Jolly Fun Mistakes Made in Pitches – Third Entry

There comes a time in the diligence process when I ask a Founder to review his or her financial plan with me.  It almost never takes place during the first or second meeting because I need to understand the opportunity at a pretty deep level before running through the forecast.  To me it isn’t an exercise in ticking and tying numbers but rather one of the best opportunities to see how the Founder thinks about his or her business and what lies ahead.  Why?  Because at its core a financial plan is a description of how the Founder sees the future playing out.  It’s the perfect excuse to discuss a host of “what if” questions because there’s precisely a zero percent chance that the future will unfold the way it’s crafted in the plan.  Precisely zero.  Zilch.  Which leads me to the next jolly fun mistake made in pitches:

Mistake #3 – Thinking of your financial plan as the only plan

To explain this mistake, I’ve constructed a simplified and exaggerated conversation with a Founder:

Me: “OK.  I have your 2015 and 2016 financial forecast in front of me.  Talk me through what the next six months look like.”

Founder: “As you can see, we plan on making very small improvements in each of our core drivers.  By year-end we plan on increasing the response rates of our direct mail campaigns by 10%, the number of booked loans per sales agent by 8% and our average loan size by 5%.  These are pretty conservative improvements relative to what we’re expecting to happen.”

Me: “Great.  Let’s start with the increase in response rates.  Are the increases due to improving the effectiveness of the direct mail collateral or improving your targeting models?”

Founder: “About half the increase is going to come through an improved response model and half through refining our marketing materials.  We’re already working on the response model and the early results are better than we expected.”

Me: “Fantastic.  Have you looked to see if the lower responding customers that you’re planning on cutting out happen to be your lower risk credit customers?”

Founder: “No.  We can run that analysis for you if you’d like.”

My Inner VoiceShouldn’t he want to run the analysis?  Isn’t he curious what he could learn about his own business?

Me: “Great.  I’d love to know how much additional marketing budget you’d need if you find out you really like these customers and want to keep them.  I have a sneaking suspicion that they’re more profitable than you think.”

Founder: “If that happened we’d find a way to improve our response to hit plan.”

Me: “But you’re already counting on improvements in your marketing materials so what else could you do to make up the difference?”

Founder: “We’re already being conservative in our forecast so I feel confident in our numbers.”

Me: “I get it.  But what if you’re wrong?  How much additional marketing budget would you need if you really like your lower responding customers?”

Founder: “We’re a team that’s really good at managing to our operating plan so the question is irrelevant.  We know what our budget is and we’re going to manage within it.”

Me: “And what if a hundred new competitors entered the market and interest rates spiked by a thousand basis points and the country entered a really really bad recession?  Then what?”

Founder: “We’d manage within our budget.  Do you have any other questions on our response assumptions or should we move on to the next performance driver in the model?”

Me: “Uhhh…..”

I know this example is a wee bit simplistic but hopefully it makes the point.  The best Founders understand that their plans are merely articulations of what they expect to happen and are prone to error.  In fact, ask any Venture Partner and (s)he will tell you that greater than 99% of their early stage companies miss their forecasts.  The best Founders recognize this and are receptive to feedback about their plans as well as flexible enough to adjust the plans as results materialize.  They can live in a world of multiple futures and talk fluently in the language of uncertainty.

And at QED Investors, we like working directly with Founders to build their plans.  Understanding the principles of how the business works and the interactions of the key drivers of success is an important step in the process.  Thinking through how the future is likely to unfold is equally important. To us, realism is much better than naive optimism even if it creates a less valuable business on paper.

So look in the mirror and say to yourself: “Only the past is known.  The future has yet to be written.  And as much as it hurts to admit it, there isn’t a chance that my 2,000 row spreadsheet connects the dots.”


  1. Good thoughts, Frank….. It is evidence of the fact that many folks look to understand just enough to validate their own perspective and the lack of flexibility in adapting and adjusting the financial plan can put artificial limits on how deep you should go to find more realistic and valuable answers.


  2. Great piece on looking deeply into all aspects of the business model. In Financial Services the products are so numbers-based the CEO must have a deep understanding of the interplay of credit, growth and cost and great grasp on the levers at the company’s disposal.


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