With investors paying such close attention to a company’s financials, you may be tempted—especially if you don’t have a great deal of financial experience yourself—to turn to a professionally designed financial model template for startups. But I don’t recommend this because, in most cases, a template isn’t as plug-and-play as it seems. You could find yourself stuck with large blank areas that don’t apply to your company’s business model, or, even worse, parts of the model that you can’t use because you are unable to tweak the embedded formulas the way you need to. Although it’s additional work on the front end, you’ll get a more useful and professional-looking result if you start from scratch.
In this article, I discuss how I have helped founders build a financial model with investors in mind—and how to use the model to create a persuasive pitch.
Focus on Key Performance Indicators (KPIs)
In your financial modeling, it’s important to strike the right balance between including enough information to provide a comprehensive picture of your startup’s financial health, and not overwhelming investors with excessive detail. Zoom in on the most important metrics, known as key performance indicators (KPIs), which demonstrate your startup’s progress and potential. This can seem obvious at the strategic level, but startup founders often get mired in detail.
I once worked with a startup that had developed an innovative e-commerce platform. It was preparing to pitch to investors for its next funding round, and had built a financial model so overwhelmingly detailed that the primary KPIs were difficult to find. I helped the founders identify and prioritize their startup’s most important KPIs and incorporated them into the financial model. Here’s how to approach getting the balance right:
Understand Your Business and Industry
Start by developing a deep understanding of your business model, your industry, and the factors that drive growth and profitability. This knowledge will help you pinpoint the specific metrics that investors are likely to focus on when evaluating your startup’s potential. For example, a software as a service (SaaS) startup might prioritize metrics like monthly recurring revenue (MRR) and customer acquisition cost (CAC), while a retail business might focus on metrics like average transaction value and inventory turnover. In the case of the e-commerce startup, we determined that metrics for customer acquisition cost, lifetime value, and monthly average users would need to be prominent.
Align KPIs With Strategic Goals
Make sure you highlight the KPIs that most clearly reflect your startup’s overall strategic objectives and growth plan. For example, if your primary goal is to rapidly expand your customer base, you might prioritize KPIs such as the number of new customers, customer acquisition cost, and customer lifetime value. If your goal is to improve operational efficiency, you might focus on KPIs related to cost control, such as gross margin and operating expenses as a percentage of revenue. The aforementioned e-commerce startup I worked with knew how much money it needed to make in sales to break even, but not how that translated to the type and number of customers it needed. We created a dashboard that tracked the number of customers for each sales channel to ensure the startup stayed on target.
Make KPIs Clear and Prominent
Ensure that your chosen KPIs are easy for investors to find and understand within your financial model. Consider creating a dedicated KPI dashboard or tab that presents these metrics in a visually appealing and easy-to-read format, using charts, graphs, and tables where appropriate. You can also include KPIs within your financial statements or in a separate analysis section. Wherever they are, always be certain that they’re clearly labeled and easy to interpret.
I helped the e-commerce startup create a dedicated dashboard that highlighted its key metrics, making it much easier for the investors to see the startup’s performance and potential at a glance. In the end, the company was able to secure its desired funding. The investors specifically mentioned how the clear presentation of KPIs helped them understand the business better and gave them the confidence to invest.
Integrate Your Cap Table
An equally essential step to demonstrate a comprehensive understanding of your startup’s financial and ownership structures is to incorporate the capitalization (or “cap”) table into your financial model presentation. The cap table serves as a snapshot of your startup’s ownership, detailing the following components:
- Founder equity: Ownership percentages held by each founder, reflecting their roles and contributions to the startup
- Investor equity: Shares owned by angel investors, venture capitalists, and other financial backers, along with their respective investment rounds
- Employee equity: Stock options and grants allocated to employees as part of their compensation packages
- Convertible securities: Convertible notes or SAFE agreements, specifying the conversion terms and potential dilution effects
- Dilution scenarios: Potential outcomes of future fundraising rounds, demonstrating your startup’s potential growth and the impact on current stakeholders
Ensuring consistency between your financial model and the cap table provides investors with a cohesive and accurate picture.
Create a Sense of Urgency
A robust financial model can help you emphasize any opportunities and market trends that present unique windows for your startup’s growth—if investors act fast. You can demonstrate urgency by highlighting a number of important factors:
- Time-sensitive opportunities: I once worked with an innovative company that developed a groundbreaking AI healthcare solution. It used its financial model to highlight the potential for substantial revenue from a new government initiative in telehealth with a limited application window.
- Consequences of inaction: A tech firm has developed a new IoT device for smart homes that is unique, but there are competitors on the horizon. Investors would be able to tell from the financial model that delays in funding could rapidly compromise the company’s projected market share.
- Speed to market: A food tech venture with a lean business model and established partnerships might use its financial model to show how quickly it could generate revenue after receiving funding.
- Early-mover advantage: A fintech startup that is first in its niche could leverage its financial model to show the potential for increased market share and brand recognition with investor support.
- Scalability and growth potential: A SaaS firm with an impressive growth strategy might use its financial model to highlight its scalable business model, demonstrating how monthly recurring revenue could skyrocket with increased investment.
Highlighting time-sensitive opportunities can help persuade investors that acting fast is essential for a stronger market position and higher returns—especially useful today, when capital is much less available than it was a few years ago, and investors are increasingly cautious.