525k in Operating Expenses divided by $7 Gross Profit per unit). So your Breakeven in this case is 76,429 widgets. I've put together more info plus a spreadsheet you can use to calculate your breakeven here. Other KPIs Here are some other key performance indicators that investors might be interested in: Churn This tells you what percentage of your subscribers stop using your service every month. You can use this to figure out how many months your subscribers stay active. Divide one by the percentage of your subscribers who left last month to get the average number of months each of your subscribers will stick around. So if 5.2% of your customers left last month, your average subscriber lifetime is 19.2 months (I calculated this by dividing 1 by .052). Cost to Acquire a Customer (CAC) This is your total sales and marketing spend—including salaries—for a period divided by the total number of sales you made in that same period. Let's say you made 100 sales in the past month while spending a total of $50k on advertising, marketing, and salaries for sales & marketing (not all of your salaries, just your sales & marketing salaries). In this case your CAC would be $500 (which I calculated by dividing $50k by 100). Remember that this is per customer, so you’ll want to reference Lifetime Value (LTV) below to ensure that you can eventually make that money back. CAC may also be referred to as COCA (Cost of Customer Acquisition) or CPA (Cost per Acquisition). Lifetime Value (LTV) This is much you expect to make off of the average customer during all of their time with your business. For a subscription business this is the Customer Lifetime in months times the Gross Profit per month (remember to subtract out COGS when calculating your LTV). If your subscription costs $10 per month and your Cost of Sales per subscription per month is $3, then your Gross Profit per unit is $7 per month ($10 minus $3). If your customers stick around for an average of 19.2 months then your LTV will be $134.40 ($7 times 19.2). For a hardware business it’s easy to end up with only a single purchase—so your LTV is simply the Gross Profit on one unit. That’s why you see Nest and Ring offering monthly subscriptions in addition to the device. If you're selling IoT with a subscription, then your LTV would be the initial hardware purchase minus COGS plus the LTV calculation for the subscription. Let's say your IoT device costs $150 with a COGS of $50. In this case you would add $100 to your LTV ($150 minus $50). On the same subscription we calculated above, your LTV will now be almost double at $234.40 ($100 LTV for the device plus $140 LTV for the subscription). I know an entrepreneur who’s business model is only selling hardware devices—without a subscription—and it’s been harder (but not impossible) for him to raise funds. Investors want to see recurring revenue. Now he’s planning to add a subscription. CapEx (Capital Expenditures) If you have big CapEx requirements, you might include a line at the bottom of your financial projections in the Cash Position section: In this case we’re starting this plan once we’ve raise $800k, we’re buying $250k worth of equipment (CapEx) in month 3, and we’re raising an additional $3 million in year two to fund growth: Now we’ve lost our negative number and we can see that we have a $52k buffer if our plan doesn’t work out as expected. Interest, Taxes, Depreciation, Amortization These items are very important once your business is making enough money that you have to pay taxes (which is actually a good thing). Most startups, however, can ignore these at first. If your business has big CapEx needs then you will probably need to consider depreciation. How to Use my Financial Projections Slide Template I’ve included two versions: one for a subscription (SaaS) business and one for an Internet of Things (IoT) business. You can simply copy the slide and paste it into your own Google Slides presentation. Or you can download the slide as PowerPoint from the Google File menu. If you're only selling hardware then you can delete the extra subscriptions line. Update the template with your financial information. Change the colors of the text and the background as needed. I prefer to format the columns for months and years differently so it’s immediately obvious which is which. Change the font to match your branding. Copy and paste the slide into your own presentation, or copy my spreadsheet tab into your own file. Or grab the full spreadsheet template at RocketProForma.com. Be Careful With Your Confidential Information You should assume that anyone and everyone will see and share your pitch deck. This is usually what you want, but I recommend holding back any highly-sensitive information. Only show show confidential info to potential investors you trust. For the most part it’s okay to share financial projections precisely because they’re educated guesses. Good luck, and please let me know if you have questions or need help. Mike Lingle is obsessed with helping founders grow their businesses. He's a serial entrepreneur, mentor, and executive in residence at Babson College. Check out Rocket Pro Forma if you want to quickly create your financial projections.

