Presentation counts when it comes to financial modeling. A financial model is a significant instrument that describes your company’s potential and proves its sustainability. It’s not just a spreadsheet of numbers, it is a lot more than that. Use your startup’s financial model to communicate the value proposition to potential investors. To navigate discussions, and secure the capital needed for expansion.
Given that venture financing is considerably more difficult to come by now than it was in 2021. Having a solid financial model is crucial. Crunchbase claims that even the mad dash to invest in AI firms in the second quarter of 2023 failed to lift global venture capital out of its gloom.
I support my customers with M&A advisory. Also with fundraising strategy, pitch presentations, financial modeling, valuation analysis, and other tasks as a startup consultant. I have seen firsthand the difficulties faced by company entrepreneurs. They are those who fail to abide by one basic guideline: Think about your financial models from the viewpoint of an investor.
Investors closely scrutinize a company’s finances. You might feel tempted to use a professionally crafted financial model template for startups. Especially if you lack extensive financial experience yourself.
However, I don’t advise doing this because a template isn’t always as simple to utilize as it looks. Large blank spaces that don’t relate to the business model of your organization could be your problem. Even worse, you might be unable to utilize some portions of the model .This is because you can’t adjust the underlying formulas to your satisfaction. Starting from scratch will yield a more useful and polished output, even though it will require more work up front.
I talk about how I have assisted founders in developing a financial model with investors in mind in this article. As well as how to leverage the model to craft an effective pitch.
Pay attention to KPIs (key performance indicators).
Achieving the ideal balance between providing investors with a thorough understanding of your startup’s financial situation and not scaring them away with undue detail is crucial. Especially when it comes to financial modeling. Focus on the most significant measurements that show the development. Also the promise of your startup, referred to as key performance indicators, or KPIs. At the strategic level, this may seem apparent, yet company founders frequently become bogged down in the specifics.
I used to work for a startup that created a cutting-edge online storefront. It had created a financial model that was so intricately complex that it was challenging to locate the key performance indicators .Because it was ready to present to investors for its upcoming funding round. I worked with the entrepreneurs to determine the most crucial KPIs for their firm Also helped them rank them, and added them to the financial model. Here’s how to go about striking the ideal balance:
Recognize Your Industry and Business
Gain a thorough grasp of your industry, your business strategy, and the elements that propel profitability and development first. This information will assist you in identifying the precise criteria. These are that which potential investors will be looking at when assessing the viability of your firm. Retail businesses may target measures like average transaction value and inventory turnover. Whereas software as a service (SaaS) startups may prioritize data like monthly recurring revenue (MRR) and customer acquisition cost (CAC). In the case of the e-commerce startup, we determined that we need to highlight measures such as monthly average users, lifetime value, and customer acquisition cost.
Match KPIs To Strategic Objectives
Make sure to draw attention to the KPIs that best capture the overarching strategic goals and growth plan of your firm. For instance, you may give higher priority to KPIs like customer lifetime value. More such as cost of acquisition, and number of new customers if your main objective is to grow your clientele quickly.If you aim to enhance operational efficiency, focus on Key Performance Indicators (KPIs) related to cost control, such as gross margin and the proportion of operating expenses to revenue. In my previous role with an e-commerce business, we knew the break-even point on sales. But were uncertain about how that figure correlated with the type and quantity of clients needed. To make sure the startup kept on course. We built a dashboard that tracked the amount of clients for each sales channel.
Make KPIs Clearly Visible
Make sure that, within your financial model, investors can easily locate and comprehend the KPIs you have selected. If necessary, use charts, graphs, and tables to present these indicators in an aesthetically pleasing and simple-to-read format on a dedicated KPI dashboard or tab.
Include KPIs in a separate analysis section or within your financial statements, ensuring they are easily interpreted and have clear labels wherever they appear.
I worked with the e-commerce firm to develop a customized dashboard that showcased its most important indicators, allowing investors to quickly assess the startup’s potential and performance. Ultimately, the business was successful in obtaining the capital it needed.
The straightforward presentation of KPIs notably bolstered the investors’ confidence to invest and improved their understanding of the business.
Include Your Cap Table
Include the capitalization (or “cap”) table in your financial model presentation as a crucial step in showcasing a thorough comprehension of the ownership and financial structures of your firm. Summarize the ownership of your startup in the cap table, which includes information on the following elements:
Founder equity :It is the proportion of each founder’s ownership that represents their roles and contributions to the startup.
Investor equity :It refers to the shares that venture capitalists, angel investors, and other financial supporters own along with the investment rounds for each of them.
Employee equity: Grants and stock options given to workers as a component of their pay packages
Securities that are convertible: SAFE agreements or convertible notes that detail the conditions of conversion and any dilution consequences
Dilution situations: Prospective results of upcoming funding rounds, showcasing the expansion potential of your business and the influence on present stakeholders
Making sure the cap table and your financial model are consistent gives investors a clear and accurate picture.
Instill a Feeling of Immediacy
If investors move quickly, a strong financial model can assist you in highlighting any chances and industry trends that offer special windows for the expansion of your firm. You can convey urgency by emphasizing many crucial elements:
1. Opportunities with a tight deadline: I used to work for a creative firm that created a revolutionary AI healthcare system. It demonstrated the possibility for significant income from a new government telehealth effort with a short application window using its financial model.
2.Consequences of inaction: Although a tech company has created a novel Internet of things device for smart homes, competitors are approaching. The financial model would show investors how quickly funding delays could jeopardize the company’s anticipated market share.
3.Speed to market: After obtaining finance, a food tech company with a lean business plan and solid relationships may demonstrate how quickly it may turn a profit by utilizing its financial model.
