What is the best way to forecast future cash needs for a startup in VC?

You should not be forecasting future cash needs. That’s a crutch to create perpetual red ink. You should be getting to breakeven at all costs. As if the money you have today is all the money you will ever raise. Once you hit breakeven, then you can take some risks and do some forecasting with growth capital — knowing you always have your beachhead to fall back to. Scale down before you scale up.

Cash is lifeline for any startup. Startups journey is quite unpredictable and it’s very important to spend quality time articulating the milestones often so that you create guard-rails on how to run it. Forecasting cash requirement for milestones you want to achieve will make fund raise journey much fulfilling as it will make you understand why and how of it. If you understand the milestones at byte size , you will be able to predict cashflow with a clarity of thought. Capturing the revenue streams, cost patterns and investment requirements to move one stage to another is essential for a quality cashflow forecast. Smartness of the founder is visible in the clarity of vision and prediction of cash requirement.

Imagine you're planning a big adventure. First, you need to know how much food and supplies you'll need. For a startup, this adventure is growing the business, and supplies are money. Start by looking at the map of where you're going. This means understanding what you'll spend money on, like hiring people or making your product. Then, think about how long your trip will last before you need more supplies. This is like figuring out when you'll make money from your adventure. Also, prepare for surprises, like storms or finding hidden paths. This means saving extra money for unexpected costs. By planning carefully and listening to advice, you can make sure your startup adventure is a success.

Cash is king. How much cash you have at hand, and how much you need on a given time frame are key elements for the survival and success of a startup. If you start by bootstrapping, you need to know how long you can last and how much you can build. If you want to raise money, you need to know how much you need and where that will take you. If you do not know where you aim, you will not reach your target.

The best way to forecast future cash needs for a startup in VC is to create a detailed financial model that takes into account all expected revenue and expense streams, as well as anticipated growth and investment plans. This model should be regularly updated to reflect changes in the business and industry. Additionally, it's important to build in a buffer for unexpected expenses and potential delays in revenue generation. Finally, it's recommended to consult with experienced financial advisors or mentors to ensure the forecast is realistic and achievable.

Your cash runway is like a timer for your startup—it shows how long you can keep going before you run out of money. To figure it out, divide your current cash balance by your monthly cash burn rate. Your burn rate is how much more money you're spending each month than you're bringing in. To predict your cash runway, you'll need to estimate your future income and expenses based on past data and growth plans. You can use a spreadsheet or software to create a cash flow statement that tracks your cash position each month. It's important to have at least 18 months of runway to avoid running out of money or having to raise funds too often. This gives you time to grow and succeed without the pressure of financial stress.

I like to run some scenarios with an outperform, average and conservative outlook. That way you can a forecast and can create a plan for each scenario.

Forecasting cash runway involves calculating the time your startup can operate before depleting its cash reserves. It's found by dividing your current cash by the monthly burn rate—the net cash spent monthly. To estimate future cash flows, analyze historical data, growth forecasts, and expenses. Utilize tools to prepare a cash flow statement, detailing monthly cash positions and runway. Aim for a 12 to 18-month runway to mitigate frequent fundraising or cash shortages.

Don't be too optimistic on your incomes. Your cash expenditures are relatively easy to plan for. You might have some uncertainty, but it stay controllable. On the inflow of cash, though, optimism can kill your startup. How many time did I see people being overoptimistic on sales? Or taking at face value investors words and subsidie scheme? Don't expect to get the money when you are told you will. I know someone who lost 3 months of subsidies for the salary of his fist employee. One day delay in weeks of back and forth with the administration caused this. He had weeks of margin for the paperwork. But there was always a field to correct. And in the end, he got very close to bankruptcy because of this. So expect hiccups. Big ones.

Determine the monthly cash outflow on operational expenses, salaries, marketing costs, and other overheads and assess the current cash balance on hand and expected incoming revenue from sales. Prepare a projection of expenses over the coming months, including expected increases in operational costs, hiring expenses, marketing budgets, and any other expenses. Divide the remaining cash balance by the average monthly burn rate to calculate the number of months the startup's cash reserves will last. Additionally, include additional revenue if expected in the near future in earnings and unexpected expenses that could reduce cash balance further to calculate the cash runway.

We usually start with three cash flow forecast scenarios, once where the company is hitting all thresholds with regards to spending/receipts, one where the flow is aggressive (with articulated goals on what this aggressive spending achieves like faster market capture) and one where the spending / general cash flow is less than ideal. For any investor this provides some confidence that the team has thought about favourable and unfavourable turn of events. A forecast at best is just that, without constant revaluation and rework it won’t stay relevant for long, especially in fast moving industries like Web3. With time, the company understands which of the three versions is best suited to its ongoing needs.

Forecasting cash burn rate involves detailing your startup's spending patterns to understand financial health and efficiency. Break down costs into fixed and variable categories like salaries, rent, and marketing. Estimate future revenues and gross margins using your sales pipeline, pricing, and customer retention data. Use a spreadsheet or financial software to construct an income statement showing monthly revenue, costs, and net profit. The cash burn rate equals your net loss, adjusting for non-cash expenses like depreciation. This projection helps you strategize funding needs and cost management.

