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Is 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 cha

Is 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 ago
Most 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 ago
  As 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 ago
  tech investors are not interested in value, they are interested in disrupting what is already there and profiting from it.
nrp 6y ago
Yes. It’s almost never too early to build a financial model. As noted in the original article, your model will always be wrong. However, the exercise of creating the model and using it to build out strawman scenarios is enormously helpful to let you understand how internal burn rates, customer acquisition costs, COGS, recurring revenues, etc all interact and how those could line up to different fundraising timelines. I’m not sure how you can reasonably start working full time on a business or idea without at least a rough model to play with.
- jhardy54 6y ago
  > almost never too early Sure, but when is "too early"?
  - shalmanese 6y ago
    It's definitionally never too early if you consider "???" as a valid business model. I often tell people that Facebook's early business was an "underpants gnomes model". ie, it was: Step 1: Acquire lots of users Step 2: ??? Step 3: Profit! But that this model was actually enormously useful to Facebook because it brought alignment over what to focus on and what not to focus on and where there were areas of high certainty and where there was, intentionally, areas of low certainty. A business model of "???" is a valid and useful business model because it tells people that we know that we do not know anything about the business model yet and this is an intentional choice and we are aware of it. The key is, even if it is "???", you still need to write it down and have everyone agree that this is, indeed, the business model right now.
  - ska 6y ago
    Before you have an idea what your first product actually is?
- icedchai 6y ago
  The exercise is useful since it makes you think. However, from personal experience working with several startups, the actual numbers are generally pure fiction.
beagle3 6y ago
The saying goes: "Plans are useless but Planning is invaluable" - and it goes well with "No business plan survives first contact with the customers" (which was adapted from IIRC Churchil's "No battle plan survives first contact with the enemy", even though customers shouldn't in general be regarded as enemies)
- dnh44 6y ago
  I prefer Mike Tyson's version; "Everybody has a plan until they get punched in the mouth."

gamblor956 6y ago

Most 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 ago
As 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 ago
tech investors are not interested in value, they are interested in disrupting what is already there and profiting from it.

nrp 6y ago

Yes. It’s almost never too early to build a financial model. As noted in the original article, your model will always be wrong. However, the exercise of creating the model and using it to build out strawman scenarios is enormously helpful to let you understand how internal burn rates, customer acquisition costs, COGS, recurring revenues, etc all interact and how those could line up to different fundraising timelines. I’m not sure how you can reasonably start working full time on a business or idea without at least a rough model to play with.

jhardy54 6y ago
> almost never too early Sure, but when is "too early"?
- shalmanese 6y ago
  It's definitionally never too early if you consider "???" as a valid business model. I often tell people that Facebook's early business was an "underpants gnomes model". ie, it was: Step 1: Acquire lots of users Step 2: ??? Step 3: Profit! But that this model was actually enormously useful to Facebook because it brought alignment over what to focus on and what not to focus on and where there were areas of high certainty and where there was, intentionally, areas of low certainty. A business model of "???" is a valid and useful business model because it tells people that we know that we do not know anything about the business model yet and this is an intentional choice and we are aware of it. The key is, even if it is "???", you still need to write it down and have everyone agree that this is, indeed, the business model right now.
- ska 6y ago
  Before you have an idea what your first product actually is?
icedchai 6y ago
The exercise is useful since it makes you think. However, from personal experience working with several startups, the actual numbers are generally pure fiction.

beagle3 6y ago

The saying goes: "Plans are useless but Planning is invaluable" - and it goes well with "No business plan survives first contact with the customers" (which was adapted from IIRC Churchil's "No battle plan survives first contact with the enemy", even though customers shouldn't in general be regarded as enemies)

dnh44 6y ago
I prefer Mike Tyson's version; "Everybody has a plan until they get punched in the mouth."