Financial modeling for early stage startups

by Eric Friedman

Many early stage investors look for financial models for 3+ years from founders to make an investment. Entrepreneurs often don’t have this information, don’t know how to put it together for the first time, and often are confused by the request.

Like most posts, this request/conversation has come up enough to turn it into my thoughts + the best resources I have to help founders. I have also backed businesses without this info based on other factors and don’t always think its required.

The best resource I have seen for financial modeling templates for startups is https://foresight.is/ which is built by https://taylordavidson.com/ and a constant place I have sent founders. They can download/purchase a financial modeling template, learn the dynamics of the entire worksheet, and turn it into their own.

Even if it’s too early, you are pre-revenue, or just at the idea stage I think its ok to hold your nose and go through the OpEx exercise. Putting something together is very helpful to think through scenarios and come up with some idea of a plan. It will arguably be more helpful to the business than not if you have nothing right now.

For me, this exercise is about competence of a modeling vs accuracy of the financial model.

I can’t remember an early stage team putting together a model that has been accurate for 3 years. In fact, for early stage companies you are usually wildly wrong. Things are either performing way above expectations or you are drastically below them. As mentioned above, the goal for me in looking at a model is the competency of setting up and predicting the costs and monthly burn for the business. It shows some of the thinking of hiring against capital projections. It shows the potential revenue, or intentional delay of revenue, associated with the business. It shows the ability to model out, month-by-month, the real costs of the business. It provides a framework to measure the books monthly – expected vs. actual. Finally, it allows for an intelligent discussion to really understand the business. 
Here are some questions that come directly from this kind of opex planning;

  1. It looks like you have 4 engineers starting in July – do you know who they are yet and what they will be working on?
  2. You have initial revenue in September, do you have an idea of pipeline and close rates for those customers?
  3. There’s a change in the unit economics in 6 months and looks like production ramps at the same time – is there a discount at this scale/volume?

Obviously all hypothetical questions but based in reality in the numbers from a founder. Instead of trying to pick apart a business, you can see the world through their eyes (in the numbers at least) and see if they can put together a comprehensive view of what will be spent. 

A financial model can be a quantitative view of the vision a founder wants to build, and a great way to get to know the strategy of what is going to be built.

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