Few people understand SaaS on this planet better than Jason Lemkin. The force behind the SaaStr podcast and the SaaS Conference has helped both Founders and VCs better grasp what makes this business model so unique.
In a talk he gave a few years back, Lemkin addresses the main issues with startups’ financial projections.
He starts by shocking the Founders in the room by saying:
“Your financials are terrible. I don’t expect the financials to be accurate.”
Experienced investors will confirm this statement. The reason why VCs insist on Founders making projections is not to hold them accountable if/when things go wrong. Predictions are used for a whole set of different reasons altogether.
As Lemkin clearly states, one of these reasons is to evaluate how well the Founders understand their business.
Showing a 100% gross margin, for example, doesn’t make sense. It proves that the startup’s Founders are not sufficiently committed to understanding their operations.
Lemkin then delivers his punchline:
“Numbers that are not even remotely sain show Founders don’t understand how business works.”
The problem with that? In most cases, the startup will fail to deliver growth, and the investment will most likely go south at some point.
This is one reason why we insist, in our e-mentoring sessions, that Founders master their key numbers. They don’t have to become accounting experts, but they need to understand and communicate clearly and accurately how they make money.
🗣How have you dealt with crazy financial projections in the past, either as a Founder or an Investor?
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🔗 You can view the whole Lemkin video here, and our video on Financial Projections here