Here's a surprising fact: there's no need for a financial model for seed funding.
We raised our $1M seed round without a financial model.
We had one for our internal use.
However, we used just a simple P&L forecast for fundraising to explain revenue and expense drivers.
I've seen hundreds of financial models.
I've created hundreds of them myself.
Complex financial models with a dozen Excel sheets don't help.
They can even frustrate you and cause you to lose focus and understanding of your business model.
- I've seen a case where a founder bought a $499 financial model template and tried to add numbers.
But it was so complicated that he wasn't able to explain it to the investor.
So, the investor asked for a simpler model.
The primary goal of the financial model is to help founders understand the business model and key metrics to drive revenue and expenses.
- Don't lie to yourself, trying to make your forecast better.
You might feel better now.
But you'll be disappointed when you don't achieve your plans.
- And yes, it's never too early for some financial modeling (even before you know how you'll make money, you'll know how you'll spend it!).
The question is, how much modeling should you do?
Only cash flows really matter in (most) earliest-stage startups.
As you gain more insights and data about your business, your model will become more complex.
However, in the beginning, a complex model isn't necessary.
It will change hundreds of times.
- You also don't need 5 and 10-year projections for a pre-revenue company.
Your assumptions at this stage are mostly based on your ideas and dreams.
You need some time to figure out what will work.
- So, here is a Financial Model Cheat Sheet.
I hope this helps to avoid some of the mistakes.
Originally published on LinkedIn