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Raising capital – Who gives a damn about the numbers?


sahil_merchant_iconMost entrepreneurs I have met are naturally optimistic. I certainly am a glass-half-full type of guy. It’s sort of hard to risk everything to start a new venture if you focus on the likelihood of going broke. Yet we all know that most new ventures never make it.

People ask me quite regularly if I can look over their numbers prior to them talking to potential funders. I have generally been happy to do so, but the truth is that I will have no clue. Neither will the potential funders. And, most likely, neither will you. The thing about most new ventures is…well, they are new. So we put down our best guesses, present them as the gospel truth and everyone pretends they know more than everyone else. What a crock.

I hate Excel forecasts. They are the very definition of ‘damned if you do, damned if you don’t’. When starting off, I modelled every part of my business in excruciating detail. Investors came in on the back of these numbers, only for our strategy to change within the first year and for our model to be rendered useless. Revenue streams I thought would work (such as corporate accounts) failed to gain traction, while I never even bothered to build in revenues for online sales. This is now a key growth platform.

So why bother? No one believed my numbers. And yet, I could never imagine approaching funders without detailed numbers in my back pocket. It’s a hygiene factor… I feel that if I haven’t gone to the trouble of doing a detailed model, people will think I am not serious.

The bigger dilemma is how to present these numbers.

Do you put down what you really think will happen? Sounds like the obvious thing to do, but VCs in particular will inevitably halve your forecasts and dumb them down to account for entrepreneurial exuberance. Then, the numbers look crap and they reject you for not having sufficient ROI potential.

Alternatively, do you present a highly optimistic case, knowing that once halved, your hockey stick graphs will still look good enough to garner their interest? Problem with this is that the VCs then see you as not having a good grip on reality, and they boot you out based on not being sufficiently grounded.

The credibility and believability of the founders are massive factors for professional investors and rightly so.

What to do? They hold the cards and I have had to regularly choose between having my numbers seen as crap versus having my smarts being questioned.

A number of the professional investors I have spoken to have given me the following two crappy pieces of advice.

Present numbers that are realistic but also highly attractive. Don’t bother coming to us if you can’t tick these boxes.

Gee… thanks. That was helpful!

I might think I can meet these two requirements, but so does every other damned fool, and therefore you, the funder, will inevitably cut my forecasts irrespective of what I think.

To anoint the VC with the god-like ability of being able to see the future and know which forecast is realistic and which is not is just naive.

If the VCs were so smart, they would only pick winners (which they don’t) and never reject the YouTubes and Facebooks of the world (which they do).

Present various scenarios. At least this shows that you have Excel modelling skills and can build pretty models.

I know that when putting forward my base case scenario and building the optimistic and pessimist cases on either side, you the funder are unlikely to invest on the basis of the optimistic case. All you do is take the pessimistic case, pick the holes in it, and cut my numbers even more.

Hope I’m not depressing you!

So, how did I manage to attract $7m in multiple rounds?

I don’t think that my saying dumb luck is going to satiate you.

I tried to put down what I genuinely believed would take place. Knowing myself to be confident in my abilities to make good things happen, these numbers were likely to be pretty good anyway. However, I tried to back them up with as many facts, triangulations, counts and physical references as I possibly could.

My aim was to have an answer to every question they could possibly throw at me. If they questioned assumption number 73, I would have three examples from similar industries and other countries to show my forecast as reasonable.

I also modeled many scenarios (despite my earlier derogatory comments about scenarios analysis), though I never presented these to the investors. However, when they asked me what would happen if the growth rate was halved and the discount rate increased by x 1.5, along with a hundred other questions, I had the answers at my fingertips.

I use the word “answers” very loosely, because even with all the preparation and homework, everything I said was ultimately going to be wrong. However (and it has taken me a long time to get to where I initially wanted this post to go), I don’t think any of it mattered.

One of my investors said to me that they threw my model and fancy-schmancy Information Memorandum into the bin the day after they invested in me, as they didn’t believe a single word or a single number. My jaw hit the ground. Why bother investing then, and why put me through the grinder on every minute detail if you were not going to rely on any of it? Their answer:

We didn’t invest in the mag nation you presented us, but we invested in the two founders, and your ability to: 1) quickly realise that everything you wrote and forecast would be wrong; and, 2) quickly adapt and find the right approach. The only thing we know for sure is that the path to success will be completely different to what any of us envisage. Therefore, we are investing in you, not the business. When we ask all those questions, we don’t care so much about the answers, but whether you have answers.

Wow – this was a revelation. Ultimately, my initial numbers didn’t matter so much, but the fact that I had worked up incredibly detailed forecasts and scenarios did.

Perhaps I was lucky to find investors of this mindset. Raising capital requires a real personal connection between funders and founders and the stars do have to align. Yet, my learning was that personal credibility is more important than the beautiful hockey stick.

My investors look to me and not “the business” to make them money. This was my first ever entrepreneurial truth.

Sahil Merchant is founder of mag nation. Follow him on twitter: @sahilmerchant. His launch post can be found here.