preparing to breed A funding round is one of the most important tasks every founder goes through. Compiling a deck, sneak peek, and executive summary requires a deep understanding of a startup’s history and the market in which it operates. But for many founders, the most challenging element required is often the most crucial: building a financial model.
A sound financial model not only helps founders understand their own business and how much capital they need to raise, but is typically required by an investor, who will review the model during due diligence.
Your blueprint is your financial roadmap. As a founder, it’s your responsibility to never lose sight of your “landing strip” (how long it will be before you run out of cash), which is calculated by dividing your available cash by your monthly burn rate. His model should reflect a runway that is long enough to get him to his next funding round or breakeven cash flow under a more conservative set of revenue assumptions. What does the next twelve to eighteen months look like from a cash flow perspective? For example, does the company have enough track record, even if it only makes half of the expected revenue, or does it make no revenue at all?
This is the ultimate goal of your model: to consistently demonstrate to a potential investor how your business will grow from a revenue and expense perspective, and indicate how much money you need to raise. While it may seem unfamiliar, as a founder, there are a few key things to keep in mind that will ensure your financial model is a powerful tool for you and investor-ready as well.
As a founder, it’s your responsibility to never lose sight of your “landing strip” (how long it will be before you run out of cash), which is calculated by dividing your available cash by your monthly burn rate.
Build a model covering the next five years
No one can predict the future, but you need to tell a investable story that demonstrates your company’s growth potential. It typically takes five years to show how a business scales, and if you’re unrealistic in presenting how your business will do, an investor may dismiss the model. Most investors will want to see a projection of at least three years, but five years provides a more reasonable increase in income and profitability.
A financial model will often include a few 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 a later-stage company. The focus is therefore on the income statement and some version of a statement of cash flows. 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 an indicator of cash flow, or you can prepare a more formal cash flow statement.
Designing a “bottom-up” financial model
There are two ways to build a financial model: From top to bottom and bottom up. in a From top to bottom approach, estimates the size of the market, and calculates its share of total market revenue each year. TO bottom up The model is more powerful, detailed and complete. In this model, you start with granular assumptions that generate revenue and build on each other.
