Why on Earth Do I need a Five-Year Plan?
There are close to 700 fundraising transactions per year in our Startup Nation. They vary in so many ways, but they all have a one major thing in common – all the startups are asked for a five-year business model during fundraising. So, founders find themselves stepping into their local café or to their new office, feeling like an elementary school kid who is forced to write a boring book report.
Yes, it’s true that it’s merely an Excel file that, according to industry lore, can ‘suffer anything,’ but still, after taking a closer look at what a VC is really after, and at the value that a young startup can actually gain from the exercise, that ‘school kid’ feeling can certainly be changed.
We approached some local VC executives and spoke with a few CFOs in our firm to get some insights into the Five-Year Plan exercise. Here are some of the findings.
“We are aware that the knowledge level of the founders and VCs is limited during the initial stage, and there is a weak correlation to how things will eventually turn out,” says Rona Segev from TLV Partners. But it is still a theoretical exercise that’s highly important for first-time entrepreneurs.
Segev confirmed that VCs are aware that the typical timeframe to building a saleable product is 18-24 months, and that they carefully examine the expense structure and planned burn rate for this time period to verify that the funds will indeed carry the entrepreneurs to the desired milestones. Nevertheless, she asks for a full 3-year model to gain more visibility on the business model, pricing and sales mechanism during the first year of sales to evaluate if the founders can imagine how the mature sales stage will look, and whether it’s aligned with benchmarks and comparable growth rates.
No one is impressed by spreadsheets, agrees Amit Karp, Partner at Bessemer Venture Partners. It’s the action behind compiling it that’s important. A five-year model is an assignment for how to build a company and how it will look like when it’s mature. Similar to Segev, Karp learns about the cost structure from the five-year plan, and judges if the people in front of him are professionals who can use the budget as a tool to manage their business. When it comes to the later columns of the plan, Karp focuses on the unit-economics characteristics (an issue for another article on its own).
It is indeed a ‘seriousness threshold,’ confirms Amit Ashkenazi, a former partner at Viola Growth. According to Ashkenazi, as an investor, he wants to see that the entrepreneurs have researched the market for their product or service and have devised a viable business model. He wants to make sure that he’s aligned with the founder’s plan and assumptions. Another reason he insists on a five year timeframe is because it’s the average period that a Growth Equity Fund holds an investment, and therefore it’s used as a basis for the ROI analysis and future financing strategy.
“Viewing your plan as a fundraising tool is just the beginning of the story,” says Itzik Lev, Partner and CFO at Nextage. Leadership teams at a startup can use the plan for so much more – for thinking of new future products and solutions, for thinking of new areas and markets to operate, for setting KPI targets and watch it evolved over the years. According to Itzik Lev, a solid Excel infrastructure can serve companies for years, helping with preparations for quarterly board meetings, annual budget approval, cash management, and more.
A few years ago Itzik wasn’t sure that the investment in time and money to develop a five-year plan was fully justified. But now, after completing dozens of successful planning processes that have led to the fundraising of hundreds of millions cumulatively, Itzik is fully convinced in the value of the five-year plan. Along with the other high-profile entrepreneurs and VCs, they