How important is a budget when seeking early stage investment?


1

Once we launch our product, we intended to raise our first round of funding. The preparation has already started, including the budget. I feel that the budget should be highly detailed, realistic and backed up with references--we need to answer the question "how will you spend our money". But my partner does not feel a solid budget is so important so early on. Hence, the question:

How important is a budget when seeking early stage investment? The reality is that we/I will do a detailed budget, if only to set internal spending expectations and priorities. But I'd still like to hear from folks in the know how heavily VCs wil weigh a budget when evaluating a candidate investment.

(Background: 9 months old startup; 2 founders, 2 equity earning only "employees"; Everyone has a day job; Self-funded (five digits); August/September public launch)

Funding Budget Deck

asked Aug 1 '11 at 19:40
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Stu Thompson
173 points
  • How much investment are you looking for? The level of detail required in financials will differ depending on the investment level. – Susan Jones 8 years ago
  • @Susan Jones: A lot. I assume you are saying the more we want the more detailed we need to be? – Stu Thompson 8 years ago
  • I've given you a full answer below. :) – Susan Jones 8 years ago

3 Answers


1

Anyone who gives you money will want to know with some detail how you are going to spend their money. However, since all plans (and a budget is just a plan) fall apart in the face of reality I would be careful spending a lot of valuable time building that budget.

answered Aug 1 '11 at 20:08
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Jim Blizard
324 points
  • Can you elaborate on "with some detail"? How much detail? Can you cite some specific examples? Thanks! – Stu Thompson 8 years ago

1

You have a great attitude: you know that first and foremost, a budget is a tool for you to use to capture decisions, set priorities and compare plans to reality. If that's already natural to you, surely you will want to share this with an investor. And any investor will certainly want to know - and have the ability to monitor or manage - how you spend their money.

The main pitfall, of course, is that things never pan out exactly as you expect. It's important to make sure you have a good understanding with your investors about what you will each be doing when the gap between expectations and experience grows.

For me, then, if budgeting is natural to you, share it. And in addition, make sure you know the driving assumptions and have talked through what you intend for better and worse outcomes than the plan.

answered Aug 1 '11 at 21:32
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Jeremy Parsons
5,197 points

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I am currently looking for funding for my startup - $1.5 million worth. As part of this process we put together a detailed financial model of the business including: financial assumptions we were making (as to sales prices and costs etc), schedules, financial statements for three years, startup costs and cap table.

It was a lot of work but worth it for several reasons:

  • We now have a very good understanding of how the numbers work, what the pricing structure is and what the critical milestones are for the business to hit. We understand our margins and how changes in those will affect our profitability.
  • We have made the business model leaner and less capital intensive
  • We were able to use scenario analysis to work out what our key vulnerabilities are and what the impact would be to the business if some of our key assumptions changed. Most importantly we have found ways to mitigate these risks.
  • We have justified every number in the model so have confidence that the business will become profitable
  • When investors ask us questions about any of these we have intelligent answers that we can justify with data.
  • We can make a decision about our valuation which is reasonable and can be justified (to some extent).

And several times I have had investors sit down and want to go through the financial model and assumptions in detail (at the first meeting) to check that I know my stuff.

So in your case, if you are asking for 'a lot', I don't think a budget will cut it. If you were applying to an incubator and asking for up to $50,000, you could probably get away with that with some of them as they don't necessarily expect you to have a lot of financial skills.

However if you are applying to a VC or angel, I wouldn't go in with doing a full financial model - otherwise I think you would just come out of interviews with egg on your face.

answered Aug 2 '11 at 20:53
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Susan Jones
4,128 points
  • Thanks for this share. We are seeking funding in the same range as you are, and having an external reality check is great. But I'm not clear on what the difference is between a "full financial model" and a mere budget...time for more research... – Stu Thompson 8 years ago
  • If you want to connect off the forum, I have an example I could share. – Susan Jones 8 years ago

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