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Why You Should Have A Solid Financial Model

You are about to go see investors and raise funds for your startup and the questions start flowing. How much you should be raising? what is your business worth? How much equity should you leave on the table?

All these questions need answers before you meet investors. The more prepared you are ahead of fundraising, the more likely you will get a fairer deal. In order to answer these questions, you need to build a solid financial plan.

In this article we go through all the reasons why you need solid financial projections for your fundraising.

For more information on how to build a solid financial model for your startup, see our articles for Ecommerce, SaaS, Mobile Apps and Marketplace businesses.

You understand your business and your market

This is certainly the most important reason for building a financial plan for your pitch deck. You show investors you are not only a great entrepreneur but also a well-rounded and omniscient founder. You understand how your business generates revenues, what are the costs and the risks involved.

Investors will give more credit to entrepreneurs who are finance savvy, as they are less prone to mistakes when managing their finances. For instance, understanding ROAC will save you from costly paid acquisition campaigns.

More importantly, investors will give more credit to financial plans based on verified assumptions and reasonable targets. Calculate expected revenue using market size, market share and/or user adoption rates for instance. The more you justify your plan with verified assumptions, the more credible it will be.

Download a financial plan and get your business funded

For startups that raise funds from VCs and angel investors

You have a good idea of your business’s valuation

Your financial model tells investors how large and profitable your business may be in the next 3-5 years. It also tells them how much you need to raise to get to there.

Your financial projections will also allow yourself and investors to calculate a valuation for your business. Indeed, there are a number of valuation methodologies based on expected financials. They help us to accurately estimate the value of any business (think multiple or Discounted Cash Flow valuation methodologies for instance).

Whilst investors will likely make adjustments to your plan to form their own view of your valuation, your plan will be their starting point. That is why you need to be prepared an have your own point of view when it comes to your business valuation. It will be crucial when discussing how much dilution you will have to accept as part of the round.

You know how much you need to raise

Many entrepreneurs and founders do not really know exactly how much they need to raise. This is a common mistake which can cost you a lot as explained in our article here.

How much cash do you need to cover your losses over the next 12-18 months? The amount of money you need to raise is the result of your financial projections. This is very important to accurately estimate your revenues and expenses. Also, you should run different scenarios to understand how much you should raise if, for instance, growth is lower than expected, or product development is delayed by 4 months, etc.

Whilst raising too little has obvious consequences later on (you will run out of cash early and will need to raise in a difficult position, urgently), raising too much can be costly too (think risk of dilution, overspending, etc.).

In any case, investors are wary of overspending and uncontrolled cash burn. Showing them you have built a credible financial model, assessed different scenarios will give them confidence money will be well spent. Also, investors are confident you are aware of the potential risks that can happen 12-18 months down the line.

Download a financial plan and get your business funded

For startups that raise funds from VCs and angel investors