Many early-stage investors now pay little attention to financial models and just try to form their own conclusions about “use cases.” Will anyone find a reason to use the proposed product, and will there be a way to collect money for that use?

In the slide rule, calculator, and ledger paper era one had to spend enormous time just trying to develop a financial model where everything foots properly. The advent of modern spreadsheets gave everybody access to the “hockey stick” in a matter of minutes. Even 25 years ago I heard investors say that alone caused them to spend less time on the numbers and more time on the fundamentals.

Then there’s always been the practice of working top-down from a market with 1 Billion users and assuming the venture will attract 2% of those at $X per month and therefore be worth $$$$$. That method of ignores all the basic questions of how you get that first customer and add them one at a time until you reach the threshold of mass adoption. It’s much more convincing to see a plan that has been thought through from the bottom-up with the mechanics of each step along the way clearly defined and quantified.

Enter now the era of “disruptive” products whose business models fall outside of any norms. They present such novel use cases that one can develop a warm feeling of possible success but have no way to really lay out the path to that happy outcome. Twitter might be the prime example of that. It’s become as much a part of our Internet infrastructure as to be almost indispensible, yet who knows how it will eventually be monetized? On the other hand, Color might be the prime example of the warm feeling that turned cold quickly when the product was exposed to its intended audience.

There’s also the question of faddishness to consider. Although I have long been departed from any role at Peachtree Software, it’s still are real company with a large user base, very profitable, and well known more than 30 years after its founding. Companies depend on it every day to keep the debits and credits balanced. However, which of the high-profile Consumer Internet plays are likely to achieve such longevity? Look at how the explosive rise of the mobile smart phone and tablet platforms has changed the landscape in just 3 years or so. Think about the time and energy applied to each new concept like Google+; those have got to subtract from patronage of other applications – there’s a finite amount of user time for all things social. What was on the main home screen of your iPhone yesterday may soon shift about 10 screens over and be forgotten tomorrow.

I’m working with three startups now that in the context of the aforementioned are tying to develop their business plans for a major round of financing. There’s no well trodden path for any of them to emulate. Each has multiple potential use cases and revenue sources, and modeling those is a matter of selecting among multiple good choices. The direction chosen can dictate such matters as company location, how much money needs to be raised, and the composition of the founding team. It’s like trying to solve an equation with all variable and no constants. And, any discussion of the art of forecasting must be tempered by the art of the possible. What strategy will in fact lure the right amount of funding, for example? Not all concepts are optimized by the “lean startup” and the “minimally viable app,” two common phrases these days. Some are just bigger ideas that won’t work under such constraints. Others perhaps should be resized to fit in these categories if investors won’t take the risk.

There will be more to follow on this topic, as for me this is a real-time ongoing experiment with 3 teams of skilled entrepreneurs.

<photo above of Jesse Dyer working on the forecast for NightRaft, Inc.>