Financial forecasting is an important part of pitching a startup, even one in its early stages. Follow these tips to find what KPIs to target in a forecast for a pre-seed or seed-stage startup.
written by: Olena Petrosyuk
edited by: Paige Bennett
Financial forecasting is an important part of pitching a startup, even one in its early stages. Follow these tips to find what KPIs to target in a forecast for a pre-seed or seed-stage startup.
written by: Olena Petrosyuk
edited by: Paige Bennett
Creating financial models as an early-stage startup can be particularly difficult with no historical data to lean on. With just a short amount of time on the market and little to no revenue to speak of, it can feel like you’re grasping at straws to pull together numbers that could resemble your real-life financial scenario in the future.
So why should you care about financial forecasts at all?
As it turns out, financial forecasting can help hone your KPIs (key performance indicators) and impress investors. Every minute counts for startups, and with the process to raise VC taking an average of 3 to 9 months, it’s crucial to put your startup’s best foot forward to move the process along as quickly as possible so your company can scale.
If you follow a few best practices, your early-stage startup’s financial forecast may even help you gain venture capital faster.
When it comes to early-stage financial forecasting, it’s not just the numbers that investors care about. What matters is the logic and thinking behind the numbers—how realistic and well-thought-out your assumptions are and how well they connect to your future strategy and growth plan. In this case, the financial model becomes just another (albeit critical) step to persuade investors you have the suitable skill set and thinking to build a successful business.
Do you need a forecast even in the earliest stages of a startup, with zero revenue or traction? The simple answer: it doesn’t hurt. Over the years at Waveup, I’ve witnessed plenty of businesses raise their first capital without ever opening a spreadsheet. More often than not, this is true for repeat founders who already have a level of trust established with investors. But here's the kicker: even if investors don't ask for a forecast, having one can be a massive value-add. It helps you validate your business model, justify your funding ask, and show investors you're not just another founder with a half-baked idea.
For a pre-seed stage, it’s wise to have at least a simple one-sheet model that details your funding ask breakdown and the expected progression of the future KPIs. For the seed stage, investors often expect a more elaborate forecast. This forecast should integrate historical revenue and cost data where available and show a solid 18- to 36-month forecast on the core metrics.
Although it goes against common perception, investors aren’t looking for investment bank-style, 100-tab models. Instead, they seek simplicity, straightforward logic, and clear assumptions that fit on a single tab of a spreadsheet.
In essence, your financial forecast must answer one question: is your business model financially viable? Most VCs won’t spend hours deciphering the answer, so make sure your financial forecast tells the right story. The best news is that you don’t need a Ph.D. in advanced calculus or even a solid financial background to achieve that.
Start by logically looking at your business. Think about the future drivers of revenue and costs. Don't just claim you'll hit $1M in revenue in year one. Show how you'll get there, step by step. How do you plan to acquire customers? What will be the key channels?
As an example, consider paid ad budgets, with relative cost per lead and conversion rates, to show how many users you’ll be able to get. In sales-led businesses, you can map out the hiring plan and individual salesperson quota to show how many new clients you will onboard monthly. Scale costs in a similar fashion, thinking about key expense drivers and linking them to the future hiring plan.
Always mark your assumptions and inputs clearly, and keep them separate from the calculations and outputs. This way, investors can easily follow your logic. Your goal is to create a flexible and effective model where anyone can audit the drivers and stress-test the assumptions.
Do triangulate your assumptions and check if the business model makes sense. Case in point: I often see how founders with very cheap B2C subscription models plan to use sales-led motion to grow (essentially hiring an army of sales and outbound professionals to sell the product). In this case, even a quick calculation of the business model economics demonstrates extremely poor customer acquisition cost (CAC) payback, as you end up building an expensive sales organization for a low average revenue per user (ARPU). The result: sales efficiency looks terrible, and investors know early on (even without a financial model) that your strategy won’t work. Use your early-stage model as a reality check to see whether the unit economics of the business overall works.
Do remember that the model is all about cash. Even the best-structured profit and loss (P&L) statement is meaningless unless it links to the cash flow gap. Account for working capital assumptions and clearly show how the forecast relates to the funding need.
