5 Common Startup Financial Modeling Mistakes
Updated: May 3, 2022
A startup's financial model is critical to attracting investors. Make sure you're covering all your bases by avoiding these five common mistakes.
1. Your financial model is a numerical pitch deck
Your startup’s financial model is more than just an internal planning tool, Many founders focus mainly on their pitch decks during the preparation phase of their fundraising campaigns. The industry encourages it, with a myriad of resources and courses on how to prepare a great pitch deck, many with an even stronger focus on how to deliver the perfect pitch, even though face-to-face presentation happens much less these days. It’s completely logical to focus on your pitch deck, given that it’s the first piece of collateral to be sent out to potential investors, but ignoring your financial model as a result is a recipe for disaster.
Ignore your financial model at your peril!
Your startup’s financial model is important, but did you realize just how much it can tell potential investors? Use your financial model to demonstrate your growth potential, key drivers of revenue, scalability, and even the quality of your team. Our investability rating assessors and AI model learn at least as much about a company and the quality of its investor proposition from its financial model as we do from its pitch deck.
Bottom line: Give your financial model as much care and attention as you give your investor presentation.
2. Remember who you are audience is
Many startup financial models used for fundraising ARE internal planning tools, but you don’t need to highlight that fact. A third party should be able to read and understand your model to extract its maximum value.
Present your assumptions clearly and logically, using formulae to “show your work”. Avoid using hard-wired numbers so that the reviewer can understand your calculations.
As we see a lot of financial models, want to know one of our pet hates? Headcount tables that don’t specify the title or function of the resource, but just use a first name as the label. It’s as much of a let-down to the reader as a very prominent typo.
Remember, most investors, and certainly, all VCs, have had formal financial training and can spot a formula error in an instant. You wouldn’t be proud of typos in your investor presentation, so make sure you audit your financial model before you send it out. Better still, get someone else to do it for you.
Our favourite trick? Send your model to a trusted friend, colleague or fellow founder and ask them to find the three deliberate errors. They will always find something you missed.
3. Make the logic for growth clear
Your financial model is like a pitch deck with superpowers. It tells your startup’s value creation story logically and persuasively. So use it to your advantage! To strike a balance between conservatism and exuberance - think about logical ambition. That is, a clearly set out value build-up based on sensible assumptions but with a growth mindset.
Investors are on high alert for growth assumptions that lack credibility but equally applaud sensibly-presented ambition. Nobody knows how your eventual financial performance will actually turn out (aside from knowing it will be nothing like the projections) but the detailed and rational presentation of an attractive growth story will always win through.
4. Make sure your model and your pitch deck match
Inconsistencies between your investor presentation and financial model are a big turn-off for investors. Errors like this are usually caused by poor version control or insufficient sleep. They suggest a lack of care and attention to detail and nothing can destroy your credibility faster.
Less destructive, but still to be avoided, are differences in your presentation. For example, lines of business that are labelled differently in your pitch deck and your financial model, or cash flow line items being aggregated differently.
Top tip: Make it as easy as possible for investors to connect the dots from one document to the other.
5. Tell the story the investor wants to hear
Have you ever asked a shoe shop for a particular shoe in a particular size, only to be told, “sorry we have it in every size but yours?” It’s not useful.
So why do so many startups present financial models to investors that don’t demonstrate the growth potential an investor requires? Investors are smart — they know things won’t turn out as initially planned. But they will still expect to see numbers presented which generate typical target returns.
Similarly, investors are concerned about cash. The highlight of your model should demonstrate how their funding will be deployed; over what time period; and what the business will have achieved as a result of that investment. Show them also how much additional funding will be required before your business will reach break-even; and how much cash the mature business is capable of generating.
Top tip: Present profits as well as cash flow by all means, but ensure that cash is highlighted.
Building a great financial model is not easy. It requires skillsets that many founders don’t naturally have. But there are many advisors and consultants out there who are willing to help, and loads of online resources to guide you through the process.
Your financial model is at least as important in the presentation of your investor proposition as your pitch deck. It can give you and your team huge credibility, or destroy it in a heartbeat. Take the time to get it right, and always have it audited and sense-checked by a friendly advisor or mentor.