Is Your Financial Model Ready to Meet Your (Prospective) Investors?

As I work with some of the startups here in the Valley looking for early-stage funding, one of the weak spots in their approach to investors is the financial model they've developed. Or - in some cases - not developed.

No matter how exciting the idea, how great the buzz or how wonderful the management team, your pitch to investors has to show how you will build a business that will be big (if it won't be big then it won't be attractive as an investment now), and will generate profits. This is not slapping together a few numbers and hoping for the best. The financial model you develop needs to show that you know how you'll monetize the idea (generate revenues) and what resources it takes to develop a robust product or service, generate customer awareness, close deals, get the customer up and running, keep them happy and scale up the business. Most importantly, it will tell an investor just how far the cash they are putting in will go - and it had better be far enough to give the company a strong shot at getting to the next fundable stage.

To explain how all this works, how to put together a compelling model and what to look out for in the process I've been presenting a workshop to CEO's of early stage companies. Here's the how I define the process for developing the model:

The last part - validating the model - is often overlooked by early stage companies. If you really think you'll be bigger and more profitable than, say, Salesforce.com or Google was after 4 years then by all means say so. But for mere mortals in business you probably want to set goals that are a little more realistic and then explain to your prospective investors how this compares to where the other companies were at similar stages in the past.

Hint: if those "comps" are now public companies you can go to their SEC filings and type in "S-1" (without the quotes) in "Filing Type" and you'll find 3 - 5 years of financial history prior to their IPO. Often this takes you back far enough to see a few years that will overlap with your model. Here's the S-1 filing for Salesforce from late 2003, with data going back to their inception in 1999 (page 23)

Here are some of my tips for success with your model:

To get a copy of my full presentation please download a .pdf of the materials. By the way, the orientation of this pitch is towards the companies I primarily work with - internet, ecommerce, software and related companies. A fabless semi company or a telecom equipment company will have, by necessity, a more complex model but the principles still apply ...

Download Startup Financial Models - Philip Smith

If you have any questions or comments, want me to come explain this to you - or just need some help - please let me know!