Preparing to increase A round of funding is one of the most important tasks that every founder goes through. Compiling a deck, teaser and executive summary requires a thorough understanding of a startup’s story and the market it serves. But for many founders, the most challenging item is often the most important: creating a financial model.
A good financial model not only helps founders understand their own business and how much capital to raise, but usually requires an investor, who will comb through the model during due diligence.
Your model is your financial roadmap. As a founder, it’s your responsibility to not lose sight of your “runway” – how long before you run out of cash – which is calculated by dividing your cash-on-hand by your monthly burn rate. Your model should reflect a runway that is sufficient to get you to your next round of financing or a more conservative set of revenue projections at break-even cash flow. What does the next twelve to eighteen months look like from a cash flow perspective? For example, does the business have enough runway, even if you only earn half of your expected revenue – or no revenue at all?
Here’s the end goal of your model: to demonstrate to a potential investor in a coherent way how your business will grow from both a revenue and expense perspective, and to indicate how much money you should raise. Although it may sound unfamiliar, there are some key points to keep in mind as a founder that will ensure your financial model is a powerful tool for you and investor ready.
As a founder, it’s your responsibility to not lose sight of your “runway” – how long before you run out of cash – which is calculated by dividing your cash-on-hand by your monthly burn rate.
Create a model that covers the next five years
No one can predict the future, but you need to tell an investable story that demonstrates your company’s growth potential. It usually takes five years to show how a business can scale, and if you are not realistic in presenting how your business will do so, the model may be discounted by an investor. Most investors will want to look at a minimum three-year projection – but five years provides a more reasonable ramp to revenue and profitability.
A financial model often includes several different statements: an income statement (profit and loss statement), a cash flow statement, and a balance sheet. For early-stage companies, with limited assets and liabilities, a balance sheet will often not be as relevant as it would be for later-stage companies. Focus, therefore, on the income statement, and some version of a cash flow statement. Your income statement can be broken down into revenue, cost of goods sold, gross profit, fixed costs, and EBITDA (earnings before interest, taxes, depreciation, and amortization). EBITDA can serve as a proxy for cash flow, or you can prepare a more formal cash flow statement.
Design a “bottom-up” financial model
There are two ways to create a financial model: Apadomostok And bottom up A Apadomostok In the method, you estimate the size of the market and calculate your percentage of the market’s total revenue each year. A downwards The model is more powerful, detailed, and comprehensive. In this model, you start with granular assumptions that drive revenue and build on each other.