Presentation is important when it comes to financial modelling. Financial models are more than just spreadsheets full of numbers. They’re powerful tools that help tell the story of your company, highlighting its potential and showing its viability. Your startup’s financial models can be a powerful tool when you are pitching investors. They will help you to communicate the value proposition of your business, negotiate, and get funding.
A strong financial model becomes even more crucial as venture capital is now much more scarce than in 2021. Crunchbase reports that not even the rush of funding AI startups during the second quarter 2023 could lift global VC from the doldrums.
In my role as a consultant for startups, I help clients with M&A advice, fundraising strategies, pitch presentations and financial modelling. As a startup consultant, I help my clients with M&A advisory, fundraising strategy and pitch presentations. Financial modeling is also incorporated into the analysis.
You may feel tempted to use a template designed by a professional to create a financial model for a startup, especially if you lack financial expertise. This is not something I recommend because templates aren’t always as easy to use as they seem. If you don’t know how to modify the formulas, you may end up with blank spaces that do not apply to the business model of your company. It may take more work up front, but you will get a better-looking and more professional result by starting from scratch.
This article discusses how I’ve helped entrepreneurs build financial models with investors in the forefront, and how they can use that model to craft a convincing pitch.
Concentrate on key performance indicators (KPIs).
It’s crucial to find the balance in your financial modelling between providing enough detail to give investors a complete picture of your company’s health and not overloading them with too much information. Focus on key performance indicators, or KPIs. These metrics will show your startup’s potential and progress. It may seem simple at a strategic level but founders of startups often become bogged down in the details.
Once, I worked for a company that developed a new e-commerce system. The startup was getting ready to present to investors its next round of funding and the financial model it had created was so detailed, that finding KPIs for primary purposes became difficult. I worked with the startup founders to identify the most critical KPIs for their business and then incorporated these into the financial models. How to achieve the right balance:
Understanding Your Business and Industry
Begin by getting a thorough understanding of the business model you use, as well as your industry and factors driving growth and profitability. You can use this knowledge to pinpoint which metrics investors will focus on in evaluating the potential of your startup. A SaaS startup, for example, might prioritise metrics such as monthly recurring revenues (MRR) or customer acquisition costs (CAC), whereas a retail company might be more focused on average transaction values and inventory turnover. We determined metrics such as customer acquisition costs, average monthly users, and lifetime value would be important for the ecommerce startup.
Align KPIs with Strategic Goals
Be sure to highlight KPIs which best reflect the overall growth and strategic goals of your startup. If your main goal is to expand your client base quickly, KPIs like the number of customers, cost per customer, or customer lifetime value might be your top priority. You might choose KPIs that are related to controlling costs, like gross margin or operating expenses expressed as a percent of revenue, if your aim is to increase operational efficiency. This e-commerce company I was working with understood how much it had to sell to break even but did not know how to translate that into the types and numbers of customers they needed. To ensure that the company stayed on track, we created a dashboard to track the number of clients for each channel.
Keep KPIs clear and prominent
Make sure that investors can easily find and understand your KPIs within your financial models. Create a KPI tab or dashboard that displays these metrics using an easy to read and visually appealing format. KPIs can be included in your financial statement or in an analysis section. Always make sure that KPIs are clearly labeled, and can be easily interpreted.
I created a dashboard for an ecommerce company that displayed its most important metrics. This made it easier for investors to quickly see how the business was performing and what potential there is. The company received the funding it needed. Investors specifically stated that the KPIs were clear and helped them better understand the company. They also felt more confident to invest.
Integrate your Cap Table
Incorporating the “cap” table (or capitalization) into your financial presentation is an equally important step in demonstrating a thorough understanding of your startup’s ownership and financial structures. This cap table is a snapshot that shows the ownership of your startup, including:
- Ownership percentages:Ownership percents that each founder holds, based on their contributions and roles in the startup
- Equity owned by investors: The shares held by venture capitalists and angel investors along with the investment round they made.
- Employee Equity: Stock options and grants that employees receive as part of their compensation package
- Securities convertible: SAFE Agreements or Convertible Notes, specifying conversion terms as well as potential dilution.
- Possible outcomes for future funding rounds: Demonstrating your startup’s growth potential and impact on existing stakeholders
Consistency between the financial model and cap table gives investors a consistent and accurate view.
Instill a sense of urgency
If investors are quick to act, a robust financial model will help you highlight any market trends and opportunities that could be unique for the growth of your startup. In order to demonstrate urgency, you can highlight a few important factors.
- Opportunities that are time-sensitive: Once, I worked for a company which developed an AI healthcare solution. The company used its financial models to show the revenue potential of a government telehealth initiative with a short application period.
- The consequences of inaction. Although a tech company has created a unique IoT gadget for smart homes, there will be competitors soon. The financial model would tell investors that delays in financing could quickly compromise the projected market share of the company.
