When it comes to financial modeling, presentation counts. A financial model is more than simply a spreadsheet full of numbers; it’s a powerful tool for telling your company’s story, highlighting its potential, and demonstrating its viability. When pitching Investor Interest, your startup’s financial model may help you articulate your company’s value proposition, negotiate negotiations, and acquire the capital you require to grow.
With venture money becoming substantially rarer than in 2021, a good financial strategy is even more critical. According to Crunchbase, not even the rush to invest in AI startups in the second quarter of 2023 was enough to lift global VC out of its slump.
As a startup consultant, I provide my clients with M&A advice, fundraising strategy, pitch presentations, financial modeling, valuation analysis, and other services. I’ve seen firsthand the issues that startup entrepreneurs encounter when they don’t follow one simple rule: think about your financial models through the eyes of an investor.
A bar chart depicting the time spent by VCs on various pitch deck portions. Financials is the second largest, taking around 25 seconds.
Money is crucial: Investors are most interested in a company’s finances after the fundraising pitch.
With investors paying such close attention to a company’s financials, you might be tempted—especially if you don’t have much financial experience—to use a professionally developed financial model template for startups. But I don’t advocate it because templates aren’t always as simple as they appear. You may end up with vast blank portions that do not apply to your company’s business model, or worse, parts of the model that you cannot utilize because you are unable to adjust the underlying formulas as needed. Although it requires more work up front, starting from scratch yields a more functional and professional-looking output.
In this post, I outline how I assisted founders in developing a financial model with investors in mind—and how to leverage the model to produce a compelling pitch.
Focus on Key Performance Indicators (KPIs)
In your financial modeling, you must strike the correct balance between incorporating enough information to provide a detailed picture of your startup’s financial health and without overloading investors with too much detail. Focus on the most critical measurements, known as key performance indicators (KPIs), that show your startup’s growth and potential. This may appear simple at the strategic level, but business founders frequently become bogged down in details.
I formerly worked for a startup that created an innovative e-commerce platform. It was ready to pitch investors for its next funding round and had created a financial model so comprehensive that the major KPIs were difficult to locate. I assisted the entrepreneurs in identifying and prioritizing the most relevant KPIs for their firm, which I then incorporated into the financial model. Here’s how you approach finding the proper balance:
Understand Your Business and Industry
Begin by learning about your business model, industry, and the factors that influence growth and profitability. This knowledge will assist you in identifying the exact criteria that investors are most likely to consider when assessing the viability of your firm. For example, a software as a service (SaaS) firm may prioritize measures such as monthly recurring revenue (MRR) and customer acquisition cost (CAC), whereas a retail company may concentrate indicators such as average transaction value and inventory turnover. In the case of the e-commerce startup, we found that measures for customer acquisition cost, lifetime value, and monthly average users would be critical.
Align KPIs and Strategic Goals for Investor Interest
Make sure to highlight the key performance indicators (KPIs) that best reflect your startup’s overarching strategic objectives and growth plan. For example, if your major goal is to rapidly build your client base, you may prioritize KPIs such as new customer count, customer acquisition cost, and customer lifetime value. If you want to increase operational efficiency, you might look at cost-control KPIs like gross margin and operating expenses as a % of sales. The aforementioned e-commerce business I worked with understood how much money it needed to make in sales to break even, but not how it translated into the sort and amount of consumers required.
Make the KPIs clear and prominent
Make sure that your chosen KPIs are straightforward for investors to identify and comprehend within your financial model. Consider developing a dedicated KPI dashboard or tab that displays these metrics in a visually appealing and easy-to-read format, using charts, graphs, and tables as needed. You can also incorporate KPIs into your financial statements or a separate analysis section. Wherever they are, be certain that they are clearly labeled and easy to understand.
I assisted the e-commerce firm in developing a specialized dashboard that emphasized crucial KPIs. Making it much easier for investors to assess the startup’s performance and potential at a glance. Finally, the company was able to get the necessary funds. The investors notably remarked that the clear display of KPIs improved their understanding of the firm and provided them with confidence to invest.
Integrate your Cap Table for Investor Interest
Incorporating the capitalization (or “cap”) table into your financial model presentation is an equally important step toward demonstrating a thorough understanding of your startup’s financial and ownership arrangements. The cap table provides a snapshot of your startup’s ownership, including the following components:
Founder equity: Each founder’s ownership proportion reflects their roles and contributions to the startup.
Investor equity: Shares owned by angel investors, venture capitalists, and other financial backers, together with their individual investment rounds.
Employee equity refers to stock options and grants that employees get as part of their pay.
Convertible Securities: Convertible notes or SAFE agreements define the conversion terms and any dilution implications.
Dilution scenarios: Possible results of future fundraising rounds, showcasing your startup’s potential development and impact on current stakeholders.
Ensuring consistency between your financial model and the cap table gives investors a complete and accurate view.
Create a sense of urgency for Investor Interest
A strong financial model can help you highlight any opportunities and industry trends that create unique windows for your startup’s growth—if Investor Interest respond quickly. You can express urgency by stressing a variety of key factors:
Time-sensitive opportunities: I previously worked with an innovative startup that created a ground-breaking AI healthcare solution. It used its financial model to demonstrate the possibility for significant revenue from a new government project in telehealth with a short application window.
