Kory Henn, Author at Concrete Ventures

Author: Kory Henn

Author: Kory Henn

A common reason why VCs don’t invest in a lot of startups is that the opportunity isn’t what we call “VC Backable”. This piece of vague feedback is common across the industry, but more importantly, I think it’s crucial for entrepreneurs to understand what this means. It very well may shift your fundraising strategy, or how you think about your business entirely.

A good place to start is by understanding the goals of a VC fund.

A venture firm’s ability to make a return on the capital it invests is key to this entire discussion. But just how hard is it to make money in venture capital? And how much money does a VC need to make? Let’s answer these questions first from a macro perspective than from a fund-level perspective.

In finance, there is a concept called the Capital Market Line. A simple chart that plots different asset classes on a risk/reward plane. See below:

Coming into Focus – Howard Marks

We all know that startups are risky. But what the capital allocation line tells us is that venture capital (which rests beyond private equity on the capital market line) is a high-risk, high-reward asset class.

So, what does this mean? If we look at VC portfolio return data from Angel List, we can see how “high risk, high reward” manifests itself:

Angel List

This chart shows us that most early-stage funds return somewhere between 1-2x the capital invested… Which is a sub-optimal rate of return. Keep in mind that this 1-2x return is happening over a 7–10-year lifespan, so more times than not – Limited Partners (LPs), who invest in VC funds, are better off investing in a different asset class if they are purely seeking superior returns. The challenge in venture capital, however, is that not all investments are equal. If every single company a VC invests in returned 3x that would be great! But that isn’t the case. So, what does a real venture fund look like?

Rhino Ventures

Rhino Ventures here in Canada publicly shares their fund performance. The 2015 vintage fund on the left really highlights how not every investment is equal. In this case, 50% of the portfolio is valued at less than 2x and while it certainly helps to not have many write-offs; the bulk of the returns came from just a few investments… According to their blog post, the overall fund has a return multiple of 7.1x (as of Q4 2020). Which is a top-performing fund by VC standards.

The takeaway here is that venture capital is just another asset class for investors to allocate capital towards. Performance matters, so VC investors want to deliver outsized returns compared to other investment alternatives. Let’s take a look at the performance of a few investment options:

Asset10-year return
A Top venture fund (2010 vintage)40.10%
A Median venture fund (2010 vintage)13.25%
S&P 500 return 2010-202011.30%

Top & median venture fund performance data courtesy of Pitchbook

Look at the top performing venture fund in our table above – coming in at 40.10% annual return which is almost 4x what you could have made in the S&P 500. This is what we call outsized returns. The median venture fund on the other hand didn’t do that much better than the S&P 500. After accounting for increased risk and illiquidity (an LPs money is locked up for 10 years in a VC fund), you likely would have been better off investing in the S&P 500 vs. the median venture fund.

So, how does this all tie back to you, the entrepreneur?

Let’s quickly summarize where we are: The goal of a VC firm is to generate outsized returns for its investors. To do this, the fund has to make high-risk, high-reward investments. With the understanding that most portfolio companies will only return 1-2x, and the bulk of returns will come from just a few investments.

So as an entrepreneur, the key question you need to ask yourself is: “Does my startup, despite all the risks, have the potential to be one of these outlier companies for an investor?

To help answer that question, consider the following:

  1. Market size

Market size often comes up in meetings with investors because it helps determine the size of the pond you might be fishing in. A total addressable market (TAM) of say, $100 million usually isn’t enough to get VCs interested.

So, for an investor, TAM = the size of the opportunity your company is going after. It’s important to be thoughtful when calculating the size of your TAM. If you’re using the headlines from Grand View Research or Markets & Markets reports you’re going to be wrong, and investors see right through that.

Of course, companies that create new markets (Airbnb, DoorDash, Uber, etc.) might find this challenging. But there are proxies you can use. For example, Uber first estimated their TAM based on the Taxi industry. Airbnb could have done the same with the hotel industry. Jared Sleeper has a great article on how you can explain your TAM to investors.

  1. Is the market large enough to support multiple $1 billion + companies?

This is key. Remember, VCs are looking for massive outlier opportunities. There are very few winner-take-all markets, but VC investors want to ensure that there is a path for the company to reach the level of valuation that they need.