Want to raise money for your startup? You'll need to make a great investor deck. I recommend using a Milestones Slide at the end of your startup pitch deck. Your Milestones Slide will do five important things: Frame the conversation with investors Instill confidence Remind you to ask for the money (people forget this part) Give targets and runway Create FOMO You can grab my Milestones Slide Template here. I put the Milestones Slide as the very last slide in any pitch deck. Just leave it up on the screen when you're done presenting and it will support exactly the conversation with you want to have with potential investors. Here's a video walkthrough of the milestones slide: Constructing the Milestones Slide Here's a walkthrough of how to create your own Milestones Slide. The important thing is to show what you’ve already accomplished plus what you’re working on next. I find that two columns is easiest for people to understand. Here's my secret formula: Column One: Milestones You’ve Already Accomplished For the first column, pick the most important items that you’ve already achieved. These typically include product, traction, and fundraising. You want to show investors that you’re a natural born hustler and that you’re already making the magic happen. Now they feel more comfortable giving you their money. They also start to feel a bit of FOMO (fear of missing out) because you're doing so well without them. FOMO is what convinces investors to actually write checks. Here are some examples of accomplishments you might list: Product Completed mock-up and pricing validation with 50 potential customers Released minimum viable product (MVP) to first 1,000 users Traction & Revenue: 10,000 registered users with 3,000 weekly actives $10,000 monthly recurring revenue (MRR) Signed first two enterprise customers Fundraising Founders invested $125k Raised $50k from friends and family Completed Y Combinator accelerator and received $125k You should include anything that shows how awesome you are, but try to keep the list to five items or less so that people can understand it at a glance. I prefer using checkmarks to indicate which items you've already completed. Column Two: Money and Roadmap Money For the second column, start with your “ask.” This is usually how much money you’re raising; whether it’s equity, convertible note, or SAFE; and how much you already have committed from investors. Your ask could be something different depending on who you’re presenting to, like a strategic partnership, etc. This is another chance to create some FOMO, especially if you already have some investors on board for part of your round. “Raising $250k as equity with $150k committed" sounds much better than just "Raising $250k as equity." It makes investors feel like they need to hurry to avoid missing out. Look for every chance you can to create FOMO. One of the most common mistakes I see in startup pitch decks is forgetting the “ask.” We're at the end of your presentation and I still don’t know what you want—because you haven't asked. Always force yourself to remember to ask by putting it in writing on the last slide. Your audience will thank you. Time-Box It Investors love it when you tell them how long it will take you to accomplish the items in your To Do list. The cash you're raising gives you a certain number of months of runway. For example, you might be raising $500k for 9 months of runway. Planning is a crucial skill for you to develop when running your company—and many people find it easier to get things done when there's a big deadline looming. Check out my Rocket Pro Forma financial projection template for startups if you need to create a solid financial plan that includes your runway. Roadmap Next list the main items that you’ll accomplish with the money you’re raising. This is your promise to investors: “If you give us this money then we will hit these milestones.” So make sure you can do it. I try to avoid listing the $ or % that you'll spend on product, salaries, and marketing here. Everyone knows you'll spend the money on product, salaries, and sales. Instead I recommend focusing on key KPIs (key performance indicators) that play off of the accomplishments you listed in the first column. For example, if you listed these two accomplishments in the first column: 2k weekly active users $3k monthly recurring revenue (MRR) Then I might list the following KPIs in the second column: 10k weekly active users $15k MRR Now you're saying that you're going to use this $500k to increase both KPIs by five times within 9 months. Investors can see what they're buying with their money and make an informed decision. Examples of Effective Milestones Slides Here's a video where I walk through a few examples of how other startups have ended their pitch decks. Some are effective, but some aren't. This Milestones Slide from Buffer captured the spirit of what I'm talking about, but I find it confusing. Two columns is easier to understand, and I prefer checkmarks to indicate which items the company has already completed. This Buffer slide took me too long to understand simply because of the way it's formatted. Using green to indicate future events doesn't make sense, for example. Starting the conversation You’ve just delivered the best pitch of your life. You get to your Milestones Slide, the investor looks at both columns and quickly understands where you’re coming from, where you’re going, and what you need to get there. She immediately starts asking questions. This is what you want! Putting this milestones slide last in your pitch deck usually starts a conversation focused on whatever’s most important to you. Just leave your Milestones Slide up there. Resist the urge to jump to a "Thank You" slide. Also remember to adjust your deck based on investor feedback. Your goal is to answer investor's questions before they ask them. You’ll get better and better at pitching over time. Let's review what we've accomplished with our Milestones Slide 1. Frame the conversation with investors The whole point of presenting our pitch deck is to ask investors for money. In order for them to write a check, they're going to want to have a conversation. Your Milestones Slide sets up that conversation perfectly: "Here's all the great stuff I've been able to accomplish without your money, here's how much I'm asking you for, here's what it will buy us, and here's how long it will take." 2. Instill confidence Investors want to put their money behind the best entrepreneurs they can find. How do you stand out as one of those? First, show that you have a great plan. Second, show that you're always pushing forward no matter what—even without the money. As a bonus third, prove that you have customers and working business model. Your Milestones Slide communicates all of this to potential investors. 