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Why proformas and pitch decks don't mix

Why proformas and pitch decks don’t mix

Nearly every time I see pro formas in a pitch deck I cringe. There it is: hockey stick growth showing massive potential. So common it is cliche. The founder hesitates a split second before saying, “As you see, we’ll be earning $38M by 2020.” The investors roll their eyes and silently think “Bullshit.” I agree with the investors, it is bullshit, and I build pro formas for a living!  No chance you’re hitting that profitability.

 

typical financial projection chart
A typical up-and-to-the-right chart that just screams “bullshit”

But occasionally someone nails it.  The pitch is going well, investors are starting to salivate, and when the pro formas come up the FOMO hits and the hook is set.

What makes a good pro forma slide and what makes a bad one?

Pro formas are not for investors

The purpose of a pro forma isn’t to value your company or dazzle investors. If so, I would be out of business. Anybody can build optimistic projections with up-and-to-the-right charts.

The real purpose of a pro forma is for you the entrepreneur to understand your company and plan more effectively. Pro formas enable:

  • Capital planning
  • Testing strategies
  • Mapping assumptions
  • Planning contingencies
  • Assessing risks
  • Defining “red flags”

If you haven’t done those six activities with your pro forma, you need to stop pitching and sit down with your CFO. Maybe you haven’t done those six because you don’t have a CFO, which is a whole different problem (email me so we can talk.)

The real way pro formas build your pitch

Once you have used pro formas as a tool rather than a to-do list item, your business plan will have matured significantly. You should be able to answer the following questions with confidence:

  • What happens if my go-to market strategy needs to pivot?
  • Exactly how much capital should I be asking for?
  • What are my 12, 6, and 3 month “red flags” so I can avoid a cash crisis?
  • How will I account for every dollar of investor money spend?

You’ll also lose your fear of spending money! Mapping out the expenses empowers you to spend money intelligently. It’s like going to the store with a shopping list vs. showing up and impulse buying what’s on sale.

Investors can sense this confidence. “She has a plan.” “He knows what is needed to get this done.” The audience will feel that right around half-way through your pitch. That’s when you hit them with your pro forma slide…

The best pro forma slide

It’s not what you think. It doesn’t have impressive numbers. It doesn’t show strong growth. Sometimes, it doesn’t even include a chart. The best pro forma slide shows the investor you know what you are doing. That means there is no formula or template – the slide depends on your business. If your business is dependent on explosive growth, show them the economics of growth (price, CAC, LTV, etc.) and design the visual to demonstrate attainability of growth. If your business has economies of scale, explain the economies then demonstrate the profit growth through volume growth. If the business hinges on well-set intelligent pricing, forget everything else and spend an entire slide on pricing. But for most of you, this is my advice:

If you haven’t used your pro forma to develop business strategy, the best pro forma slide is no slide at all.

I’ll repeat: for most of you, the best slide is no slide at all. If you haven’t cleaned your house, don’t invite guests over. If your car is not reliable, don’t sign up to car pool others. And if you don’t use your pro forma as a tool to drive strategy, don’t share it with investors.  Period.

By the way, I would never invest time or money in a company with such poor financial planning. And neither should you.

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