Win Investors’ Trust with Credible Financials

Financials are typically a weak point in most startup pitch decks and a source of fear for most early-stage founders. Yet, they are a critical part of the due diligence process and execution post funding.

Creating projections at early stages is challenging for founders for several reasons:

1. There is usually little or no financial data to use as a starting point for projections.
2. Founders fundraising for the first time don’t know exactly what investors are looking for in their financials.
3. Founders with product or technical backgrounds lack the basic knowledge of finance and accounting. With the lack of this knowledge, it is hard to compile and present the data correctly. 

In this blog we will be discussing five reasons why early-stage startups need a financial model, what financial data pre-seed and seed investors expect to see from founders, and most common mistakes founders make in their financial models.

“Why create financial projections when it is all a guess?” That is a question I hear all too often. Many entrepreneurs and small business owners have trouble making estimates and reducing the uncertainty in which they operate to a limited set of variables within a structured model. Their mistake is how they define the objective they aim to accomplish.

The goal of financial projections is not to guess the future. That is simply not possible. Rather, the goal is to define the company’s strategy for the next 2–5 years and create a mathematical representation of that strategy in the form of a financial model.

Here are 5 reasons why forecasting is key to your business’s success:

• Sales baseline
• Budgeting
• Required expertise
• Internal interdependencies
• Capital requirements

Watch the video below and read more here.

Product / Service roadmap

A roadmap for the rollout of different revenue streams is important because it represents how you see your company evolving near and long-term. You may want the revenues’ launch timeline based either on timing (Year 1, Year 2), or on some other trigger, such as reaching a certain customer base or financial target.

We recommend presenting this roadmap as a revenue projection, linked to your GTM strategy as well as business model. The business model describes how you charge for various products/ services and which customers buy what product or service.

Intended GTM strategy

Most founders are too focused on how their product works and not focused enough on how to bring it to market. This is a mistake. 

A clear measurable GTM strategy is key to execution and revenue generation. After all, your revenue is the cheapest capital you can raise. If sales and marketing are part of your raise, it is important to outline how this capital will be allocated between hiring sales/marketing staff and paid advertising. It is also critical to establish early-on how the effectiveness of such capital allocation will be measured.

Financial assumptions and KPIs

Any model is only as good as its assumptions. Therefore, the more time you spend on formulating those assumptions, the better the final model will be. 

Specifically, we recommend that you ensure that your financial model assumptions clearly represent your product/service roadmap, intended GTM strategy, and the costs required to accomplish those tasks. Do not forget to consider working capital requirements.

It is equally as critical to define KPIs so that when you launch your product, you know what data you need to track and how.

MPV/ Beta / Launch metrics

Once you begin executing on your plan  and obtaining launch metrics, you can determine how the initial financial assumptions you established in the pre-seed stage should be adjusted. 

As we mentioned above, it is important to decide in advance which metrics you will be collecting and select the right systems for tracking and collecting that data.

Product / Service roadmap

At this stage you may have more details on your business model. Like at the pre-seed stage, we suggest presenting this roadmap as a revenue projection, linked to your GTM strategy as well as business model. The business model describes how you charge for various products/ services and which customers buy what product or service. 

Financial results

You should have your results recorded in professional accounting software such as QuickBooks. We recommend you hire an accountant to set it up and a bookkeeper to maintain it. 

It is also critical at this stage to establish a financial management cycle and begin monthly reconciliations of projections to actual results. It will allow you to understand which parts of your strategy are working and which are not and to ensure you don’t waste capital and time.

Forward looking projections, including path to profitability, key assumptions (e.g., CAC) with sensitivities, capitalization plans

We recommend that you build a full financial model at this stage. Such a model will contain:

• A complete financial model with all the KPIs;
• A 5-year growth strategy comprising revenue launch timeline, pricing strategy for each revenue stream, go to market strategy for each revenue stream, and expenses, including operating, capital expenditures, and working capital;
• Funding requirements;
• Valuation;
• Break-even analysis;
• Financial summary; and
• Scenario analysis.

Reach out to us by sheduling a free 30-min consultation here if you’d like to get our step-by-step guide for creating financial model assumptions.

In the final part of our blog, we’d like to note five most common mistakes startup founders make in their financials so that you can build your models correctly.

Mistake # 1: A financial model only has P&L and missing Balance Sheet and Cash Flow Statements.

Mistake # 2: Revenue projections are not linked to the company’s product/service roadmap, GTM strategy, and other constraints.

Mistake # 3: Use of funds don’t account for working capital or contingency.

Mistake # 4: Founders don’t value their company based on its fundamentals.

Mistake # 5: Financial model assumptions, business logic, and /or KPIs are improperly defined.

Watch the video below for more detail: 

If you have any questions or need further assistance, feel free to reach out to us and shedule a free 30-min conlsultation here.

Victoria Yampolsky, CFA, is the President and Founder of The Startup Station, a comprehensive resource for modeling and valuing early-stage startups. She evaluates the financial feasibility of business models and specializes in the financial modeling and valuation of pre-revenue companies. She also created a finance curriculum for early-stage founders and launched The Startup Station’s educational program in 2015. Since then, more than 1,000 founders have attended her online and in-person finance classes and learned the basics of financial modeling, valuation, and startup financing.

Previously, Victoria worked for the Deutsche Bank Research Department and performed IT consulting for CapGemini’s Financial Services Division. Victoria holds a Bachelor’s Degree, Cum Laude, in Computer Science, with a minor in Mathematics, from Cornell University and an MBA, with honors, from Columbia Business School. Victoria is also on the Advisory Board of the Computing and Information Science (CIS) Department of Cornell University.