Financial planning for startups
Over lunch last week, I asked a Redpoint entrepreneur, who had recently sold his company, how his board could have been more helpful to him. His answer surprised me.
He wished the company had built a financial/operational plan sooner.
Building an financial plan is challenging and it is often perceived as a waste of time because the plan can be so inaccurate. Lots of entrepreneurs tell me their plans are just WAGs - wild assed guesses. And to some degree they are.
But, in the words of this entrepreneur, financial planning helped him sleep better at night - even if the plan was a guess. When I asked him why he felt better with a plan in place he outlined three reasons:
Reverse engineer the next round - For most of the life of a startup, the company is targeting a subsequent round of financing and working towards a milestone to underpin the financing. A financial plan helps to determine whether or not the milestones are achievable with the cash in the bank.
Degrees of freedom - Can we hire another engineer? What if we spent $15k on this conference? What is the impact of hiring a VP of Sales? How does this accelerate our out-of-cash date? Does this accelerate our path to the milestone? A financial model helps explore different scenarios - the degrees of freedom a startup has to achieve milestones.
All the arrows point in the same direction - The financial plan is a concise summary of the way a company is likely to be managed. It’s helpful for the board to help validate the plan compared to other startups’ plans. The plan is also a great way to level set the management team on the plan for the business.
The financial plan may never be accurate. But the accuracy of the plan isn’t the point - instead, the plan is a tool to communicate, explore scenarios and successfully manage the company to the next big milestone.