All early-stage startups need robust financial models
99% of startup founders are afraid of the terms Pro-forma Financials, Balance Sheet, Types of Cash Flow, WACC, IRR, and especially, Valuation.
99.9% of startup founders don’t understand how to logically estimate demand for their pre-revenue ventures.
If you’re reading this, it’s because you’re raising money or researching the best ways to raise money for your seed or Series A round. It’s a daunting challenge, even for the best finance professionals, and downright scary for startup founders with no finance experience.
According to Fundable and Entrepreneur, 565,000 startups are launched every year and just under 3% receive angel and VC investments. Entrepreneur identifies three main reasons startup founders fail to secure funding:
Misunderstanding your financial situation.
Underutilizing your management team.
Lacking a clear go-to-market strategy.
Investors are looking for a company with a clear and scalable business model they can get behind and help grow. You need to determine a reliable and defensible value of your startup’s worth before VCs will even enter into the discussion.
Modeling an early-stage venture is especially hard because there is no baseline for any financial estimates. Yet, to position your startup as an attractive investment, you must show growth in revenues and profits. The question is how fast they should grow and where that growth comes from. The earlier stage a venture is, the more detailed strategy representation is required for a financial model to be credible.
Unfortunately, just modeling revenue growth rates does not work for a startup because it does not explicitly show where this growth comes from. In the absence of any financial history, the absence of revenue-generating logic makes any resulting numbers unjustifiable.
That is precisely why you need to provide a higher level of granularity in modeling those companies and think about the concrete actions a company must take in order to generate revenues. Those actions will include its go-to-market strategy as well as other business-model specific considerations.
99.9% of startup founders do not have this vital aspect of a successful startup down on paper correctly. If you’ve been struggling to get meetings with VCs or to win competitions, your Financial Models may be unrealistic and the source of the problem. Here is where the rubber meets the road! Focus on this issue and make sure your financial model is rock solid!
In the current business environment, having credible financials is more important than ever to make investors take your seriously!
Action Steps:
Decide if you need a financial slide in your pitch deck. Financial deck slides do not take a standard form. Some startups will use them to showcase how much they raised during their first seeding round or to list potential buyers for an exit strategy. Others might skip this slide altogether and include an income statement on their traction slide instead, highlighting their venture's success so far.
Evaluate your Business Model Slide - if you don’t have a financial slide, your business model slide will undoubtedly be the slide VCs focus on the most. Therefore this slide is the most important slide in your deck!
Mention the following metrics and explain everything in detail with number crunching:
Total Business Done till date (Called traction)
Revenue Lines (transactions from which you will make money)
Business Model (complete end to end mention of one transaction by a user and you) – which will result in a sale and you making money)
Pricing Arrival (how did you arrive at the mrp and what are the avg margins)
Customer Acquisition cost (CAQ) & Life time Value of Customer (LTV) (Very important in pitch deck template)
Feeling like you need help on Step 1 or 2? Watch the brand new FREE masterclass from our strategic partner, The Startup Station, called "Build Credible Financials for Your Early-Stage Venture" which describes their unique framework for modeling pre-revenue ventures in a credible way. This is applicable to any product, software, or service startup, pre-revenue or revenue-generating. Sign up today and take the first step towards getting funded!
HIRE US TO HELP YOU WITH YOUR BUSINESS MODEL AND VALUATION
We help startups articulate their business case to investors from the financial point of view. We create a detailed strategic roadmap, a robust financial plan and a resulting valuation that outline business logic, drivers, financial goals, and key metrics for their company. .