Startup financial models are dead. Long live startup financial models

Do early stage teams need a 1 to 3 year financial projection? Yes, and heres a free template and why they are essential.

Photo by Campaign Creators on Unsplash

It started with a post on Twitter/X by @jefielding following an epic discussion on LinkedIn all about how, when, and why to have an early stage financial model for any startup. 

The fun part is there are A LOT of conflicting opinions and lots of “advice” out there. The goal of this post is to give you enough information to think critically and make the decision that is best for you and your team. Like many things we do at Graph Advisors and Everywhere VC, we take a give first mentality and if you decide to create an early stage OpEx model you can use our free startup financial model template - duplicate and use in Google Sheets.

Investing and operating in early stage companies for the past 15 years has taught me that it is always more about competency of modeling vs. accuracy of prediction.

Nobody in the history of startups has been right about their model. They are either low because of figuring out growth and success, or wildly high because they did not. For this reason, it's not about predicting the future, it's about making a plan, understanding scaling, and being prepared.

The purpose of an early stage financial model is to create a way of looking into the future you want to create. Nobody has a way to look into the actual future. No team gets a 6 month, 1 year, or 3 year OpEx plan right and I am here to tell you that it is completely OK.

Show vs. Tell through a forecast

Creating a financial model is a way to communicate effectively for those who want to understand the story you tell, and for those who want to see the work. Creating a financial model is a great way to ask yourself questions, and calculate the answers. Much like explaining to a potential customer the pain you are solving, a financial model provides a way to tell the story of how the finances of a company will go.

Showing this story serves a few purposes;

1. Quantitative investors may process data vs narrative differently

2. Provides a tangible story for your champion investor to share with their partners

3. You can lean on this framework to remove decision paralysis

More Answers vs. More Questions

I love the adage that investors are default yes, until they are shown a reason not to invest. Getting to this optimistic view takes discipline and mental strength (don’t feel too bad for VCs). This means that when going through a mental or literal investment checklist - founders must have the details needed.

Let an investor say “no” because of a lack of conviction in the space you are building, in the team, or something else - not because you don’t have a model for their checklist. 

What are some common questions with (and without) a model?

1. Why do you want to raise $3m?

   1. No model: “Well, I want to quit my job, hire 2 engineers and a designer to handle all the customers we hope to have in a few months.”

   2. Model: “I put together a plan that shows it's going to take me 1 month to bring on an engineer, she is ready to quit her job and join me, and 3 months for the other - maybe less but you know hiring. I also want to work with a great designer and have budgeted a few months to find them. This is why you see headcount going up in months 1 and 3. I also have in my plan for the legal, misc. And other costs associated with the first 6 months. Does this plan have anything missing from what you have seen recently?”

Now you are in a conversation with an investor.

2. Can you show your thoughts on growing the customer base?

   1. No model: Of course, my friends at X Co. said it should take 6-12 months to grow to $1m ARR, and I think we can beat that, so I am assuming we go even faster. With some churn maybe we are off a bit, but we need to hire some customer service people to help them as we grow.

   2. Model: “I put together a plan that shows our growth - as you know we have about $200 ARPU and right now seeing growth at 10% MoM.”

Now you can talk through average revenue per customer, your SKUs, and more.

3. How are you handling churn right now?

   1. No Model: We haven’t really seen anyone cancel, which has been great.

   2. Model: “I put together a model, with our entire plan, that shows about 15% churn per month - is this inline with startups you help? - this is a variable we can change but things its smart to look at our burn against customers churning as we figure out what they want most. We found early on that our happiest customers love V2 and we are leaning in and focusing vs V1 which we think is ok to sunset at some point in the future.

4. How are you thinking about growing the business?

   1. No Model: We are going to create a viral video and work with some influencers in the B2B space who are going to love what we are doing - the goal is to spend on marketing this quarter to see how fast we can grow.

   2. Model: We modeled out about 50% customer acquisition costs starting in month 1. Obviously we want to be wrong here and bring this number down but this will give us a chance to continue in the 2 channels we use together, and add another after this fundraise, to continue growth. This CAC still puts us on the path we want to be on by year end. What have you seen in our category?

By now you should get the idea. Our goal is to show vs. tell founders how this type of exercise can be helpful. It services you the CEO, the prospective investors, and of course the team. Each audience has their own goals - but the work is the same. By putting in the time upfront you can have more intelligent conversations and help everyone make better decisions.

Download the template today and of course let us know what you think, or see our other templates that might be useful.