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Startup Financial Modeling: What is a Financial Model? (2016)
- paulryanrogers 6y ago> Google sheets is convenient for making changes and having multiple people editing, but sending an investor a model in Google sheets signals that you are not financially savvy. I do wonder how many of these 'signals' there are, and what weight they really carry for investors.
- dasil003 6y agoAlso what is the concern here? Is it that the investor will take advantage of you if they don't think you're financially savvy, or that they won't invest? If it's the former then you need to know your shit because any superficial signaling will evaporate within the first meeting. If it's the latter, then the investors are circle-jerking morons by valuing financial savvy over strength in product, engineering, operations, or even charisma.
- rogerkirkness 6y agoThe other side is everything via DocSend so you can surveil them. This also doesn't go well.
- JaakkoP 6y agoThis may have been true in 2016, but since then, I’ve seen CEOs raising multimillion dollar rounds using Google Sheets, financial modeling software, and Excel alike. There’s certainly still some preference towards Excel in 2020, but in no way using sheets will mean that you’re not “financially savvy.”
- formercoder 6y agoBack in 2016 google sheets couldn’t do circular calculations, so many financial modeling tasks were impossible.
- ska 6y agoThis is a good point. It started off with a bit of a "toy spreadsheet" reputation (fair or not) and that may have biased some people for a while. It shouldn't matter now.
- hutch120 6y agoYep, this is where I switched off. If the advice is to "look good" to investors based on the type of spreadsheet program you use you've got bigger problems.
- itslogotime 6y agoLol agree with this
- nilsbunger 6y agoThis particular one is outdated advice. I’ve seen many financings the past few years, and many really sophisticated google sheets models. It’s a total no-op what you use as long as it can model what you need it to.
- harha 6y agoIf the business model is solid, I prefer the type of investors who look at the assumptions and not at the font the calculator uses. It’s not rocket science, it’s adding up a bunch of imaginary cash flows, explaining where they might come from should be the important bit.
- jd115 6y agoThere's a bigger issue here, apart from the outdated advice. It's just BAD advice to begin with. What it signals is lack of tech savvy in the investors. It does not in any way shape or form signal any lack of financial savvy on the part of the founder. If you're starting a tech company, do you REALLY want to work with an investor who can't open a cloud spreadsheet ffs?
- rorykoehler 6y agoGoogle sheets has an xlsx export feature. One great trick for investors that should be focusing on the model instead of the app used to create it.
- ArikBe 6y agoFor those looking for the rest of the series, it's here: https://www.mathventurepartners.com/blog?offset=1573736899004&category=MATH+101 https://www.mathventurepartners.com/blog?offset=157373689900... This looks like a series on how to build a relatively straightforward operating model with a focus on cash balance and "founder value" (I guess that's attributable equity to the founder) If you're interested in valuation, it's worth checking out Prof. Damodaran's work or an online resource such as Macabacus modeling guide: https://macabacus.com/operating-model/introduction https://macabacus.com/operating-model/introduction
- itslogotime 6y agoMultipleExpansion.com is another good (and free) modeling resource. Damodaran is good for understanding valuation - not necessarily financial modeling.
- ArikBe 6y agoThanks! I did not know about MultipleExpansion. And yes you are right that Damodaran - although the spreadsheets on his site can be useful as well.
- justiceforsaas 6y agoIs it useful to have a startup financial model if you're still at the early stages? I've analyzed over 480 founder interviews (mostly for their acquisition channels [1]) and there's 1 adjective that defines their growth: "messy". They pitched a bunch of journalists, did a trial & error for 100s of ads on FB/Google, had search traffic after 6 months of trying (but 0 before that) and so on. There's a sub-headline in the article that says "Why Should Founders Care about Building a Financial Model?"...I think a more important question is "WHEN"? [1] https://firstpayingusers.com https://firstpayingusers.com
- gamblor956 6y agoMost startups have a financial model before they start doing business, because most startups aren't in tech. Tech is the only market where you have the luxury to not know what your revenue model is, or even what your product is, for months or years after you have "launched." Given the high rate of failure with tech startups, more financial modeling in the early stages would probably have resulted in more meaningful attempts at creating value, rather than the constant copycatting you currently see.
- marcosdumay 6y agoAs long as you don't mix the meaning of "tech" with "informatics", yes, that seems correct. When you do stuff that nobody ever tried you both get some leeway on experimenting how to interact with the market and is unable to predict how the market will react to it. If you are doing the same thing everybody does, you are expected to know beforehand what is your product. That is true whether you do those things in a computer or not. But you are pointing on some confusion of investors that think they are getting into a tech company when the company is actually just a copy of something else. That may be widespread for all that I know (I still somewhat doubt it), but most product development does consist on copying nearly everything of another existing one, this does not make it any less tech.
- b20000 6y agotech investors are not interested in value, they are interested in disrupting what is already there and profiting from it.
- carterklein13 6y agoFYI - not sure if this is your website, but when I press escape I'm taken to a Squarespace admin login page
- rapidlyinc 6y agoYou could also just get Finmark.
