After two years of graduate school and seven years of early stage venture investing, it seems like I am continually having to unlearn what I was taught now that I working with seed stage companies in Montana. One of the first requests from VC's when looking at companies is "let's see the finanicals" meaning, let's analyze the Balance Sheet, Income Statement and Cash Flow Statement. Like any good little grad student or analyst in a VC firm, I can crunch numbers with the best of them. In fact, I love to do that. I can spend hours calculating ratios and indicators. Only now am I starting to understand the futility of this exercise and the in-appropriateness of it for early stage companies. Why?

1. The whole foundation is flawed. Extracting meaningful and actionable information from three spreadsheets that by definition, look backward is not very meaningful for seed stage companies.
2. Who, besides your CPA really understands them to the fullest extent? Remember that exercise in Accounting 201 where we were given a balance sheet and income statement and told to create a cash flow? It was hard then. I venture that very few CEO's could do that today. And yet, companies, especially early stage companies, live by cash flow.
3. They are misleading. Financials have alluring terms in them such as Revenue, Net Income, Earnings, Assets, Equity and others. Trying to maximize any of those, for a small company, is reckless.

Do I dare say it? Stop looking at financial statements! Start looking at a cash forecast and your general ledger.

More later.