To model, or not to model, that is the question
Here's a simple yet effective financial model for founders to get started.
You may have read Jenny’s spicy post on Twitter/X proclaiming that financial models are back in fashion for early stage startups. At Everywhere Ventures we've helped pull together a short how-to. Overall, models are another tool to add to your toolbox, and something that can help get investors over the line. The jury's still out, but we think more tools, not fewer, puts you in the driver’s seat.
The backstory is that during the ZIRP years, the tech narrative was more about growth at all costs rather than about running a sustainable business, so the financial model was often pushed aside. More recently, with a return to sanity within the tech sector, concepts such a profitability, unit economics and sustainable burn are no longer taboo phrases and the upshot is that more investors and founders are paying attention to the financial model itself.
The Tweet and subsequent Linkedin post unleashed a heated debate among founders and funders centered on if an early stage company should even bother building out a financial model or wait for a later inflection point in the business. One school of thought is that early stage founders need to focus on building world class products and getting them into the hands of customers, not on building out complex financial models. With inevitable pivots and incorrect assumptions, what exactly is the point anyway? The other side of the debate is in favor of putting a model together, despite the fact that many of the assumptions will be incorrect. Whichever camp you are in, our perspective is that a financial model should not be scary, overcomplicated or intimidating to founders.
As a 2x founder who did not go to Business School and does not have exceptional Excel skills, Jenny is the first to acknowledge that building out a financial model is not her idea of a fun time. So to make this all a bit easier for founders, we teamed up with Eric Friedman and his team at Graph Advisors who put together a simple yet effective financial model for founders to use (thank you Eric!)
To be clear, the goal of this financial model is not to predict the future - but rather to help any leader have a basic plan, understand the levers needed to scale and be one step ahead of key business decisions.
Getting investors over the line typically requires a magic trifecta - the pitch, demo and model.
An effective financial model can also help with fundraising by telling the story of the business in quantitative terms. Getting investors over the line typically requires a magic trifecta - the pitch, demo and model. While a pitch is focused on vision, founder DNA and articulation of a monster opportunity and the demo or prototype shows an ability to understand customers and build product, it’s the financial model that demonstrates the health of the business itself and how the concurrent growth trajectory and associated costs all fit together.
Do you absolutely need to build a financial model as a pre-seed stage company? 🤷🏻♀️ But the model is an empowering exercise that all founders can benefit from and hopefully, the template and explainer video will make it much easier to get started.
Check out Liz O’Sullivan with Noah Spirakus on the Venture Everywhere podcast: Vera-fy with AI, Listen now on Apple and Spotify and check out all our past episodes here!
