7 Tips for an Investor Grade Startup Financial Model
A great way to showcase your disruptive startup’s potential and growth strategy to investors is through a well thought out startup financial model. As a startup founder, your goal is not to convince every investor but to convince the right investor. Sometimes, investors lose interest because they just don’t get a robust financial model, or your idea is not exactly what they were looking for. Acquiring the help of an experienced business financial consultant is a fool-proof way to create a robust startup financial model.
A well-built startup financial model is like a well-oiled machine. However, this does not necessarily mean that it has to be a complex one. A business financial consultant can simplify the complex nuances of a financial model and transform it into something clear and concise. Based on a set of assumptions, a startup financial model is used to make smart decisions, such as a variable pricing strategy or staff to hire. The model includes financial projections that are tied mathematically to the assumptions, which allows operators to “play with the variables” in order to understand how certain decisions might affect the future health of their company.
Robust Financial Model
When pitching your business to venture investors, sharing a well-designed startup financial model shows that you can model the strengths and weaknesses of your business. This demonstrates the fact that you understand your business idea and strategy completely, providing a sense of trust and responsibility to investors. It provides insights into how you think about your business, helps clarify the main assumptions that drive the strategy and implicitly sends messages about how tech entrepreneurs approach their business.
When to Build a Financial Model
A common concern amongst founders is that they just can’t predict the numbers for the next 4 or 5 years. Not knowing the projected future cash flows can create complications in raising funds for business growth. This is where a business financial consultant can help you. Consultants ensure that you pay attention to your cash flows by diving in and building a startup financial model from an early stage. This ensures that you not only understand the financials of the strategy you’re executing but also get a grasp of your pre-revenue valuation.
Finding a startup financial model template is easy but these templates were not built for your unique business. Using pre-made templates will only increase your technical debt without providing any benefits. A business financial consultant can assist you in creating a unique and personalised template that is compelling and effective.
Financial, Traction, and Operational
Generally during the life of a startup, the startup financial model is usually used in years one and two. As the startup matures in years two, three and four, typically startups run a Traction Model and after year four is when you start getting into Operational Models.
What to Include
The startup financial model has two parts – the input sheet and the output sheet. The input sheet has the assumptions, revenue and expenses and the remaining in the output sheet. Some of the components are explained further:
- Assumptions: The basis of the whole financial model is defined by the assumption, so it must be detailed and well defined.
- Revenues & Expenses: When it comes to these, you only have to remember two things — a detailed breakup and a logic behind the numbers.
- Output sheet: Based on the assumption sheet, the revenues and expenses are derived.
- Weighted Average Cost of Capital refers to the investors’ expectation/return from the project.
- Terminal Growth rate for the company: Assuming the company is an “ongoing concern”, this rate defines at what rate a company will grow after the projected period specified in a model.
Expert Financial Modeling
A well-built financial model is essential in attracting investors and raising capital for your business. Startups spend uncountable hours and end up with a mediocre financial model. At Seven Startup, we help ambitious founders get funded. Our expert financial modeling services team has immense experience in various verticals and can build a bespoke financial model. If you are serious about your financial model and getting funded, talk to one of our experts at Seven Startup Advisory. We help founders embed sales and investor psychology in the financial model.