Don't neglect operational metrics. Show investors you know the basics of your business vertical. For SaaS businesses, you must show expected churn and lifetime value (LTV) in ratio to CAC. For marketplaces, take rate and transaction volume. For gaming or social networks, show daily active users (DAU) or monthly active users (MAU) and expected monthly user retention rates.
Don’t be too conservative in your revenue assumptions. Being modest is admirable but rarely helpful in the VC world. Remember that your investors are looking for venture scale returns (usually at least 10x on their investment). Make sure your growth trajectory fits into their expectations. Don’t go overboard, though—very few companies have achieved $1B in revenue within the first three years. If you go aggressive on your top-line assumptions, be prepared to defend them.
Don’t rely on unrealistic profitability projections. If you're showing 70% or more earnings before interest, taxes, depreciation, and amortization (EBITDA) in year three, you might want to check if you're accidentally selling money-printing machines. Strike a balance between realism and ambition in your growth projections. Benchmark your numbers against your peers’ numbers. Carefully think about all the cost categories. Most startups I work with severely underestimate their marketing expenses and count too much on virality or word-of-mouth. In reality, most early-stage businesses spend over 100% of their revenue on sales and marketing in the early years and 30% to 40% once they mature. Make sure your salary projections are realistic and in line with market rates, and don’t forget the additional costs that often come with hiring people (benefits, taxes, recruitment fees, etc).
Assuming you have a trading history of at least a few months, investors will want to dive into your historical data and KPIs on top of the forecast. In this case, a good question is where to focus your attention—and what to show to tick off all the boxes.
While requirements here might vary, a good rule of thumb is to review three core areas every investor would want to validate before investing. These three metrics also serve as a proxy for whether you achieved product-market fit and if the business is scalable.
Investors love to see rapid, sustainable growth. To validate this, they will look at metrics like monthly recurring revenue (MRR) or annual recurring revenue (ARR), as well as the evolution in the number of new customers and average contract value (ACV).
Many VCs expect 200% to 300% year-on-year growth or at least 20% month-on-month growth in the early seed stages. These percentages might look scarily high but don’t despair if you are not yet at the right level. Remember that every investor has a different appetite for growth. Your most important task is to be ready to explain performance to date and present a strong plan on how you plan to accelerate.
Customer retention is a critical indicator of product-market fit and long-term business viability. Here, investors focus on net revenue retention (NRR) and gross revenue retention (GRR), expecting at least 90% GRR and 100% or higher NRR. If your business is outside the SaaS vertical, you’ll need to show some proof of customer usage or repeat purchase behavior.
A few years ago, investors were heavily burned by businesses that exhibited a ‘growth-at-all-costs’ mentality. Many investors are much more cautious today, even in the early stages. They want to see a sustainable scaling model.
Multiple metrics can represent capital efficiency, but the most common ones include CAC payback time, Rule of 40 (for SaaS businesses), burn multiple, efficiency score, and magic number.
If you’re unfamiliar with these metrics, read up on them. Then, look at the benchmarks for your industry and build a solid story about how you plan to improve your KPIs going forward.
While a financial model isn't always mandatory for pre-seed and seed fundraising, it can be an invaluable tool for founders. Forecast models are all about the logic behind your numbers. Do you know where your customers will come from? Have you accounted for all the possible costs? Did you think about different business scenarios? Did you benchmark your assumptions against the industry? Investors will be looking for answers to these questions, and financial forecasting can help even early-stage startups respond to these inquiries with conviction.
The goal isn't to predict the future with pinpoint accuracy but rather to tell a compelling story about the potential of your business. So roll up your sleeves, dive into those numbers, and let your financial model become a roadmap for your startup's future.
Whether or not you hit your targets later is a different story. As long as you can prove that you can get your business model to work financially and your logic is reliable, you’ll secure investor confidence, and the term sheet will surely follow.
Olena has 14 years of experience in finance, consulting, and technology from the world’s top-tier advisory firms and startups. She is currently the COO at Klevu, an AI discovery solution for e-commerce, and a partner at Waveup, helping Seed to Series D+ companies raise funding ($3B+ in funding to date), scale, and fulfill their growth ambitions.
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