Venture capital · CFO

How much to raise in a Series A?

Richard Pridham Investor, President & CEO at Retina Labs

December 5th, 2016

We have just completed our business plan which is backed by a very detailed 5-year, month-to-month financial plan. We left no stone unturned in the financial plan. Every assumption about the business has been parametrized in our model. Every element is based on assumptions and logic that can be justified. It's rock solid.

Revenues are always tricky to project, especially when your plan calls for developing new markets for your products. In our case it's telehealth solutions for eye care industry. We already have institutional customers in Canada but are looking to develop the US market plus new markets in front line care. We've come up with what we think are excellent "bottom up" (SOM & SAM) market sizing stats and reasonable assumptions to develop these segments of the market in our customer acquisition modelling.

We have modelled 3 scenarios: best case, likely and worst case. Of course, each one has different implications for how much money you need to raise. If it's best case, then not that much. If it's worse case, a whole lot.

So what number do you show a VC? I've seen some pitch decks that show all 3. But how do you show all 3 and justify one ask number? Do you base it on the middle of the road "likely" scenario? The worst case for us still looks pretty good, it's just that the time line to achieve certain revenue and profitability targets get pushed further out. Our concern is that these new markets, however good the market sizing data, might take longer to develop for different reasons.

Rob G

December 6th, 2016

the last person up who's skirt you want to blow smoke is your own.  I would not give all 3 scenarios.  Pick the one you have the most confidence in (after all, you are going to be held accountable to hit or beat those numbers) and present that. You can certainly mention that you've done a lot of modeling and you understand the range of possibilities.  Potential investors are going to do their own modeling and they may want to explore the range of possibilities in which case you are prepared. 

The planning is more important than the plan.  You have to know the numbers inside and out, upside down and backwards (for your own purposes) and you need to have faith in your assumptions.   It's not that the assumptions won't change, but you need to have confidence that you've done your homework thoroughly and that you understand all the levers and which of those levers/inputs are most sensitive (have the most dramatic effect on results).  you are putting your own time, money and reputation on the line here too.  

As you mention, revenues are hard to forecast.  My guess is your selling model is b2b.   I would take the scenario that i have the most control over and work the numbers from there.  Understanding the size of the addressable market is only a small part of the equation, albeit an important part.  If the market is there, then the most important part is your customer acquisition plan and associated costs and growth assumptions. Things like virality and conversion are very hard to accurately forecast.  I  like to use a 'feet on the street' selling model as my 'worst case' customer acquisition model and go from there.    Things like number of sales reps, time and cost to recruit and train, ramp time, territory size (how much territory they can handle and cost to access), deal size, etc. are easier to quantify and should present you most costly scenario ('worst case').  If you can make the revenue numbers work using a 'feet on the street' model then you can have more confidence in your revenue numbers and then model how you later make this revenue model more efficient (add a distribution partners, add inside sales, add self-service model, etc.).  You have things to learn and the best way to learn them is face to face with prospects. This may not be as 'sexy' as 'growth hacking' or 'viral loops', but it's a model that is far more predictable and controllable in the early days and it's an excellent source of input for when you start to automate your selling machinery. 

Michael Leeds CEO & Founder

December 5th, 2016

Probably best to start with "actuals" and then show a range of future possibilities. Remember that investors have seen it all before. They will most likely be interested in the actuals + your reasoning for future outcomes than they will be with the specific numbers -- especially the ones 5 years out.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

December 5th, 2016

If you don't use the worst case, you may not raise enough and then you will be in trouble. Using conservative forecasts is the only way to go. Worst case you will beat you own numbers which any VC will attribute to their own ability to pick a winner.

Kishore Swaminathan Serial entrepreneur looking for a cofounder

December 5th, 2016

You probably wasted a lot of time my friend projecting month-to-month for 5-years to come up with best, worst and average. This is not of interest to any investor, and as you'll find out, it won't be of interest to you either in 6 months. Startups that project a five-year plan (as Martin Omansky says) immediately paint themselves as amateurs. 

Here are my 2 cents.

1. Show them the best case and and justify it with your unique selling point or value proposition. 

2. If you want to show that you have left "no stones unturned", then pick the 800-pound gorilla in your market and posit them as the potential competitor. Show how you have what they don't have and how your solution/branding/execution can still make you a viable player - and a potential acquisition. 


Martin Omansky Independent Venture Capital & Private Equity Professional

December 5th, 2016

Warning!! Be realistic. Investors are increasingly sophisticated and look askance at entrepreneurs and opportunities that don't pay attention to real-world conditions. Investors and/or their advisors can sense an amateur a mile away. Sent from my iPhone

Mark Schopmeyer Investment Professional at Carrick Capital Partners

December 5th, 2016

Here's what I found helpful when I was on the investment side: Don't show all 3 in the presentation. My recommendation is to present two cases: 1) Current trajectory of the company without capital - if you're burning cash, show how long you can go before running out and 2) Base Case that leans conservative (think of underpromising and overdelivering). If your VC is smart, they'll be putting together their own point of view through their own financial model so it's not helpful in hiding information or showing unreasonable targets that you're unlikely to hit. The best way to impress is to be straight forward and show all aspects of the business backed by reasonable assumptions / prior data (show the VC you know your business inside and out; sales ramps, etc.) while showing the levers that can be pulled to adjust the business and still hit your targets. In terms of capital needs, it's better to strive for the minimal amount of capital needed to execute your business for the next 18 months.

Happy to give more thoughts in detail if you're interested.

Joe Emison Chief Information Officer at Xceligent

December 6th, 2016

Mark Schopmeyer is giving good advice. You don't need to show multiple scenarios--you need to show one. Investors will decided where that one falls. The "here's when we'll die based upon cash and currently contracted revenue" (or, if you have reliable sales performance and retention numbers for 12+ months, "here's when we'll die based upon cash, currently contracted revenue, and reasonable expectations based upon past year's sales performance) is a really good base case to show.  Then you show the investment case (if we get $X, we'll do Y, which we estimate should lead to financials Z).

I also agree that you'll do best if you get your investors to agree with the most conservative numbers possible. They can't be so low that they're not attractive, but there's no real advantage to setting harder-to-achieve goals. Also, your investors will make their own decisions about what you should be able to do...

Mindy Barker Passionate executive working with entrepreneurial companies to improve profitability, value and cash flow

December 6th, 2016

Make sure your most likely is indeed most likely and include a summary in Executive Summary. You can discuss the other scenarios in due diligence. You have limited time to get their attention and to much information will overwhelm them. You will also risk losing their attention - they only have a short period of time to review your information.

Mark Michuda

December 5th, 2016

I agree with Michael.

A smart VC(99%) will see your biz plan and forecast as a wild guess.  Even the most brilliant CFO has no clue what the future holds.  It's just all hype to them.

However, you can brag on the the current numbers.  Talk about some huge wins, amazing breakthroughs, and/or giant growth trends.  Those are real things.

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

December 5th, 2016

The middle case (i.e., "most likely") is probably easiest to present and defend. Investors know that you can't predict the future and are more interested in real market potential, and the logic of your business plan, than they are in your spreadsheet's calculation of return on investment. An interested investor will also know that, inevitably, it will take longer and cost more to achieve results. Beware any investor who doesn't understand that and isn't willing to provide at least a cushion of reserve capital.