Attract investors with a financial model that provides them with all the information they want about your firm in a snap.
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 more than simply a spreadsheet of numbers. Your startup’s financial model may assist you in presenting your value proposition to potential investors, navigating discussions, and obtaining the capital you require to expand.
Given that venture financing is far more difficult to get 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 advise, fundraising strategy, pitch presentations, financial modeling, valuation analysis, and other tasks as a startup consultant. I have seen personally the difficulties faced by company entrepreneurs who fail to abide by one basic guideline: Think about your financial models from the viewpoint of an investor.
With investors closely scrutinizing a company’s finances, you might feel tempted to utilize a professionally crafted financial model template for startups, especially if you lack extensive financial expertise. 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 might be your problem. Even worse, you could be unable to utilize some portions of the model since you can’t adjust the underlying formulae to your satisfaction. Starting from scratch will yield a more useful and polished output, even if 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 post, 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 when it comes to financial modeling. Focus on the most significant measurements that show the development and 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 as it was ready to present to investors for its next fundraising round. I worked with the entrepreneurs to determine the most crucial KPIs for their firm, helped them rank them, and included 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 company strategy, and the elements that propel profitability and development first. This information will assist you in identifying the precise criteria that 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). We determined that highlighting measures such as monthly average users, lifetime value, and customer acquisition cost would be necessary for the e-commerce firm.
Match KPIs To Strategic Objectives
Make sure to draw attention to the KPIs that best capture the overarching strategic goals and growth strategy of your firm. For instance, you may give higher priority to KPIs like customer lifetime value, cost of acquisition, and number of new customers if your main objective is to grow your clientele quickly. You may concentrate on KPIs associated with cost control, such as gross margin and operating expenditures as a proportion of sales, if your objective is to increase operational efficiency. The e-commerce business I previously worked with knew the amount of money needed to break even on sales, but it was uncertain about how that figure correlated with the type and quantity of clients required. To make sure the business kept on course, we built a dashboard that tracked the amount of clients for each sales channel.
Make KPIs Clearly Visible
Make sure that, inside your financial model, investors can easily locate and comprehend the KPIs you have selected. If necessary, use charts, graphs, and tables to show these indicators in an aesthetically pleasing and simple-to-read style on a dedicated KPI dashboard or tab. Make sure to include KPIs in a separate analysis section or in 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 investors notably remarked how their confidence to invest was bolstered by the KPIs’ straightforward presentation, which improved their understanding of the firm.
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. The ownership of your business is summarized in the cap table, which includes information on the following elements:
- Founder equity is the proportion of each founder’s ownership that represents their responsibilities and contributions to the business.
- Investor equity refers to the shares that venture capitalists, angel investors, and other financial supporters possess 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 scenarios: Prospective results of next financing rounds that illustrate the potential expansion of your firm and the effect 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 may convey urgency by emphasizing many crucial elements:
- 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.
- Consequences of inaction: Although a tech company has created a novel Internet of things gadget for smart homes, rivals are approaching. The financial model would show investors how quickly financing delays may jeopardize the company’s anticipated market share.
- Speed to market: After obtaining finance, a food tech company with a lean business plan and solid relationships may demonstrate how soon it may turn a profit by utilizing its financial model.
- Early-mover advantage: A fintech company that leads its industry may use its financial model to demonstrate how, with the help of investors, it could grow its market share and brand awareness.
- 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 further investment may lead to a sharp rise in monthly recurring income.
Emphasizing chances with a short window of time may assist convince investors that moving quickly is necessary for a better position in the market and greater profits. This is especially helpful in the current environment, when investors are becoming more cautious and cash is much less available than it was a few years ago.
Arrange Your Financial Model for Impact and Clarity
It’s time to settle down and start building your model now that you know what has 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 file 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 various 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 may enhance the impact of your presentation and assist investors in rapidly understanding the most crucial information.
In comparison to your genuine concept, 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 presentation 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 restaurant 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 browse 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, advisers, 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 business 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 Prepared to Answer Questions and Defend Your Assumptions
In my experience, investors—especially for early-stage companies—prioritize two things: whether the numbers are reasonable, and whether the founder actually understands how their business works. To effectively address inquiries and instill confidence, you must know every aspect of your model inside and out so you can explain and defend your assumptions, calculations, and financial projections in detail. Here’s how to prepare:
- Recognize your assumptions: Although it might seem apparent, you’ll need to be able to tell investors where your assumptions are coming from. For instance, industry research may point to cycles or patterns 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 method.
- 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 update can do to help a business 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 entrepreneur, to understand and utilize. Your company’s basis will be built using a financial model. Almost all of the decisions that will impact the future of your business will be made with it in mind, including monitoring your progress, putting your ideas to the test, assigning resources, looking for finance, assessing risk, and forecasting your growth. Just think about how bad it would be to base a choice on information that was imprecise, erroneous, or lacking because your model was too complicated.
You don’t have to be an expert in all the finer points of money; not every founder is. Your startup’s financial model may 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.