Raising seed? Your MRR and ARR forecasts are a waste of time

It’s common for angel investors to ask for three or five-year projections. That’s ridiculous for most early-stage startups – how can you develop forecasts without any data to extrapolate?

The majority of pre-revenue decks that we see make this mistake. They include a hockey stick graph where they’re making millions in year three, but what’s that based on?

Avoiding the trap

People start with a high per-day customer acquisition number, apply a 15% month-on-month growth rate and compound it over two years. At the end of that, you have 5,000 users and a high Monthly Recurring Revenue (MRR).

That’s a great story.

When you hear that as an investor, a little piece of your heart breaks… A good investor will pull it to pieces. I’ve been there. My first investor pitch, many years ago, brought me nearly to tears.

Explaining how you got to these numbers with evidence to suggest that they are true would help. If you’re struggling with Customer Acquisition Cost (CAC) and Life Time Value (LTV) then you’re probably too early to be putting any of this in.

So, you either need to strengthen your assumptions based on evidence or take the forecast out.

Build a believable argument

It’s more useful to talk about your model, how to get it working and the research you have to back it up.

At its simplest, if you’re building a SaaS service you could survey 100 potential customers, carefully avoiding confirmation bias (what the thinker thinks the prover proves). Knowing that 60% are keen, gives you a reasonable assumption about your target market to start with.  

Once you’ve made your first five sales you can tailor these assumptions. That starts to bring the model into focus and helps you build a believable narrative.

If your first proof point is getting some revenue, then that’s good. But make sure your model fits that and make sure your product fits it too.

If, on the other hand, your proof point is to show that you can fulfil a specific function for a specific type of customer, then why would you be worried about revenue in the first place?

That doesn’t require a long-term forecast. It’s about building a compelling argument from the evidence you have.

Improving your assumptions

When you’re raising funding for an early-stage startup you’re building a belief system. That’s about evidence. So your mission is to get as much evidence as possible.

Investors want to understand the rationale behind your thinking. It’s not necessarily about being right – it’s about proof, collating information and making product, business and model decisions that are explainable. If you have the data, you can extrapolate it. If you don’t, you can explain how you currently think it will work and what you will get back based on your research.

While it’s always true that an investor needs to believe in the founder and their ability to execute, it’s imperative at an early stage. Bringing evidence to the table that you’re doing what you’ve said you’re going to do will make an investor believe that you will deliver on your current promises. 

Investors want to know that their money is in safe hands. How can you prove that?

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Holly Sawyer
Holly is the Marketing Manager at Inkwell, the company behind The Pitch.

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