- ramie 6y agoThanks for the shoutout! www.finmark.com (YC S20)
- davidedicillo 6y agoIt’s interesting to see the proliferation of tools focused on tackling these business needs. This post reminded me of http://usesummit.com http://usesummit.com which allows to create financial forecasting models
- lharries 6y agohttps://www.causal.app/financial-planning https://www.causal.app/financial-planning is another good one and has a bunch of starter templates
- ramie 6y agoYou're not wrong about a ton of new tools coming to market in this space. Redpoint recently did a writeup of just some of the financial modeling companies https://medium.com/redpoint-ventures/the-finance-tech-stack-opportunities-for-innovation-part-ii-58e89a0d7c67 https://medium.com/redpoint-ventures/the-finance-tech-stack-...
- einarvollset 6y agoCheck out: usesummit.com
- TeeWEE 6y agoHe is refusing to share the financial model and requires to sit with the investor...? I understand that F2F is better when looking for investors. But this gives me the idea his documentation of the financial model is very poor or he is afraid people don't understand it (which indicates it can be improved).
- nilsbunger 6y agoI’m a seed stage VC. I give our founders the same advice as OP when raising their next round: If it’s more complicated than a basic pitch deck, walk through it with the VC, and optionally leave them a copy to play with. Investors don’t have much time and can misconstrue stuff easily. When you walk through it, you get to answer questions in real-time and learn about any weaknesses they perceive in the modeling or the underlying biz. Why wouldn’t you do it that way?
- baking 6y agoSpreadsheets are non-linear. I would rather be given the chance to explore first on my own, and then have a chance to ask questions. The forced walk-through might be helpful to some people, but that can also be documented in the spreadsheet. Also, formulas are what they are. You can try to tell me what they do, but the formula speaks the truth and I don't want noise when reading formulas for the first time. Again, you can comment any non-obvious formula, but let me read the formula on my own.
- westurner 6y agohttps://www.causal.app/ https://www.causal.app/ has free business model templates: SaaS (Foresight), eCommerce (https://foresight.is/ https://foresight.is/), Startup Runway, Buy/Rent, Ads Calculator
- tasuki 6y agoThe article explicitly, repeatedly says templates are a bad idea. If you disagree, it'd be interesting to see your reasoning, rather than links to free templates.
- Artistry121 6y agoCausal is also really easy to build something from the ground up. The templates are nice guides but it’s a cool tool.
- westurner 6y agoWe'd do better to find a list of business modeling books and tools. And then take a look at integrating actual data sources; hopefully some quantitative with APIs. Uncertainties supports mean±"error" w/ "error propagation": https://pypi.org/project/uncertainties/ https://pypi.org/project/uncertainties/ Sliders etc can be done in Jupyter notebooks with e.g. ipywidgets: https://ipywidgets.readthedocs.io/en/latest/ https://ipywidgets.readthedocs.io/en/latest/
- ChicagoDave 6y agoMy late business attorney would have said the same thing. The act of building a business financial model includes questions about the specific business. You can have assumptions about expenses, but how you create revenue is likely highly unique. The balance between these items can only be constructed through conversations, not plugging numbers in a template.
- monkeydust 6y agoAnyone tried to do something like this with business modelling tools like https://sheetless.io/ https://sheetless.io/ ?
- b20000 6y agoa financial model is a document that you spend weeks creating, which is then ignored in the countless pitches you will do in front of VCs, possibly shared with other companies they already invested in.
- ramie 6y agoNext time you want to make a financial model, instead of spending weeks making it try out Finmark (YC S20). We want to make creating a model turbotax easy without forcing people to use a template. Instead, our modular approach allows every company to create their own unique model in under an hour.
- b20000 6y agoit doesn't change the fact that VCs simply ignore your model and then give it to someone else they already invested in.
- baking 6y agoThe model is an idea. The spreadsheet is an implementation. Don't confuse the two. You should be able to describe your model on paper or a slide or two. The spreadsheet as a working version of the model is necessarily more complicated. Having both allows anyone to verify that the model is working as intended. "I can't explain it" is not the same as "You wouldn't understand it."
- corry 6y agoAdding a +1 for building your first models by hand, before using something "on rails". Perhaps until say $5M ARR for B2B SaaS. My experience was that I have a much better command of the important levers in my business -- and can more easily scenario plan -- with a robust model that I built myself. Much easier to derive key metrics out of it too. And once you have a starting point, it's easy to iterate and expand it as the business grows. My limited experience with the "financial model as a service" apps are that they make a bunch of assumptions for you and make it a lot harder to ad hoc plan. i.e. What if we delayed our hiring round of 5 headcount 2 months? What's the impact on ending cash balance? What's the impact if I move part of my ARR pricing into an up-front setup cost? What if we offer quarterly payments instead of annual pre-paid, and 30% of our clients opt for that (where does that leave cash)? etc. These are things that you could do in Excel in about 10 minutes with even a basic model, but would be challenging to do in another person's app. IMO an early-stage SaaS startup's initial model should be focused on ARR/cash burn, looked at Monthly, with true planning cycles quarterly or maybe every 6-months if progress is more or less on plan. I don't think I was asked in a single board meeting until $4M ARR or so about Revenue. ARR and cash are king.