Those of you who have looked at some of the startup listings on Seedrs will have noticed that none includes financial projections. That was a conscious choice by us when we built the platform, and I thought I’d take a moment to explain why we made that choice.
Financial projections are always speculative. Even for the most well-established companies, saying what will happen in the future involves a substantial amount of guesswork. When the company has a meaningful operating history, however, projections can be very useful, as they show how anticipated changes in internal or external factors are likely to cause variations from past performance. They still need to be taken with a grain of salt—the whole concept (which is common in public markets) that a company is a failure if it predicts that it will make 39p per share but actually makes 38p is ridiculous—but at least there is sufficient value in these projections to be one component of making an investment decision.
For seed-stage businesses, with no operating history at all, the story is very different. Financial projections become not an indicator of variance from the past but instead a pie-in-the-sky dream of what might be. The only “hard” numbers available tend to be, at most, a year’s worth of cost estimates, with later costs and even early revenues being purely guesses. If you’ve ever sat with an entrepreneur who is trying to draft projections for a brand new business, you’ll recognise the experience: he will start with year 5, figure out how big he wants the company to be by then, and then work backwards to show numbers that build into that end-result (preferably in a hockey-stick pattern, so that growth becomes exponential in years 4 and 5). It may sound ridiculous—and many people would prefer not to admit that this is how it’s done—but it is the reality, and it’s the reality because there is simply no sounder way of creating projections for a business at this stage.
As a consequence, we think that financial projections for seed-stage businesses are not only irrelevant but positively distracting for anyone trying to make an investment decision. When numbers are presented, investors tend to focus on them as a source of comfort, often to the detriment of all the other available information. This, we believe, takes investors’ attention away from what does matter when evaluating a seed-stage business: a qualitative evaluation of the idea, the market and the team. More importantly, it leads investors to make decisions based on information that is inherently misleading, and that is a sure-fire way of causing them to suffer “investor’s regret” down the road.
So if you see one of our startups and think to yourself, “Why can’t I see their net profit projections for year 3?”, the answer is that they don’t exist in any meaningful form. The real choice is to see made-up numbers or not to see any numbers at all and instead focus on the genuine information that does exist about the business. We believe the latter is the better approach, and as importantly, we don’t want to be a part of presenting inherently misleading information. That is why we have excluded financial projections from Seedrs listings.