• 7 February 2024
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How to Build Startup’s Financial Model To Attract Investment

How to Build Startup’s Financial Model To Attract Investment

How do you build a financial model to grab the interest of investors?

Hi, I’m Nabeel Shaikh, a seasoned chartered accountant, management consultant, and entrepreneur with 17 years of diversified experience. In this article, I’ll guide you through the financial modeling process that not only meets investor expectations but also elevates your pitch presentation to a persuasive level.

In my journey, I’ve witnessed the hurdles startup founders face, especially when they overlook a fundamental rule: viewing financial models from the perspective of an investor. 

As investors scrutinize a company’s financials closely, the key is to tailor your financial model accordingly.
As entrepreneurs, the ability to showcase your startup’s potential through a well-designed startup financial model is a skill that can make or break your fundraising journey.

When pitching to investors, think of your financial model as the storyteller of your business journey. It goes beyond being a set of figures on a spreadsheet; rather, it serves as the narrative thread that illustrates the exciting trajectory of your venture, highlighting its possibilities and demonstrating its feasibility. 

Often entrepreneurs go for ready-made financial model templates that may fall short, leaving them with gaping holes or rigid formulas that don’t align with their unique business model. 

Securing funding is no walk in the park; even during the rush to fund AI startups in 2023, global venture capital remains a challenging arena, emphasizing the importance of a standout financial model. Let’s get started:

Guiding Your Financial Model with Accuracy 

In the complex world of financial modeling, it’s crucial to strike a balance. 

You need sufficient details to showcase your startup’s financial well-being without overwhelming investors with an avalanche of numbers. The secret is focusing on what truly counts – your Key Performance Indicators (KPIs). 

These KPIs act as beacons, shining a spotlight on your startup’s progress and potential without overwhelming your audience. It might sound straightforward at a high level, but the reality is that many startup founders find themselves lost in the complicated excessive detail. 

Understand Your Numbers and Industry 

Before delving into the complexities of financial modeling, start by grasping the fundamentals of your business and industry. 

This foundational understanding not only empowers you but also allows you to pinpoint the vital metrics that capture investors’ attention when evaluating your startup’s potential. Consider your business model, the unique aspects of your industry, and the factors steering growth and profitability. 

This deep dive allows you to zero in on the metrics that matter most. For instance, if you’re running a Software-as-a-Service (SaaS) startup, metrics like Monthly Recurring Revenue (MRR) and Customer Acquisition Cost (CAC) take center stage. On the other hand, a retail venture might prioritize metrics such as Average Transaction Value and Inventory Turnover.

Connect KPIs to Your Startup’s Goals 

When highlighting Key Performance Indicators (KPIs), make sure they seamlessly align with your startup’s overall goals and growth strategy. It’s not merely about metrics; it’s about choosing the ones that reflect your strategic vision. 

For instance, if your primary mission revolves around rapidly expanding your customer base, key KPIs could include the number of new customers, customer acquisition cost, and customer lifetime value. On the flip side, if your focus is on operational efficiency, KPIs related to cost control, like gross margin and operating expenses as a percentage of revenue, take center stage. 

Showcase KPIs for Investor Confidence 

In dealing with KPIs, clarity is your greatest ally. Make sure your selected metrics aren’t just hidden in your financial model but are prominently showcased and easily understandable for investors.

Consider crafting a dedicated KPI dashboard or tab, transforming numbers into a visual story with charts, graphs, and tables. Make it visually appealing and reader-friendly. You can also seamlessly integrate KPIs into your financial statements or a separate analysis section. 

The golden rule? Keep things clearly labeled and effortlessly understandable. 

Complete Financial Picture: Weaving in the Cap Table 

To provide investors with a complete understanding of your startup’s financial and ownership details, smoothly incorporate the capitalization table, often known as the “cap” table, into your financial model presentation. 

The cap table functions as a snapshot, detailing crucial components:

Founder

Equity

Investor

Equity

Employee

Equity

Convertible

Securities

Dilution

Scenarios

Outlining ownership percentages for each founder, reflecting their roles and contributions.  Showcasing shares owned by angel investors, venture capitalists, and other backers, along with their investment rounds.  Highlighting stock options and grants allocated to employees as part of their compensation packages.  Addressing convertible notes or SAFE agreements, clarifying conversion terms and potential dilution effects.  Illustrating potential outcomes of future fundraising rounds, projecting your startup’s growth trajectory and its impact on current stakeholders. 

Maintaining consistency between your financial model and the cap table ensures that investors receive a unified and accurate depiction of your startup’s financial landscape. 

Grabbing Opportunities: Sparking Urgency in Your Financial Story

A dynamic financial model goes beyond numbers; it’s a potent tool to highlight time-sensitive opportunities that can propel your startup’s growth—if investors act quickly. Here’s how you can infuse a sense of urgency into your pitch:

Seizing Timely Opportunities: Imagine a groundbreaking AI healthcare solution tapping into a new government initiative in telehealth. By showcasing this in their financial model, a startup highlighted a limited application window for substantial revenue gains. 