Consequences of inaction: A tech company has created a novel IoT device for smart homes that is unique, but competitors are on the way. The financial model would show Investor Interest that funding delays may quickly erode the company’s predicted market share.
Speed to market: A food tech startup with a lean business strategy and existing partnerships may utilize its financial model to demonstrate how quickly it can produce income following investment.
Early-mover advantage: A fintech business that is the first in its niche can use its financial model to demonstrate the potential for higher market share and brand awareness with investor assistance.
Scalability and growth potential: A SaaS company with a strong growth strategy may use its financial model to demonstrate its scalable business model, showcasing how monthly recurring revenue can rise with additional investment.
Highlighting time-sensitive opportunities can assist persuade Investor Interest that acting quickly is critical for a better market position and higher returns—especially now, when capital is much less available than it was a few years ago and investors are becoming more cautious.
Format your financial model for clarity and impact
Now that you’ve determined what you need to include, it’s time to sit down and create your model. Thoroughness is crucial, of course, but don’t discount the value of smart design. A decent financial model should be as simple to use as a neatly ordered filing cabinet. This is how you do it:
Divide each main component of your financial data into its own tab. The must-have tabs often comprise assumptions, income statements, balance sheets, and cash flow statements. There may be tabs for scenario preparation and your cap table.
Avoid clutter: You do not need a separate tab for each view or analysis. Use one tab for each statement or topic, and simply change the variables to switch between relevant perspectives.
Differentiate your material: Use prominent headings and subheadings to separate parts. Use bold text for headings, distinct font colors for assumptions, inputs, and outcomes, and italics for comments or notes. If necessary, utilize lines and backdrop colors to distinguish tables, dashboards, and other types of information.
Stay consistent: Use consistent formatting and styling throughout. That is, all headers, subheads, inputs, and outputs should be identical. This will significantly improve the clarity of your model’s hierarchies and equivalencies.
Investor Interest Create visual tools to demonstrate your model: Create clear and succinct charts, graphs, or tables that illustrate crucial features of your financial model. These data visualizations can help Investor Interest rapidly understand the most critical facts and make your presentation more compelling.
The presentation may appear to be a minor part of your model in comparison to your main idea. But I cannot overstate how important it may be. Consider a real-life example: a SaaS startup I formerly worked with. Its product was excellent—a financial management and payment solution aimed at small and medium-sized businesses—and its pitch deck was stunning. Its financial model, on the other hand. Was like a kitchen where the components could not be distinguished from the cooked meal. The investors informed the founders that their strategy made it hard for them to understand the company’s financial potential.
I noticed that the company required someone to come in and help clean up their “kitchen.” I used consistent formatting to distinguish between inputs and outputs and to make each tab easier to explore. It was immediately easier for the founders to handle their own finances. And for Investor Interest to comprehend the company’s potential. As a result, the SaaS business received the cash it required. A strong, well-tested financial model indicates your knowledge of the firm and boosts your reputation. Consider the following tips to guarantee your model is accurate, dependable, and successfully communicates your startup’s potential:
Double-check assumptions, inputs, and calculations. Ensure that all of the assumptions and inputs in your financial model are based on reliable data and market research. Check that your calculations are correct and logically derived from the inputs. Use industry benchmarks or historical data to evaluate your assumptions and lay the groundwork for your estimates.
Stress-test your model: Conduct sensitivity analyses by changing key variables and assumptions in your model to see how the outcomes are affected. This helps you understand the potential risks and risks linked with your firm, preparing you to handle investor concerns or questions regarding various situations.
Seek opinions from trusted professionals. Share your financial model with seasoned experts, such as advisors, mentors, or colleagues who have successfully completed the fundraising process. They can assist you spot any flaws, discrepancies, or opportunities for improvement.
Revisit and update your model on a frequent basis: Your financial model should change alongside your business. Regularly update your model with fresh data, market research, and any changes to your business strategy. This not only guarantees that your model remains correct. But also reflects your continued dedication to understanding and maintaining your startup’s financial health.
Be Prepared to Answer Questions and Defend Your Assumptions
In my experience, Investor Interest, particularly for early-stage startups, prioritize two factors. Whether the numbers are acceptable and whether the founder understands how their business operates. To effectively respond to concerns and create trust. You must understand every part of your model. That you can thoroughly explain and defend your assumptions, computations, and financial projections. Here is how to prepare:
Understand your assumptions: It may appear apparent, but you must be able to explain to investors. Where your assumptions come from—for example, industry research may reveal trends or cycles that you might expect to repeat.
Explain your process: How did you arrive at your numbers? Transparency and a desire to share your process soothe investors and increase credibility.
Do your research: Your Investor Interest are likely more knowledgeable about your industry than you are. Use reliable sources related to your field to demonstrate. That your assumptions are founded on the knowledge that your investors can and will trust.
Anticipate common queries: Prepare for common questions about your model and practice your responses. For example, if you run a SaaS company, you should be prepared to address questions. About how you manage attrition, how you intend to scale customer support and other related topics.
I’ve seen time and again how a simple model update can change the game for a firm seeking to reach out to Investor Interest. A well-formatted financial model guarantees that investors can easily understand crucial data and assess your startup’s potential. A poorly designed model, on the other hand, can cause confusion, undermining the tale you’re attempting to convey.
Equally important, a well-organized and personalized model makes it easier for you, the entrepreneur, to read and utilize. A financial model is the foundation on which you will build your business.
