Preparing for a hike A funding round is one of the most important tasks every founder goes through. Putting together a pitch, teaser, and executive summary requires a thorough understanding of the startup’s story and the market in which it operates. But for many founders, the most challenging element is often the most important: building a financial model.
Not only does a sound financial model help founders understand their own business and how much capital to raise, but it is usually required by an investor, who will comb through the model during due diligence.
Your model is your financial roadmap. As a founder, it’s your responsibility not to lose sight of your “rolled” — that is, how long before you run out of money — which is calculated by dividing your cash by your monthly burn rate. Your model should reflect a long enough runway to get you to the next round of financing or equal 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 an adequate runway, even if it only generates half of your projected revenue – or none?
This is the ultimate goal of your template: to coherently show a potential investor how your business will grow from a revenue and expense perspective and to indicate how much money you have to raise. As unfamiliar as it may sound, as a founder, there are a few key things to keep in mind that will ensure that your financial model is a powerful tool for you and investor-ready as well.
As a founder, it’s your responsibility not to lose sight of your “rolled” — that is, how long before you run out of money — which is calculated by dividing your 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 an investable story that shows your company’s potential for growth. It usually takes five years to show how a business scales, and if you’re not realistic in presenting how your business does, the model may be discounted by the investor. Most investors will want to see a minimum three-year forecast — but five years provides a reasonable increase in revenue and profitability.
A financial model often includes a few different statements: income statement (profit and loss statement), cash flow statement, and balance sheet. For early-stage companies, with limited assets and liabilities, the balance sheet will often not be as relevant as it is for a later-stage company. Thus, the focus is on the income statement, and some versions of the statement of cash flows. Your income statement might 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 a proxy for 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: top down And Progressive. in top down approach, you estimate the size of the market and calculate the percentage of the total market revenue each year. a Progressive The model is more powerful, detailed and comprehensive. In this model, you start with accurate assumptions that drive revenue and are mutually dependent.