Recall that since most investments only return 1-2x the capital invested, the few companies that perform very well need to generate strong returns for the entire fund. This is why investors look for companies that can achieve valuations in the range of hundreds of millions to billions of dollars.

  1. Do you as the entrepreneur even want to go down this path?

Funding from VCs sounds great because it solves your near-term problems. But do you really want to grow into a $1 billion+ company? Be honest here – lots of mentors / advisors / others might say “I’ll intro you to VCs, you need capital to scale, etc.” but once you take that money your signed up for the $1 billion + ride. And if that’s not what you want then I can almost guarantee you that the money won’t be worth it.

There is nothing wrong with building a business that doesn’t scale to VC-level outcomes. In fact – I’d almost argue that non-VC businesses are just as critical if not more critical to the economy. Besides, the opportunity for you + your employees to be successful doesn’t rest on being a billion-dollar business… Over the last several years there have been new funding models popping up. For example, ClearCo & Pipe are two companies looking to change the landscape of business funding that don’t require equity.

So to summarize, throughout this post I wanted to highlight two things: 1) How VCs think about their investments and why such large outcomes are required. And 2) How this ties back to you as the entrepreneur. Both from the opportunity-size standpoint (is it possible to generate outsized returns via investing in your startup) and the more personal one (do you even want to go down this road?).

Hopefully, this sheds some light on why an investor might be saying “I don’t think this is VC backable” – Often times we are big fans of the business, but we just don’t see it being able to generate the returns we need.  

Financial Model Templates, balance sheet example

We created a template that covers everything discussed in our how-to post. Filled with sample data for an imaginary startup so you can take the time to understand how cash flows through the business and eventually translates into progress towards milestones. 

This template is an over-simplification designed to drive home the point that cash is the lifeblood of your startup. Fill it with your own information and add what you need so you can get a clear picture of what’s driving your business. 

Concrete Ventures Pre-Seed Financial Model Template

If you’re looking to level up your financial model, then check out some of these financial model templates below:

SaaS Financial Plan v2.0 by Christoph Janz

Use this tool to:

  • Create a simple plan for an early-stage SaaS startup with a low-touch sales model 
  • Includes support for multiple pricing tiers
  • Supports annual contracts with annual pre-payments
  • Great headcount planning section
  • Simple cash-flow planning
  • Plenty of built-in charts


  • Revenue/cost-based model (no balance sheet)
  • Month to month only (doesn’t account for annual plans paid up-front)

SaaS Financial Model, by Jaakko Piipponen

Use this tool to:

  • Upgrade your SaaS Financial Model to an operational tool that helps you make more informed decisions.
  • Build scenario-based forecasts to get ahead of the data instead of reacting to it.
  • Includes loans & investments 

Charlie Tillet Financial Template

Use this model to track:

  • P&L by year and quarter
  • Sales Plan
  • COGS
  • Staffing plan
  • Expenses
  • Balance Sheet
  • Capex and Cashflow
    • Which lets you account for investment

Cash Flow Projection Tool for Tech Companies | BDC.ca

Use this tool to:

  • Present past financial results and project cash flow for up to 24 months into the future
  • Automatically generate key SaaS metrics, for example churn rate, monthly recurring revenue, and customer lifetime value
  • Present financial information and growth forecasts to investors, bankers, and other partners

Use insights from the cash flow projection tool to:

  • Understand the amount of additional funding you need to keep your tech company on the right growth trajectory
  • Highlight shareholder investments and other financial inflows, such as grants, when applying for loans
  • Keep track of key SaaS metrics, such as MRR and churn
Creating your pre-seed financial model, including a balance sheet, to keep track of your cash.

Why we are talking about this:

As early-stage investors, we have seen plenty of financial models, balance sheets, budgets, & forecasts. Surprisingly, considering the importance of cash for any company, it doesn’t seem like there is a consistent “best practice” for financial modeling at the early stages of building a company. 

This post is for entrepreneurs who are just getting started. Maybe you have an idea, an MVP, or even one or two customers. If you already have significant revenue then the finance function of your business will look very different than what we present here, as it should. So with what appears to be an endless amount of advice for budding entrepreneurs, we wanted to create something that would help you cut through the noise and focus on the one thing that truly matters: cash.