- Speed of market entry: An innovative food technology venture that has a simple business model with established partners could use the financial model it uses to demonstrate how fast they can generate revenues after funding.
- The early-movers advantage: An innovative fintech company that was the first to enter its market could use its financial model as a way to demonstrate its potential for brand recognition and increased sales.
- Growth potential and scalability: An impressive SaaS company with a growth strategy could use its financial models to demonstrate its scalable business, showing how monthly recurring revenues can skyrocket when increased investments are made.
It is important to convince investors of the importance of acting quickly in order to gain a better market position. This is especially useful now, as capital is scarcer than a few short years ago and investors have become more cautious.
Create a clear financial model to maximize impact
It’s now time to build your model. Don’t forget that smart design is just as important as thoroughness. The financial model you use should be easy to understand, just like a neatly organized filing cabinet. How to:
- Divide your data by tabs. Tabs that are a must include income statements, cash flow statements, assumptions and balance sheets. Tabs may be included for your scenario planning or cap table.
- Don’t clutter up your screen: There is no need for separate tabs to represent each view or analysis. You can use a tab to represent each topic or statement, then change variables in order to switch between views.
- Make your content stand out: Divide sections with prominent subheadings. You can use bold font for the heading, different colors of text for inputs and outputs and italics to indicate comments and notes. Use lines or background colors to differentiate dashboards and tables if necessary.
- Use consistent styling and formatting throughout. All headers, subheadings, inputs, and outputs must be consistent. It will make your model’s hierarchy and equivalencies much easier to comprehend.
- Use visual aids when presenting your model. Make sure you use clear, concise graphs or tables to represent the key elements of your financial model. The data visualizations will help your investors to quickly understand the key information. They can also make your presentation more interesting.
It may appear that your presentation is a minor aspect of your idea, but it has a huge impact. Consider a SaaS business that I helped. The product, a SMB-targeted financial management tool and payment system, was excellent. Its pitch deck also impressed. The financial model was as if you were in a cooking kitchen, where it’s impossible to tell what’s inside from the finished product. Investors told founders their financial model prevented them from seeing the financial potential of the business.
The company was in need of someone who could help them clean up their “kitchen”. I used consistent formatting for inputs and outputs to distinguish between each tab and make it easier to navigate. It was immediately easier for both the founders and the investors to see the potential of the business. The SaaS company was able to secure the necessary funding.
Do not stop testing your financial model.
Your credibility will increase if you have a robust and well-tested model. Consider these tips to ensure that your financial model accurately and reliably communicates the potential of your startup.
- Check assumptions, inputs and calculations. Make certain that all assumptions and inputs are supported by solid market data. Verify that the calculations you have made are accurate, logically deriving from your inputs. Validate your assumptions using industry benchmarks and historical data.
- Test your model under stress: Change key assumptions and variables in your model, to determine the impact on outcomes. You will be able to better understand your company’s potential risks, uncertainties and questions.
- Get feedback from experts you trust: Discuss your financial model and ask for their opinions with professionals who are experienced, like advisors, peers, or mentors. You can use their feedback to identify weaknesses, inconsistent information, and areas that need improvement.
- Update your financial model as your business changes. Update your financial model regularly with the latest data, research on your market, and changes to your business strategies. It is important to update your model regularly. This will ensure that it remains accurate and also shows your commitment to managing the financial health of your startup.
Be prepared to answer questions and defend your assumptions
In my experience, investors–especially for early-stage companies–prioritize two things: whether the numbers are reasonable, and whether the founder actually understands how their business works. You must be able to explain your calculations and financial projections and provide detailed explanations and defenses of assumptions. How to prepare for the interview:
- Know your assumptions. Although it may sound obvious, you will need to tell investors how you arrived at your assumptions. For example, research into the industry may show trends and cycles that you should expect to repeat.
- Explain the methodology you used: How did you come up with your figures? Investors are reassured by transparency and your willingness to explain how you arrived at the numbers.
- Research: It is likely that your investors know more than you about your field. You can use reputable, relevant sources to prove that you are basing your assumptions on reliable information.
- Prepare for common inquiries:Practice your answers to likely questions about your business model. If you run a SaaS business, for example, be prepared to answer any questions regarding your customer service, or how to manage your churn.
Every time I have seen how a model update can make a huge difference for a struggling startup trying to get investors’ attention. Investors can easily grasp the key points and potential of your startup with a well-formatted model. Poorly formatted models can cause confusion and undermine the message you are trying to convey.
A model which is organized and tailored to the needs of your company will be easier to understand and to use for you as a founder. Your company’s foundation will be built on a financial model. You will use it to make almost every important decision for your business: track your progress, test your ideas, allocate resources, seek funding, analyze risk and project your growth. Imagine the damage that could be done if you made a decision on inaccurate or unclear information because your model is too complicated.
You don’t need to be a finance expert. Your startup’s financial plan can be easier to manage with expert planning and regular maintenance. It will also increase the chances that you secure investment to help grow your business.