In this article, the financial model – The Basics, we provide an introduction to the start-up. Here, the goal is to highlight one of the biggest issues when preparing to fundraise. The main key question to answer is what content should be included in the model and why that content is needed.
We will provide a complete insight into some templates and tools that we have to offer. Hence, helping the user in his start-up. Concerning what investors want, there is a benefit to this exercise. Since it enables you to think clearly about all assumptions, pricing models, growth, and churn rates. Besides, modeling shows you are targeting a specific market which can help you to draft a business plan and how much investment you need.
An introduction of a company is the critical component of any business or a start-up, therefore, the financial model is an extension of that introduction. As it allows the reader to judge what is achievable and is to expect from the business. It paints a picture of the potential size of the market and allows the reader about the ambition of the company. Moreover, it demonstrates whether or not the business has realistic assumptions.
There are many templates available online on different platforms and there is a lot of inconsistent advice out there too. Since most templates are prepared from the company’s point of view not taking into consideration what the investor is looking for. Like for example, Return on Investment (ROI) is a very important metric in terms of seeking investment or a loan. So, any investor or funds provider will want the business to ensure the project or business has the potential to return money at a good percentage.
In any case, below are some important points that investors are looking for:
The model should include what key drivers of your revenue are:
You model should breakdown all expenses and cost associated with the business:
In other words, the model is all about cash. Therefore, make sure financial statements resolve to the all-cash line:
Sources of cash should also be included. Such as cash flow from financing, investing, and operating activities.
Every investor is different from the other. However, there are some common points the investors are looking for:
The most important factor for an investor is the return and whether the model has the potential to generate the return. Yes, of course, it is a bit difficult. The model will not only demonstrate the outcome. Also, it has to be credible enough to compete in its presentation of the return ratio included in the model.
It is a test for the creator of the model and tests the requirements of the target audience. But most importantly the financial model is the test of understanding its method and credibility which will be used in Business Plan and Pitch Decks.