We have seen pre-seed startups doing everything from 5-year models, discounted cash flow valuations, and complex scenario analysis. But for a business with little to no revenue, and maybe an MVP, do you really know what your finances will look like in 5 years? How confident are you in that model? 

As investors, the most important things we look for in pre-seed financials are 1) where the cash is coming from, 2) where it’s going, and 3) how that translates into progress towards meaningful milestones. We believe that as an entrepreneur, those three things should resonate with you as well. 

Where is the cash coming from?

The title tells you everything you need to know. The first section of your model should be all about what cash is coming into the business and where it’s coming from. 

Cash sources could be revenue, investment, grants, loans, or any other substantial funding. Breaking out the sources of all your cash line by line helps provide a clear picture of what is really keeping the business alive. Is revenue your main source of cash? Investor capital? non-dilutive funding or grants? 

A common pitfall we have seen is the desire to lump everything into “revenue”. From the accounting perspective, this may be correct in some cases. But it doesn’t provide the insights you need to properly manage your cash.

For example, a business with $500,000 in revenue being sourced by selling products to customers is much more sustainable than a business with $500,000 in “revenue”, with no customers. 

Where is the cash going?

It’s important to get a grasp of where your spending is coming from. Creating a balance sheet and listing all your major expenses line by line can help give you the visibility that you need. 

It’s important to use “fully loaded” costs here. For example, with employees, you must also pay the employer portion of CPP,  EI, vacation pay, benefits, etc. What this means is that the software developer you hired with a monthly salary of $7,500 can end up costing more, depending on your local labor laws. 

When it comes to expenses, don’t feel obligated to list every expense item. Some things like software subscriptions you can lump together to make it easier to read. Especially if the amounts are small. Once certain expenses get over a certain monthly threshold perhaps revisit breaking them out (i.e. paying $2,500 a month for HubSpot). 

Understanding the end result: Your cash balance 

On a monthly basis, you want to understand how much cash you are forecasting to have at the end of the month, as well as how much runway you have remaining. The math is simple: (cash in – cash out) + previous month’s balance. If you’re not yet profitable, you will notice your cash balance continues to decrease. For profitable businesses, this number will increase. 

As the months go by, filling in the “actual” numbers for your cash-in and cash-out items on your balance sheet gives you a glimpse of how your cash balance will change in the future. For example:

  • Slow revenue growth may mean that cash-out is closer than anticipated. Perhaps you hold off on hiring that SDR and customer success rep to help extend runway.
  • In a tight labor market, the cost of great talent may have been higher than you planned. Again, this will reduce the time you have until cash-out. 
  • A favorable scenario – perhaps revenue growth exceeded expectations and you want to know if you can hire the customer success rep 3 months sooner. How will this impact your cash?

Milestone Progress 

Milestones are what define the progress your business is making. Proper milestone identification is a topic on its own. At a high level, it’s important to lay out your roadmap alongside your financial model. 

Being able to see your milestones on the same page your budget allows you to ask some key questions:

  1. Am I spending money on the right things, at the right time?
  2. Will I run out of money before achieving all my milestones? 
  3. Do I have extra time to achieve milestones if things take longer than expected? 

This also helps both you & investors understand how spending ties back to milestone attainment. 

Best Practices

As your business grows, revenue tends to become more predictable. When that time comes, you can start to plan on longer time horizons, which increases the complexity of your modeling. Picture driving a bus, when going slow you don’t need to see too far ahead of you. But once you are traveling at 100km/h you need to see pretty far ahead. The same can be said with financial planning. 

For a pre-seed company with little to no revenue, it’s almost impossible to predict where you will be in the next 24 months. Sure, it will look nice in the spreadsheet and give you some confidence, but will you be right? Unlikely. Will you need to make significant changes? Almost certainly.

Planning for the next 12-18 months is what most early-stage investors are looking for. Answer the question, “what gets us to a seed/series A round?” and then show that from a numbers perspective. 

You don’t need multiple tabs, with tons of variables and complex calculations, and you certainly don’t need a discounted cash flow valuation. 

In addition, you don’t need to plan 3-5 years out, not yet. 

At the early stages of your business, all you need is a bulletproof understanding of where the cash is coming from, where it’s going, and how that translates into progress. 

We gathered a few different financial model templates to get you started