4.Early-mover advantage: With investor assistance, a fintech business that leads its niche can use its financial model to demonstrate the possibility of growing its market share and brand awareness.
5.Scalability and potential for expansion: A software as a service company with a strong development plan may utilize its financial model to showcase its scalable business model and show how more investment could lead to a sharp increase in monthly recurring revenue.
Emphasizing chances with a short window of time can assist convince investors that moving quickly is necessary for a better position in the market and greater returns. This is especially helpful in the current environment, where investors are becoming more cautious and cash is much less available than it was a few years ago.
Arrange Your Financial Model – Impact and Clarity
It’s time to settle down and start building your model now that you know what needs to be included. Of course, thoroughness is crucial, but don’t undervalue the influence of clever design as well. Navigating a sound financial model should be as simple as opening a neat filing cabinet. This is how you do it:
Sort your financial data such that each key component is on its own tab. Assumptions, income statements, balance sheets, and cash flow statements are typically the essential tabs. Additionally, tabs for your cap table and scenario preparation can be present.
Prevent clutter:
Each view and analysis doesn’t require its own tab. For every statement or subject, use a separate tab, and switch between pertinent views by just changing a few variables.
Make your content stand out:
To separate sections, use clear headings and subheadings. For headlines, use bold text; for assumptions, inputs, and outputs, use different font colors; for comments or notes, use italics. If necessary, further distinguish tables, dashboards, and other information chunks using lines and backdrop colors.
Maintain coherence:
Throughout, use the same formatting and style. This implies that every header, every subhead, every input, every output, and so on should have the same appearance. This will significantly improve the understandability of the hierarchies and equivalencies in your model.
Create visuals to help you showcase your model:
Make simple and easy-to-understand graphs, tables, or charts that highlight the important elements of your financial model. These data visualizations can enhance the impact of your presentation and assist investors in rapidly understanding the most crucial information.
In comparison to your genuine idea, presentation may appear like a surface-level component of your model, yet its potential influence cannot be overstated. Let’s look at a real-world example, a SaaS business that I previously assisted. Its pitch deck was outstanding, and its product—a financial management and payments application geared for SMBs—was excellent. Its financial approach prevented the investors from seeing the company’s financial potential; investors compared it to a kitchen where the food was prepared but the components were hidden.
I could see that the business needed assistance cleaning up its “kitchen.” To make each tab easy to navigate and to distinguish between the inputs and outputs, I used consistent formatting. The founders found it considerably simpler to handle their own finances right away, and investors saw the company’s potential immediately. Consequently, the SaaS firm was able to obtain the necessary investment.
Test your financial model, and keep testing it until it passes.
A solid, tried-and-true financial model boosts your reputation and shows that you understand the industry. Take into consideration the following tips to make sure your model is precise, trustworthy, and successfully conveys the potential of your startup:
Verify calculations, assumptions, and inputs again: Ensure that the assumptions and inputs in your financial model are supported by reliable data and market analysis. Verify that your calculations make sense and are accurate based on your inputs. To support your estimates and verify your assumptions, consult industry benchmarks or historical data.
Test your model under stress by adjusting important parameters and underlying presumptions to observe how the results change. This aids in your comprehension of the possible dangers and uncertainties connected to your company and equips you to respond to queries or worries from investors about various situations.
Ask dependable professionals for their opinions: Present your financial model to seasoned experts who have successfully raised money, such as mentors, advisors, or colleagues. They can assist you in determining any flaws, contradictions, or potential areas of development.
Regularly review and update your model: Your financial model should change as your company does. Update your model often to reflect new information, market analysis, and adjustments to your company plan. This not only guarantees the accuracy of your model but also shows your continued dedication to comprehending and overseeing the financial health of your firm.
Be Ready to Provide Inquiries – Provide Support for Your Presumptions
Investors prioritize two factors, in my experience, especially for early-stage companies: if the founder truly understands how their business operates, and whether the figures are realistic. You need to be an expert in your model so that you can thoroughly explain and defend your assumptions, computations, and financial projections in order to effectively respond to questions and inspire trust. This is how to get ready:
Recognize your presumptions:
Although it could seem apparent, you’ll need to be able to justify to investors the sources of your assumptions. For instance, industry research may point to cycles or trends that you might anticipate repeating.
Describe your approach:
In what precise manner were your numbers determined? Gaining trust and reassuring investors is possible when you are open and eager to share your process.
Make an investigation:
You don’t probably know as much about your industry as your investors do. To demonstrate that your assumptions are supported by data that prospective investors can and will believe, use credible sources that are pertinent to your industry.
Expect frequently asked questions:
Practice your answers in case someone asks you a question concerning your model. For instance, if you run a software as a service business, you should be prepared to respond to inquiries about your churn rate management strategy, your plans for expanding your customer support team, and other pertinent topics.
I’ve witnessed firsthand how much a straightforward model refresh can do to help a startup that is having trouble getting funding. Investors will notice your startup’s potential and be able to rapidly comprehend critical insights if your financial model is well-formatted. Conversely, an ill-formatted model might lead to misunderstandings and compromise the narrative you are attempting to convey.
Not to mention, a well-structured and tailored model makes it simpler for you, the founder, to understand and utilize.
Build your company’s foundation using a financial model. Keep it in mind for almost all decisions that will impact the future of your business, including monitoring progress, testing ideas, allocating resources, seeking finance, assessing risk, and forecasting growth. Consider the potential consequences of making a choice based on imprecise, erroneous, or incomplete information due to the complexity of your model.
You don’t have to be an expert in all the finer points of money; not every founder is. Your startup’s financial model can help you manage your business more smoothly and improve your chances of getting the funding you need to expand and succeed over the long term with careful planning and consistent maintenance.