Think of your revenue projections for your firm as a piece of speculative fiction, similar to a Hollywood script that is “based on a true story.” Though your expectations may be based on how well your startup performed in the past, the future is actually a strange and unpredictable place.
If your financial picture seems a lot like your past, you may actually be running a typical business rather than a startup. Although it is not what venture capitalists (VCs) are searching for, it is totally OK.
The Fallacy of Forecasting
Though not because they would ever believe your estimates, some investors will ask to see a company plan or three to five year financial forecast from you.
Some people may request it because they believe it will reduce the risk of their investment choice for them or the investors they represent (which they aren’t, but beliefs matter too).
Investors primarily want to examine your thought process and methodology while developing those models.
Curewellhub | vitalmednet | medhealthgo | puremedaid | fitmedclinic | wellnessfitgo | fitnessvitaly
The Reasoning Process Is Important
More than just a collection of figures, your financial model is a representation of your goals, your comprehension of the industry, and your aptitude for strategic planning. What actually interests investors is as follows:
- Assumptions and Rationality: The first thing they look for is the validity and realism of your assumptions. Do you base the growth of your revenue on reliable market research? Are there any potential problems included in your cost projections?
- Modularity and Adjustability: Is your model able to adjust to modifications? Being able to pivot is essential in the ever-changing startup landscape. Your financial model ought to account for many contingencies and show that you are flexible.
- Knowing Your Business’s Key Drivers: Do you know what motivates your company? A thorough understanding of the factors that drive your startup can be demonstrated by identifying and concentrating on its important KPIs.
The significance of the X and Y axes is equal.
The longer your past revenue history, the more likely you are to be correct in your financial modeling; nevertheless, the opposite is also true: the shorter your company’s history, the less likely you are to be able to forecast the future.
Therefore, avoid being that three-month-old startup with a financial model that predicts you will break even in a year and turn a profit in five years.
A solid rule of thumb that I frequently advise is to demonstrate an investor roughly a future twice as long as your prior trading history. Generally speaking, most businesses project too far into their financial future. The following year is certainly a reasonable estimate if you have only recently begun charging clients for the use of your MVP, and the year after that is only helpful inasmuch as it demonstrates the way in which you have developed your model and your strategic thinking.
Working Together Is Essential
Let us face it: not every founder has a strong financial background. Work with someone who is proficient in financial modeling if you are not good with numbers. This partnership has the potential to enhance your forecasts and make them somewhat trustworthy.
Imagining Your Success
A story of success, development, and promise should be conveyed by your financial model. Make good use of the images. Visual aids such as graphs and charts can successfully emphasize important points and make complex material easier to understand. Recall that an image is worth a thousand words, and in the startup world, it may be worth millions of dollars.
In my experience, I am good at visual pattern matching even though I can find it difficult to understand financial models. The revenue line, which consistently projects exponential revenue growth to the right, is one element of startup pitch decks that never changes.
A competitor being acquired by a tech giant and suddenly tripling their marketing spend is an example of an unexpected terrain ahead. On the other hand, there will be future variations that you can predict, such as a dip or flattening in revenue each time you execute the “landing” part of your “land-and-expand” strategy in overseas markets.
Though it can be a welcome change to meet a startup that can anticipate the forecastable, such as a “land-and-expand dip” that plateaus revenue and increases opex for a few quarters while the firm adjusts to the new terrain, there is obviously no need to forecast the unforecastable.
Closing Remarks
In terms of art, financial modeling for startups is quite dreary, but it is more science than storytelling. It all comes down to telling a story that, albeit somewhat fantastical, investors can be persuaded to buy into. Your stats should be more about demonstrating your strategic thinking, market knowledge, and future vision than they should be about making exact predictions. Thus, accept the speculative fiction that is financial forecasting, work with specialists, and create a compelling narrative about the possibilities of your startup. Belief is, after all, the most important currency one can bank in the venture capital market.