Cash burn rate encompasses the entire organisation's Operations. It covers : - Overheads, you are incurring on a monthly basis, these are fairly fixed costs and can be optimised basis the organisation structure - Operational costs, are the costs you incur for achieving your revenue targets. This is very tricky and the entire company can come to standstill if you get this wrong. You need predict the demand accurately - marketing & sales costs, these are generally incurred for growth enablement and this is the area where the cost of failure can be highest for the startup - Capital Investments, specifically applicable for product based companies, SAAS companies, technology companies. You need to estimate these on a monthly basis

I've written about this extensively on my LinkedIn page: you need to build a solid P&L in 6 steps: 1) revenue = price x quantity. 2) variable costs that lead you to margin analysis. 3) fixed costs that will lead you to EBITDA, ignore depreciation and amortization that are not cash, include CAPEX, and that will take you to Free Cash Flow. 4) From there build a J-curve to understand the cash needs of the business over the next 5 years. You should aim to finance the business every 18 months, so the curve will tell you how much to raise in tranches 5) try to check the model for consistency with vertical + horizontal analysis. 6) do a sensitivity analysis with scenarios (best case, worst case, target case). Use it during fundraising negotiation.

Many struggle in figuring out milestones or objectives in forecasting so I find it helpful to think of this a little differently. When you are making your plan, as yourself what questions you need to answer. This process can actually help in formulating the plan as each question answered leads to the next. As you answer questions, you are actually de-risking the company. De-risking the company increases value which then enables future funding. For instance, early on you are looking at: - does the product work? - what do you have to do to scale to the next level? - what staffing do I need to take the next step? - how much will the staffing cost? The right questions enable putting a plan in place and help to enable appropriate execution.

Forecasting funding milestones requires understanding the benchmarks for your industry, company stage, and location. These milestones are critical for securing the next funding round and should align with market expectations, showcasing your startup's potential for growth and profitability. Investigate typical VC expectations for businesses like yours, integrating this research with your detailed plans for product development, marketing, and team expansion. Utilize tools to track your progress against these milestones, ensuring they are SMART: specific, measurable, achievable, relevant, and time-bound. This approach helps articulate your growth trajectory and funding needs clearly to potential investors.

This is one of my faviourite topic while talking to startup founders I see many pitch decks have the funding requirement slide with mix of expenses which the founder plans to incur towards various expenses, typically depicted by a pie chart. Any investor would like to invest towards the growth of the startup and investor should see how startup is planning to grow by achieving various growth milestones. Your startup's journey can be very well depicted by showing a nice chart of milestones you will achieve. Short term milestones can be : Achieving certain revenue targets, Testing a new customer segment, Long term milestones can be : Launching new product, Expanding globally etc. These can be set up as proper metrics for monitoring

Utilizing tools and templates can significantly streamline your cash flow forecasting process. Services like Brex and Finmark offer specialized financial tools tailored for startups, providing functionalities like revenue, expenses, and cash flow forecasting, as well as funding round planning. Y Combinator's resources, such as their cash flow and cap table templates, are invaluable for structuring your financial data effectively. While these tools provide a solid starting point, it's crucial to tailor them to your startup's specific context. Regular updates with real-time data and stakeholder feedback ensure your forecasts remain relevant and accurate, helping you make informed decisions and communicate effectively with investors.

Whilst there are many tools towards forecasting cashflow and measuring startup milestones, capturing these in a spreadsheet is a good start. Collaborative tools such as Notion can be useful as well. Its important to review these milestones on a periodic basis Capturing these as a part of monthly review with your team and then reporting to your board and investors can be a great practice as well. Forecasts if not updated regularly will be of no use. These are very good indicators of how you are managing your organisation. Investors would always want to look at financial forecast with milestone as this provides a first level reality check of what you presented in pitch deck. Its never too late, so why not start working on it today ?

One of the top reasons why startups fail is due to lack of cash or funding In my opinion, many startups fail as they are unable to predict cash, cash burn at the right time. Capturing byte sized cash requirement to achieving byte sized milestones can be a great way to grow your startup bit by bit and step by step. A startup founder should always be stay objective while being passionate towards what he/she is creating. Balancing all four quadrants of customer, people, investor and operations and all of them in an objective way can help you to stay ahead of the curve. Finance strategy is of utmost importance for your startup to succeed. Key aspects of Finance Strategy are Pricing of Product, Estimating Demand, Financing the Startup

Cash is king. It will drive everything from your survival to your valuation. How much money you can raise. How fast you can move. How many mistakes you can make. So give your bank account the attention it requires. Anticipate your expenses. Don't count your money until it is in your bank account. And create a safety margin. Entrepreneurship is about calculated risks, not a series of all in bets that luckily succeeded.

Probably you already forecasted funding on the basis of operating expenses and capital expenses needed, funding milestones, etc. and you have used a very complicated spreadsheet or other specialised software tools for that purpose. Well, then whatever you think it's needed, you'll need 15% more of it. Adding a funding buffer is something that most startups should do as cash runs out quicker than what they think, but this one shouldn't be touched unless absolutely necessary. You'll quickly realise that a quick lawyer query that you didn't think about earlier will have to happen to secure that market entry, or that additional working capital investment is needed to move faster.. there'll be a world of reasons, so prepare for a rainy day.

Money in Bank always helps the founder. The best to estimate cash is to build a business model and stick to it! Check for deviations every month through MIS tracking and you are good to go.