3. Remember to ask for the money (people forget this part) I can't tell you how many startup pitch deck I've seen that don't say anywhere how much money they're raising. Writing it down forces you to remember and it keeps you from chickening out and changing the number (which is the same reason I recommend writing down your pricing in your startup's sales presentations). 4. Give targets and runway Remember that investors love entrepreneurs with a plan. Here you're telling them that you're already figured out what you'll accomplish and how many months of runway this money will give you. Remember to focus on a few key metrics for product, traction, revenue, and fundraising. Those are the things the investors truly care about (they already know that you'll spend the money on product, sales and marketing, and salaries. 5. Create FOMO Fear of missing out it what actually convinces investors to write checks. Do you know why Peter Thiel was the first investor in Facebook? Because they had so many users that they needed the money to buy more servers. This told Thiel how popular Facebook was, and he realized he would miss out if he didn't write that check. Now Go Raise Money You can grab my milestones slide template here: Plan for multiple conversations with people before they actually invest (unless you're Facebook and you just need to more server space to handle all the demand). For best results, tell people about all the new progress you've made since the last time you spoke to them. Investors want to see momentum in order to feel comfortable putting money into your company. It's part of the way they decide who to invest in. So make sure you’re always moving the ball down the field. Good luck, and let me know how it goes! I'm Mike Lingle, a serial entrepreneur, mentor, and executive in residence at Babson College. I'm obsessed with helping founders grow their businesses. Check out my Rocket Pro Forma if you want to quickly create your financial projections.

Launching a company is harder than it looks! In fact, I’ve been running startup accelerators for years and it’s much, much easier to tell people what I think they should do than it is to start my own successful business. Customers shape successful products, so it’s important to get them involved long before you think you’re ready. Otherwise you end up so far along that it’s hard to adjust the product based on valuable customer feedback. This process is called “Customer Validation” and here are the top strategies I’m using as I launch my Rocket Pro Forma financial projections template: Spend as much time on marketing as product Provide amazing customer support Get paid for customer validation I’ve included a bonus fourth strategy at the end of this article too. Here’s a quick video walkthrough that includes my pricing strategy from RocketProForma.com. This conversation grew out of an online session I did with Stefano Selorio from Carevocacy. "Customers shape successful products, so it’s important to get them involved long before you think you’re ready." Let’s dive into each strategy one-by-one: 1. Spend as much time on marketing as product I want to spend most of my time working on my product. It feels good to just put on my headphones and work (here’s my playlist of music without words from my buddy DJ Stochastic to keep me focused). The problem here is that if I’m not careful I’ll end up building my product for no one. I see founders make this mistake all the time. The job of a startup founder is to create a working business. The product is only one part of that equation. The most important ingredients by far are the customers: Are there enough of them for this to actually be a successful business? Do I know who my customers are? Do I know how to find an endless stream of new customers? Figuring these things out takes at least as much time as building my product, maybe more. If I wait to tackle my marketing until I’m satisfied with my product, I’ll be too late and I’ll likely go out of business. And if there’s not a big enough market I’d rather know that right away instead of months down the road. "If I wait to tackle my marketing until I’m satisfied with my product, I’ll be too late and I’ll likely go out of business. And if there’s not a big enough market I’d rather know that right away instead of months down the road." Here’s what the kiss of death sounds like for a lot of startups: “We’ve put $400,000 into building an awesome product and now we just need to raise money to find customers.” Actually, no. You’re too late and you’re likely to scare investors away because you spent a ton of money on something that may not actually have a market (smart budgeting is also a great reason to plan ahead with a financial projections template). Ouch! 2. Provide amazing customer support I think Mike Tyson said it best: “Everyone has a plan until they get punched in the face!” That’s exactly what putting my product in front of customers is like. They don’t understand my awesome interface! They don’t know which button to press (hint: it’s the giant red one right in front of you)! They don’t use my product the way I was expecting! I suddenly start to understand how complicated even seemingly simple things are for other people. And I’m forced to make everything even simpler. Apple is insanely great at this. I’m getting better through practice, and the first step is admitting there’s a problem. I’m friends with a very successful software entrepreneur who asked me how he could increase sales. I told him to sit with his customers and watch them try to use his product. I pointed out that he couldn’t outsource this because he wouldn’t believe the results if someone tried to tell him, and that he only needed to watch between 3 to 5 people in order to start seeing patterns. He assured me he knew how his customers used his product and swore he wouldn’t learn anything. He ignored my advice for a