Why Investors Won’t Believe Your Projections

If you buy something through our links, we may earn money from our affiliate partners. Learn more.

Entrepreneurs frequently complain that business angels and venture capitalists don’t take the sales growth projections in their business plans seriously. Rather that discounting those projections by 5, 10, 25, or even 50 percent, investors just ignore them.

While that frustrates many entrepreneurs, it makes a lot of sense because sales growth projections aren’t very informative.

Venture capitalists and angel groups are looking for companies that can scale quickly, reaching $50 million or more in sales in six years after starting. So entrepreneurs project that kind of sales in their business plans. For instance, more than half of the companies that presented to one angel group I know well presented sales projections of over $50 million in six years.

Unfortunately, very few companies actually achieve this level of sales in this amount of time. According to data from the U.S. Census on the sales of start-up companies six years after they were founded, only 0.4 percent of all software start-ups, 1.18 percent of computer peripherals companies, 2.0 percent of computer hardware companies, 2.61 percent of surgical and medical instruments companies, hit $50 million in sales within six years of starting.

If more than half of entrepreneurs seeking money from angel groups and venture capitalists project sales of more than $50 million in six years, but less than three percent of them actually make that target, then sales projections don’t provide much information to investors.

So it’s not a question of discounting the projections. The projections don’t help to separate the good deals from the bad ones. To make their decisions, investors need to look at something else.

* * * * *

About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of seven books, the latest of which is Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By. He is also a member of the Northcoast Angel Fund in the Cleveland area and is always interested in hearing about great start-ups. Take the entrepreneurship quiz.


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

3 Reactions
  1. Scott,

    So, what do investors look at?

    All the Best,

    P.S. I am on chapter 4… 🙂

  2. Martin,

    There are two different answers to your question. One is that investors in young, potentially high-growth companies aren’t systematic precise investors with a formula that they are looking for. Each one has his or her own favorite indicator. That could be the entrepreneur’s track record, or evidence of customer interest in the product, or the advisory board of the company, etc… Therefore, fit is key. You need to have the right indicator for a particular investor.

    A second answer is that most predictors are crude, which leads a lot of investors screen out rather than screen in. For instance, venture capitalists screen out businesses that aren’t in a narrow range of industries. From 1980 through 2004, 81 percent of all venture capital dollars were invested in just five industries: computer hardware, computer software (including the Internet), semiconductors and other electronics, communication, and biotechnology, and 72 percent of recipient companies operated in these industries. So most VCs just screen out business opportunities not in those industries.

    Screening out means that a bunch of things are not considered, but within the narrow categories that are considered, the reasons why somethings interest investors more than others are more idiosyncratic.

  3. Scott,

    Thanks for your detailed reply. I will look out for the “matching” investor who could fit our business! 🙂

Leave a Reply

Your email address will not be published. Required fields are marked *