Results of Inaction: Picture a tech firm unveiling a unique IoT device for smart homes, but competitors are on the horizon. The financial model lays it out—delays in funding could swiftly erode the company’s projected market share. 

Quick Market Entry: Consider a food tech venture with an efficient business model and strong partnerships. Their financial model might reveal the rapid influx of revenue after securing funding. 

Pioneering Advantage: Think of a fintech startup taking the lead in its niche. The financial model, vividly illustrates heightened market share and brand recognition, stressing the significance of investor support. 

Scaling and Growth Potential: In the case of a SaaS firm with a strong growth strategy, the financial model serves as a canvas to exhibit scalability. Additional investment could propel monthly recurring revenue to unprecedented levels. 

By weaving these narratives into your financial model, you’re not just presenting numbers; you’re conveying a compelling story that urges investors to act swiftly for a stronger market position and higher returns. In today’s cautious investment landscape, where capital is less abundant, emphasizing urgency is a strategic move. 

Create a Clear Financial Plan: The Importance of DesignHow to build a financial model to attract investment

Now that you’ve identified what to include in your financial model, it’s time to roll up your sleeves and build it. While thoroughness is key, don’t overlook the impact of smart design. Think of your financial model as a well-organized cupboard—it should be easy to find your desired shirt:

Organize with Tabs: Separate major components into tabs—assumptions, income statements, balance sheets, cash flow statements, scenario planning, and your cap table. 

De-Clutter the Space: Avoid tab overload. Use a single tab for each statement or topic, tweaking variables for relevant views. 

Differentiate Content: Headings, subheadings, bold text, different font colors—use these to divide and differentiate sections. Lines and background colors can further enhance clarity. 

Consistency is Key: Apply consistent formatting throughout—headers, subheads, inputs, and outputs. This creates a model that’s easier to understand. 

Visual Aids Speak Volumes: Develop charts, graphs, or tables to visually represent key aspects of your financial model. These aids help investors quickly grasp crucial information and add engagement to your presentation. 

Keep in mind that presentation isn’t merely a surface-level detail. Let’s delve into a real-life scenario—a SaaS company boasting an exceptional product but grappling with a tangled financial model. Through consistent formatting, we reshaped their model into a user-friendly guide. The outcome? The startup successfully obtained the necessary funding. 

Design plays a crucial role in turning your financial model from a disordered kitchen into a neatly organized recipe for success. 

Build Trust: Testing the Reliability of Your Financial Model 

To ensure your model stands strong and effectively communicates your startup’s potential, follow these steps:

Double-Check Assumptions: Base your assumptions and inputs on robust data and market research. Validate calculations against industry benchmarks or historical data, ensuring a sound foundation for your projections. 

Stress-Test Scenarios: Conduct sensitivity analyses by tweaking key variables. This stress-testing reveals how different scenarios impact outcomes, preparing you to address investor concerns and uncertainties associated with your business. 

Seek Trusted Feedback: Share your model with experienced professionals—advisors, mentors, or peers who’ve navigated fundraising successfully. Their feedback can pinpoint weaknesses, inconsistencies, or areas for improvement. 

Regular Updates Matter: Just as your business evolves, so should your financial model. Regularly update it with fresh data, market insights, and changes in your strategy. This not only maintains accuracy but also showcases your commitment to managing your startup’s financial health.

Testing isn’t a one-time affair; it’s an ongoing process that builds confidence in your model and reinforces your dedication to steering your startup toward success. 

Answer Questions: Expertly Defending Your Financial Model 

Investors, particularly in early-stage ventures, closely examine two vital aspects: the validity of your numbers and the in-depth comprehension of your business. To skillfully navigate this scrutiny, you must master your financial model, prepared to articulate and justify your assumptions, calculations, and projections. Here’s your playbook:

Assumption Clarity: Know the roots of your assumptions. Whether it’s industry research or insightful trends, be ready to explain the origins of your assumptions to investors. 

Methodology Transparency: Unpack your numbers’ journey. Share your methodology openly—this transparency not only reassures investors but also builds credibility. 

In-Depth Research: Your investors likely boast industry knowledge. Prove your assumptions’ credibility by leveraging reputable sources relevant to your field. 

Anticipate Questions: Foresee and prep for common questions. If you’re in the SaaS realm, be ready to address inquiries about churn rates, customer support scalability, and other pertinent aspects. 

Repeatedly, a straightforward model update has proven to be a game-changer for startups aiming to capture investor attention. A well-structured financial model serves as a guiding light, enabling investors to quickly grasp key insights and visualize your startup’s potential. 

On the flip side, a poorly formatted model can breed confusion, undermining the narrative you strive to convey. 

Furthermore, think of your startup’s financial model as your personal guide. It’s not just for impressing investors; it’s like your business compass. It helps you make smart decisions, keep tabs on how you’re doing, manage resources, and plan for the future.

Imagine the problems that can arise from unclear information when making decisions. You don’t have to be a finance guru. With good design and regular updates, your financial model becomes a tool that makes running your company easier and improves your chances of getting the investments you need.

If you’re new to financial modeling, check out our next article to grasp the fundamentals and get started on your financial modeling journey.

Read more: How to Build Financial Model: A Basic Guide for Beginners

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