year. Then one day he called to say he tried it—and he couldn’t believe how difficult his software was to use! The interface he had spent so much time simplifying completely confused his customers. Fortunately, he immediately understood how to solve many of the problems after watching only a few people. My shortcut to this is to constantly be reaching out to customers asking how I can help them. What are they confused by? What are they stuck on? Do they have a few minutes to walk me through it? Then I help them solve their problem with my product. This allows me to understand each experience and to spot patterns across my customers. I get to hear their questions straight from their mouths and I start to learn the language they use, which I can then turn around and use in my marketing. I also learn who my customers are and what they’re trying to accomplish. This helps shape both my product and my marketing. Finally, this helps me focus. One of my biggest challenges as an entrepreneur is turning the list of all the things I could be working on into just a short list of high-priority items to solve right now. My customers help me do this every day. Here’s an example of what one customer told me as I was helping her: I asked how she found Rocket Pro Forma and learned a few things: First, my content strategy is working because strangers are finding me and passing my articles along. Second, she bought my financial projections template because she wanted to make sure she didn’t forget anything. Now I can work that point into my marketing language. "One of my biggest challenges as an entrepreneur is turning the list of all the things I could be working on into just a short list of high-priority items to solve right now. My customers help me do this every day." 3. Get paid for customer validation Are you earning revenue from your customers? I know this sounds obvious, but I’ve seen entrepreneurs spend tons of time working with free “customers” who have no intention of ever paying. Hint: They may not be customers if they don’t pay you (unless you’re Facebook, Google, or the Discovery Channel). I don’t prioritize suggestions from people who haven’t paid for my product. On the other hand, I will provide terrific customer service to someone who has paid me even a little bit of money—and I will take their feedback seriously. Remember that the #1 goal of an entrepreneur is to create a successful, repeatable business model. This means that customers need to pay—and the only way for that to happen is for you to provide them with more value than you’re asking them to give you. You can only test that by getting them to actually pay you. People lie all the time when asked if they will pay for something. They say yes even when they mean no. The only true test is to get them to actually pay. If they’re not willing to part with their money then you’re not offering enough value. It’s that simple. "Remember that the #1 goal of an entrepreneur is to create a successful, repeatable business model. This means that customers need to pay." I intentionally started charging money as soon as possible. Here’s the pricing strategy that I’ve been using: My main goal is to sell as many of the $99 coaching sessions as possible, because these give me the greatest insight into my customers. I’ve priced them lower than I normally would in order to make it easier for people to choose—and they’re a win / win because my customers get a terrific service from me. I will eventually raise the price, but this has been working well during my initial, intense customer validation phase. I’m also interested in selling the $39 self-serve downloads of my financial projections template. I don’t learn as much from these customers (although sometimes I still do if they reach out with questions—or respond to my check-in emails), but I’m totally happy to learn how to attract and sell to these customers. I’m using two pricing anchors to make the $39 and $99 prices seem attractive. First, the $3,000+ custom engagement establishes a high value, so people feel like they’re getting a lot for their money if they choose one of the other options. Read “Influence: The Psychology of Persuasion” by Robert Cialdini to learn more about how leading with an extreme number affects how people perceive and react your pricing. I’ve also used crossed-out numbers to reinforce the higher value of both the $39 and $99 prices for my startup financials template. I haven’t decided what the eventual price of the product will be, but now I’ve at least proven a baseline for what people are willing to pay. I can experiment from here. 4. Bonus Strategy: Tell everyone what I’m doing (because stealth kills startups) James Clear says, “You can attract luck simply by telling people what you are working on.” Magic Leap, by contrast, appears to be going out of business after raising $2.6 billion (yes with a “b”). I think the fatal mistake they made was trying to develop their product in secret. They kept their potential customers completely out of the process and guess what? People didn’t want the product they brought to market. It was too bulky, it was too expensive, and the benefits weren’t great enough to overcome these challenges. Remember when we talked about the kiss of death being, “We’ve put $50 million per month into building an awesome product and now we just need to raise money to find customers.” This is what I mean by building a product for no one. Stealth kills startups. When I tell everyone what I’m doing—and when I let them touch and feel early versions of my product—magical things happen. We really do create our own luck. First, I’m making it easy for people to help me. Now they start bringing me customers, investors, partners, advisors, business deals, and other great opportunities. People want to help us. All we need to do is make it easy for them. Second, I’m forced to practice my elevator pitch over and over again—and I get a little bit better each time. Third, now I’m truly committed. Telling everyone what I'm doing attaches my reputation and self-worth to this project. This is terrific motivation for me to make it work. I'm Mike Lingle, a serial entrepreneur, mentor, and executive in residence at Babson College. I'm obsessed with helping founders grow their businesses. Check out my Rocket Pro Forma if you want to quickly create your financial projections.