What the 3 year plan reveals about a startup or…

Many investors will tell you that a 3 year plan is a complete waste of time. Its a fiction, it never materialises. The cliched hockey stick often evokes amusement. So, should you prepare one at all — if no-one believes it?

I think so. I find it a useful indicator of a number of things.

A detailed 12 month financial plan is essential and reveals really important information:

• what is the expected composition of the team? How will it grow during the year(s). These data indicates the focus and orientation of the founders — product, market or finance focused?

• how are they (including the founders) going to be compensated? Is everyone financially aligned in terms of risk reward? The bulk of investors cash is going to pay founders and team — is the team compensation appropriate for the stage of the business?

• how are the founders thinking about their occupancy costs?

• has revenue been built into the plan? If so, is it built ‘bottom up’?

• subscriptions for tools and infrastructure tend to grow and are often considered to be de minimis — they need to be thought about and budgeted for

• are variable costs relevant and have they been properly reflected in the P&L

• if working capital or fixed assets are relevant, has a balance sheet and cashflow been prepared. Its surprising how frequently working capital movements are not fully understood.

What about years 2 and 3?

Here is where ambition needs to be revealed — with a dose of reality. An anaemic plan will deter venture investors but an unrealistic one will damage credibility. Getting this balance right is really important and will demonstrate a good understanding of what it takes to build the business and of the market potential.

Personally, we prefer to see a bottom up plan for year 2 — as a continuation of year 1 — especially because at LocalGlobe we are strong believers in funding businesses for at least 18 months (revenue free) until the next funding round.

As the business matures, it is important to maintain a rolling 3–5 year financial plan — updated every year based on the learnings of the past and new perspectives of the future. Time spent on this exercise is time really well spent — especially if the whole leadership team is intimately involved.