How can you evaluate a startup's financial projections?

1 Understand the assumptions

The first step to evaluate a startup's financial projections is to understand the assumptions behind them. Assumptions are the key drivers and variables that affect the revenue, costs, and cash flow of the business. For example, some common assumptions are the market size, growth rate, customer acquisition cost, churn rate, pricing, and margins. You should ask the startup to explain how they derived their assumptions, what sources they used, and what scenarios they considered. You should also check if the assumptions are consistent, reasonable, and supported by evidence.

2 Compare with benchmarks

The second step to evaluate a startup's financial projections is to compare them with benchmarks from similar companies, industries, or markets. Benchmarks are useful to gauge the validity, feasibility, and attractiveness of the projections. For example, you can compare the startup's revenue growth, profitability, unit economics, and valuation with those of their competitors, peers, or industry averages. You should also look for any outliers or anomalies that might indicate unrealistic or inaccurate projections.

4 Review the milestones

The fourth step to evaluate a startup's financial projections is to review the milestones and timelines that the startup plans to achieve with the funding. Milestones are specific, measurable, and achievable goals that demonstrate the progress and value of the startup. For example, some common milestones are product development, customer acquisition, revenue generation, profitability, or market expansion. You should ask the startup how they determined their milestones, how they align with their strategy and vision, and how they will track and report their performance.

5 Validate the traction

The fifth step to evaluate a startup's financial projections is to validate the traction and feedback that the startup has achieved so far. Traction and feedback are indicators of the market demand, customer satisfaction, and product-market fit of the startup. For example, some common metrics of traction and feedback are user sign-ups, active users, retention rate, revenue, referrals, reviews, or ratings. You should ask the startup to provide data and evidence of their traction and feedback, as well as any challenges or obstacles they faced or anticipate.

6 Ask the right questions

The sixth and final step to evaluate a startup's financial projections is to ask the right questions that can help you uncover the strengths, weaknesses, opportunities, and threats of the startup. Questions are an excellent way to probe deeper, test assumptions, clarify doubts, and discover insights. Some common questions include: How did you validate your problem, solution, and market? What are your key assumptions and how did you test them? How do you differentiate from competitors and what is your unique value proposition? What are your main revenue streams and cost drivers? How do you acquire, retain, and monetize customers? What are your key risks and how do you mitigate them? What are your short-term and long-term goals and how do you measure them? How much funding do you need, how will you use it, and what are your expected returns? By following these steps, you can better evaluate a startup's financial projections and make informed decisions about investment or fundraising opportunities.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?