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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 crea

by 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.
- ska 6y ago
  Perhaps "fiction" is the wrong way to look at it, because the exercise has value. I think of it this way: every business's financial model is a collection of numbers, some empirical (and hopefully correct) and some estimated. The thing about a startup is that there are few empirical numbers (but they are critical, you have to understand your burn rate and what affects it) and the estimated numbers are poor estimates. The evolution of the size of the error bars on those estimates is probably more important than the size itself. If you are very early on, you should be using these to help you focus information gathering on the most impactful areas.
  - icedchai 6y ago
    The exercise does definitely have value... My frustration comes from personal experience. I've worked in a few startups where the "size of the error bars" never changes. It is very, very frustrating to see the same optimistic, almost delusional thinking used 3 or 4 years in. Some founders are very, very stubborn and won't listen or look at previous results.
    - ska 6y ago
      That's fair enough. I think a good measure of how an early stage startup is doing is to see how the thinking is evolving. If your CEO is doing the same hand-waving in year 3 that sold the seed round, I agree something has probably gone wrong, and may indicate time to think about a change.

by nrp 6y ago

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.

ska 6y ago
Perhaps "fiction" is the wrong way to look at it, because the exercise has value. I think of it this way: every business's financial model is a collection of numbers, some empirical (and hopefully correct) and some estimated. The thing about a startup is that there are few empirical numbers (but they are critical, you have to understand your burn rate and what affects it) and the estimated numbers are poor estimates. The evolution of the size of the error bars on those estimates is probably more important than the size itself. If you are very early on, you should be using these to help you focus information gathering on the most impactful areas.
- icedchai 6y ago
  The exercise does definitely have value... My frustration comes from personal experience. I've worked in a few startups where the "size of the error bars" never changes. It is very, very frustrating to see the same optimistic, almost delusional thinking used 3 or 4 years in. Some founders are very, very stubborn and won't listen or look at previous results.
  - ska 6y ago
    That's fair enough. I think a good measure of how an early stage startup is doing is to see how the thinking is evolving. If your CEO is doing the same hand-waving in year 3 that sold the seed round, I agree something has probably gone wrong, and may indicate time to think about a change.