How do you make your financial projections and assumptions credible?

1 Start with the market

Before you dive into your own financials, you need to understand the size, growth, and dynamics of the market you are targeting. How big is the total addressable market (TAM) and the serviceable obtainable market (SOM) for your product or service? How fast is the market growing and what are the key drivers and trends? How do you segment the market and position yourself against the competition? These questions will help you define your market opportunity and validate your assumptions about customer demand, pricing, and acquisition.

2 Build a bottom-up model

A common mistake that founders make is to use a top-down approach to estimate their revenue and growth potential. For example, they might say that they can capture 1% of a billion-dollar market in five years. This sounds impressive, but it does not show how you will actually achieve that goal. A better way is to use a bottom-up model, where you start with your unit economics and work your way up to the total revenue. For example, you might show how many customers you can acquire, retain, and monetize, based on your product features, value proposition, and marketing channels. This will give you a more realistic and granular view of your revenue potential and growth drivers.

3 Use scenarios and sensitivity analysis

Another way to make your financial projections and assumptions credible is to use scenarios and sensitivity analysis. Scenarios are different outcomes that could happen based on different assumptions or events. For example, you might show a base case, a best case, and a worst case scenario, based on different market conditions, customer behavior, or competitive actions. Sensitivity analysis is a technique that shows how your key metrics change based on changes in one or more variables. For example, you might show how your revenue, profit, or cash flow change based on changes in your customer acquisition cost, churn rate, or pricing. These tools will help you demonstrate your understanding of the risks and uncertainties in your business, as well as your ability to adapt and pivot if needed.

4 Align with your milestones and ask

One of the main purposes of your financial projections and assumptions is to justify your funding request and show how you will use the money to achieve your milestones. Therefore, you need to align your numbers with your roadmap and your ask. For example, you might show how much revenue and growth you can achieve with the current funding level, and how much more you can achieve with the additional funding. You might also show how the funding will help you reach certain milestones, such as product development, customer validation, or market expansion. This will help you show the value proposition and the return potential of your investment opportunity.

5 Be transparent and honest

Finally, the most important tip to make your financial projections and assumptions credible is to be transparent and honest. Do not inflate your numbers, hide your assumptions, or ignore your challenges. Instead, be clear about the sources, methods, and data that you used to create your financial model. Be ready to explain and defend your assumptions and choices, and acknowledge the limitations and gaps in your analysis. Be open to feedback and questions, and show that you are willing to learn and improve. This will help you build trust and credibility with your potential investors, and show that you are a reliable and confident founder.

6 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?