In my time working for early-stage startups, there are a few overheard phrases that always pique my attention around the office. One phrase that causes me to immediately pull up my budget spreadsheet?
“Ok, If we had to guess…”
There is a lot of guesswork involved in a SaaS startup–especially when it comes to financial projections. With high risk of churn, subscription models with multiple pricing tears, uncertainty about when we’ll hit product/market fit, and a hundred other unknowns in play, anybody who’s been on the ground-level team at a SaaS startup knows that the only thing constant about SaaS financial projections is change.
And, let’s face it; We’re dreamers. Founders and early-stage teams are typically optimistic by nature–or, at the very least, convicted that our business will succeed (otherwise we wouldn’t be here working late nights). So of course, we tend toward optimism in our projections, too. But in order to gain the trust–and, more importantly, the dollars–of potential investors, there has to be a sense of realism to our financial projections.
Successfully striking a balance between optimism and realism in your financial projections shows potential investors two things:
You cannot have a successful pitch without financial projections that reflect a balance of optimism and realism. So, how do you strike that perfect balance?
Here are a few tips:
If you’re going out for funding, odds are you’re a pre-revenue company, which makes the perceived accuracy of your revenue projections especially important. Think about it: if you present a wildly unrealistic revenue ramp to your potential investors, that’s an automatic red flag indicating a slew of potential missteps (unrealistically high pricing, insufficient market research, bad formulas or data, overly-optimistic customer acquisition)–all of which are grounds for that investor walking away. Not to mention, your revenue projections have a lot of crucial business decisions rolling up into them, like headcount additions, sales projections, So, how do you build a realistic revenue model into your projections, all while injecting a touch of that founder’s optimism? One common roadmap is called the T2D3 roadmap–or, “triple, triple, double, double, double”. This model suggests that you project that after establishing a base ARR (typically takes a year or two after product/market fit), you’ll triple the following year, triple again the year after, double the year after that, then double for two more years. (This blog post introducing the idea explains it in much more depth, and lays it out numerically for a business looking to reach over $100 million in ARR in those first 5 years).
Especially in the world of SaaS subscription models, your customers will need support. This is something your investors know well, and will surely want to see reflected in your projections. Because where there are unsatisfied customers, there is churn. And if your financial projections show low churn with virtually no budget for customer support, your investors will know your optimism overtook your realism. Now, how you reflect spend on customer support is up to you to decide. This could look like projected headcount for a customer success team, projected spend on in-product support like live chat or a knowledge base, or a combination of the two.
This may seem like a no-brainer, but you can’t throw together projections without doing your research. This is a recipe for numbers that are far too optimistic. If the aforementioned T2D3 revenue roadmap doesn’t seem like it fits your pricing structure or long-term sales strategy, do your research and seek inspiration from other similar companies who are a few years ahead of you. You cannot rush financial projections (so please don’t tell me you’re frantically reading this while trying to throw a pitch deck together for an investor meeting tomorrow), so give yourself time to do the research, and don’t be afraid to go back and continually change the numbers as you learn more about the market, your business needs, etc.