When pitching to a VC, how far should your projections go? [Ask Your VC]

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Q. When pitching to a VC, should an entrepreneur include plans based on anticipated future rounds of funding or should the projections and deliverables be based on only the current round that is sought?

There isn’t actually one “right” answer to this. Before I get to that, let me mention that perhaps the most important thing an investor wants to see in an entrepreneur’s projections isn’t the actual list of numbers but the thought process of how these are arrived at, how the entrepreneur plans to actually achieve these numbers and whether the order of magnitude broadly makes sense.

For example, if an entrepreneur is focused on a market that just doesn’t seem big enough to justify a VC investment, then the conversation ends right there. Or if the entrepreneur’s projections appear to show that her company will achieve, say, a 90% share of her SAM with 80% gross margins, then that would come across as over-optimistic and lead to a lot of skepticism.

Now, let’s assume that those first-level issues are solved and come to the specific question here. As I said, there is no one correct way to present numbers. My personal preference is a mix of the two approaches described in the question.

  • Make projections based on the current round of funding. This doesn’t mean you have to perforce assume you will be profitable just based on the current round of funding. If you plan to be profitable after the current round of funding, that’s great. If you don’t plan to, that’s fine too.
  • Then add information on when you plan to raise your next round of funding, how much you anticipate this to be and what you will do with the money. (You can plan to raise money even if you think you will be profitable before then).

Naturally, you know less about your plans for the distant future compared to your plans for the next few months. Smart investors know this too so don’t worry too much about predicting the distant future with 100% accuracy.

One last point: one of the most common mistakes when providing financial projections for early-stage, unprofitable companies is the statement, “This is my last round of financing.” No, it isn’t.

Q. What happens to all the portfolio companies when a VC has to close shop?

Short answer: nothing happens. Portfolio companies are independent of their shareholders.

Long answer: this situation isn’t likely to happen for one simple reason. VC firms manage closed-end funds, which can have a tenure of anywhere from seven to 12 years (including fund extensions). Longer time horizons are more common than short ones. If you’re an entrepreneur accepting a fund’s money today, it is far more likely that your company will close shop before the VC does.

Of course, VC firms do go out of business too. Let’s take a hypothetical example:

  • VC firm ABC Ventures raises its first fund, which has a life of seven years.
  • ABC then invests in a few companies over a period of two-three years.
  • For whatever reason, ABC does not raise any more funds after its first fund.
  • At the end of seven years, ABC is required to liquidate its fund and return proceeds to investors in its fund who are known as Limited Partners or LPs.
  • Ideally, ABC would have exited all of its investments before the end of seven years.
  • If ABC still has shares in portfolio companies that it has not exited, then ABC will seek to convert these shares into cash by finding a buyer for them. LPs have invested cash in the fund and expect to receive cash when the fund is liquidated.
  • ABC may technically have the right to pass on shares in its portfolio companies to its LPs, but this happens very rarely.
  • Portfolio companies continue to live on, just with a different shareholder at the table.
Murli Ravi

Murli Ravi

Murli Ravi is a seasoned VC who has overseen investments in over 20 companies at a relatively young age across Australia, India, the US and Singapore. His portfolio companies have spanned a wide range of industries and his particular sectors of interest are enterprise software, ad tech, media, analytics, telecom, and other B2B & B2B2C areas. Prior to VC, he was an investment professional at one of the world's largest sovereign investment firms, worked in strategy consulting and conducted academic research. He has been part of start-up teams in operating roles and has a close appreciation for the issues entrepreneurs face. Murli occasionally acts as an independent director or advisor at start-ups that live by the shared values of fierce ambition, humility, intellectual honesty and trust. Follow him on Twitter at @murli184