“The entrepreneurs dilemma” is a term that @azeem came up with in reference to a post on how to raise money without lying to investors on VentureHacks. The point I wanted to make was that entrepreneurs often have to chose between being honest about the future and hearing “no” from investors more frequently and being overly-optimistic in their outlook. On the surface, it may seem that the latter is a net win but that’s not true. Over-promising and then under-delivering can have big negative consequences.
As with many blog posts, the comments are very interesting. Here are some highlights.
Excellent article. As a lawyer, there’s only so much wordsmithing I can do in the financing documents to protect founders from their own promises that reflect unrealistic assumptions. Of course most financing rounds never lead to litigation, but if things crash and burn, and finger-pointing and recriminations ensue, I’d rather not have excessively rosy five-year financial plans floating around as Exhibit A for the plaintiffs’ lawyers.
I think bootstrapping is very important for both entrepreneurs and for the VC’s. In my experience, the only way to have a meaningful conversation with VC’s is when we are already shipping products. I usually don’t even prepare a separate PowerPoint presentation. Instead I start the company by saying, “Let me show you how I convince customer ABC to buy our product”. Life is good after that.
GK The pertinence of forward looking sales projections depends on the stage of the business. If you raise capital from investors who pretend not to understand this, you will be setup for financial incongruity.
Consider 5 distinct business stages:
2. Build Product
3. Early-Adopter Success
4. Repeatable Sales
5. Scale the business
In (1,2) sales projections are useless, the time to prepare them is wasted effort.
In (3) sales projections are presumptuous; you have yet to comprehend WHY and HOW the buyer will commit.
In (4) sales projections become essential to internal planning.
Raising capital between stages 3,4, a 1-year plan is valuable, surfacing the right questions/equations within the business, and with potential investors. A 3-5 year plan is chimerical until stage 5 and the shift preceding it.