Proforma Over Pitch
Why knowing your numbers trumps pitch-perfect slides
A common mistake founders make is putting all their time and effort into making a great-looking pitch deck for investors but not giving the same degree of care to their proforma.
Your pitch deck is important for several reasons but mostly it serves as a presentation tool to elicit engagement in front of a crowd, or act as a primer, or an entrance into a deeper conversation about your business.
Your proforma however is your companies working financial model representing the scenario in which you have investor money to deploy against your plan. It’s easy to slip into thinking that it’s there to show how much money you will make in the majical, post-funded future, and if you are an investor, you can be forgiven for that, but if you are a founder it is a mistake.
The good thing about this mistake that is it’s an easy one to fix.
Well, maybe not “easy” – but certainly do-able with the right help.
A lot of founders come to me with really impressive (and sometimes less impressive) pitch decks. Founders rarely come to me with really impressive, or impressive, or even sufficient proformas.
Based on this, I assume that a lot of founders embark on a fundraising effort without this critical tool, or without something that comes close enough to it to really do its job for either the founder, the business or the raise.
Your proforma is the model that plays out your assumptions over time. The numbers that show up in year 2 or 3, those are the proformas numbers. The assumptions… those are yours and they need to be clearly articulated, validated and factored to be conservative. Once you have settled on your assumptions you need to build an assumptions framework that you can use to sensitivity test your allocation of capital to the growth levers in your plan.
Proformas help you make mission-critical decisions.
Resources are always scarce and every spending decision has an opportunity cost. Do you invest in marketing for new customers or to increase the value of the ones you already have? How do you know which is best? For that matter, how do you know how much money you should raise and how long it will last. When will the volume of business require that you hire more people, when you will break even or become profitable?
The truth is, if you have a plan but have not yet built a proforma, you do not know the answers to these questions and you do not have a plan so much as a story.
Need a little help? We do that.
In addition to the rarity of strong proformas amongst seed stage founders, there is a total absence of education, resources and tools to really arm you with the model that you need to make all the decisions I have listed above.
We have continued to rely on accounting models that are fairly useless as predictive tools and too complex for people without an accounting background to understand. I didn’t understand them and that is why I developed a dramatically simplified approach to building my own proforma model and using it as a working tool in my business and in my fundraising efforts.
One blog post isn’t going to cover it, but I will continue to write on this subject and share tools that will support you in building your own. It’s a huge part of our Capital Masterclass and is available as a workshop for groups if you just can’t wait.