Detailed forecasts are largely meaningless in seed and early stage investing. When I get monthly forecasts of specific KPI’s and financial statements for a company that has yet to launch, or one with a very limited operating history, I only glance over the values in each specific month. There are simply too many assumptions which go into the forecasts, and too much uncertainty about each assumption, for the forecast to be valuable.

Instead, I take a look at the forecast figures for a specific month roughly one year into the company’s future. Specifically, I look to see whether these figures are aggressive or conservative. These figures reveal a lot about the entrepreneur’s psychology and approach to the business.

Sometimes┬áthere’s a reasonable alignment between the entrepreneur’s expectations and mine. This includes any forecast where the difference between our expectations is less than a factor of 3 apart. Although a factor of 3 may initially appear like a large difference, it isn’t in the context of seed and early stage startups.

However, at other times the forecasts are too conservative. For example, the entrepreneur’s forecast may be 10 times smaller than what I think they could achieve. This may indicate that the entrepreneur isn’t thinking in big enough terms for the business to be a successful investment. Venture investing requires very large returns from a select few investments so we can’t invest in entrepreneurs without bold ambitions.

Although this takes place less frequently, sometimes the forecasts can also be unrealistically aggressive. The market may simply not be large enough to accommodate the forecasts. There can be exceptions to this rule if the company has the potential to expand an existing market, or create a new one. However, outside of these exceptions, forecasts that appear unrealistic relative to a market’s size can signal that the entrepreneur hasn’t done their market research.

Also published on Medium.