What are VCs doing?
A friend of the newsletter recently made a great point about sales expectations for founders.
She read my recent LinkedIn post,
(originally posted for you all in this newsletter!)
About how often first-time founders make the mistake of thinking sales traction will happen within 3 months
And how this unrealistic expectation often shows up in their financial models.
Her amazing question was this:
If founders are creating these financial models for investors to review,
Why aren’t investors correcting these expectations?
How could investors not know that 3 months is unrealistic?
How could investors see this situation play out so often and not correct it?
In truth, I’m not an investor so I’m not 100% sure the answer.
But from my interaction with investors,
Here’s what I think is going on:
Some do. Some investors will see these numbers and help founder set more realistic expectations.
Some investors don’t look at models at all (some even complain models are BS for early stage companies!).
Most investors want founders to be ambitious and to shoot for the moon. They want founders to feel pressure. Why dissuade these new CEOs from making unrealistic promises they’ll fight like hell to keep? Investment is typically a fixed price per round. Founder effort is dependent on motivation.
One might argue Valuation would motivate investors to call down unrealistic revenue expectations. Wouldn’t inflated early sales projections increase Valuation? But that’s not often the case. Valuation at the early stages is more based on funding stage norms and the longterm market opportunity. No smart investor would base valuation on a first-time founder’s first-year sales projections.
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