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Startup proformas, or financial projections, are well known for flights of fantasy, unsubstantiated assumptions, and wishful thinking. And while there is no crystal ball that perfectly predicts the future, there is a lot that founders can do to create a believable proforma. Here are a few ways NOT to create a proforma that is useful to both founders and investors.
1. Believe that because you cannot accurately predict the future, you cannot direct the future toward desired outcomes.
CEOs need to master uncertainty. They need to identify what they can control while making decisive experiments around what they cannot. Some CEOs simply give up on projections because they cannot handle the uncertainty. That tells us as much about the company as any set of numbers would have.
2. Project for only two years because anything beyond that is impossible.
I hear founders and well-meaning advisors say this all the time. A good proforma begins with the end in mind. Start with the year you expect to exit and work your way backward to today. Your proforma is a roadmap toward that exit, and it needs to show how you plan to return investors’ money.
Imagine a wedding ceremony where the bride and groom pledge to be faithful to each other for two years because you just can’t predict what will happen after that. That’s what it sounds like when you say you can’t project your numbers for five years. And, by the way, a marriage is a lot easier to get out of than an angel investment!
3. Use top-down projections only.
Proformas with crazy projections typically start with a statement like, “If we owned just 1% of this market, we would have $1 billion in revenue.”
There is a place for certain top-down projections, especially as a reasonableness check. But picking an arbitrary percentage of a huge market and hanging your entire projection on it is both lazy and unbelievable. A credible proforma needs to show how customers are actually acquired, what they pay, how quickly the business can scale, and what resources are required to make that happen.
4. Reinvent financial reporting.
I’ve had to hold some proformas upside down to figure out why the “bottom line” is on the top!
You don’t have to be a CPA to look at a few financial statements and see the pattern: the bottom line goes on the bottom. An income statement does not report the company’s assets, and investment capital is not revenue.
The three basic financial statements are the income statement, balance sheet, and statement of cash flows. Those three should form the foundation of the proforma. You can add whatever supplemental analysis is useful, but don’t reinvent accounting along the way.
5. Don’t sweat the details.
A good proforma will have detail tabs for the important parts of the company’s strategy. Common tabs include:
Staffing: This ultimately becomes a proforma organizational chart showing how you view the human resources required to achieve your goals.
Product: Don’t model just the first product. Show the product pipeline and when new products or services are expected to be introduced.
Channels: What channels will you use to get to $1 million in revenue? How will those channels change at $10 million, $50 million, $100 million and beyond?
Regulatory resources: Particularly important for life science companies, where regulatory strategy can have a major impact on both timing and capital requirements.
AI token use: How are you accounting for this increasingly important cost? For some AI companies, compute and token costs can become as significant as payroll.
There are plenty of other ways not to create a startup proforma, but if you follow these five approaches, sadly, you’ll have plenty of company.
Better yet, DON’T use them—and create a proforma that founders can actually manage to and investors can believe.
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