Since every business is unique, this will lead you into trouble. While it’s easy to search around and find a template to use, those templates were built by someone with a particular business in mind. Why is it Important for Founders to Build a Financial Model from Scratch? In the end, I did eight of these meetings and EVERY ONE of the firms that did the 90 minute meeting with me on the financial model either made an investment in the company or made an offer to invest in the company. I knew the model inside and out since I built it I could answer any question about any cell and look like a genius. I wanted the meeting not just to save them time and frustration learning a new model, but more importantly to get more face time with them in a situation where I was going to shine. They would insist that they could figure it out without the meeting, but I ALWAYS held my ground. I would only share it by first sitting down with them and an associate and reviewing the model in person and after that 90 minute session, I would leave them a copy of the model to play with further. They would ask to be sent a copy of the model and I would refuse. I would tell them that we had a very detailed financial model that drove it, I was setting the bait… Inevitably, VC’s would ask where the numbers came from. “When fundraising for SurePayroll, we had some very high level financials in the pitch deck. Troy has an important story to share on this topic:
Why Should Founders Care about Building a Financial Model? The model includes financial projections that are tied mathematically to the assumptions, which allows operators to “play with the variables” in order to understand how certain decisions might affect the future health of their company. how many sales people to hire and what to pay them). One model can produce multiple sets of projections given different assumptions.īased on a set of assumptions, a financial model is used to make smart decisions (e.g. The outputs are a set of projections that show how the company will perform if the assumptions are true. The inputs are the assumptions that drive the model, things like what drives your customer acquisition cost, what your churn rates are, how much you pay people, etc. In short, a financial model is an abstract mathematical representation of how a company works (and more importantly, how it will work going forward). Part 4: Cash Flow, Balance Sheet and Keeping the Model Updated Part 3: Income Statement and Custom Detail Tabs Part 1: The Why and What of Financial Modeling
#Prota ventures series
Our plan is to break this out into a four-part series and guide you through the components necessary for building your own financial model from scratch: We sincerely hope you find this series helpful. After I asked him where I could find his lecture material online, he suggested we co-author this article series since there weren’t many solid resources available. He invited me to a 90-minute lecture he gave where he overwhelmingly convinced me and the room that, indeed, founders need to take the time necessary to build their models from scratch. His feedback was, essentially, to never use a template and instead build each model from scratch. More accurately, the “debate” was a strong adverse reaction from Troy after I shared a template I built for Prota Ventures’ portfolio companies. This series is the result of a friendly debate I had recently with Troy Henikoff (former Techstars Chicago Accelerator Managing Director) regarding the best approach for founders to take when building a financial model. This article was originally published over on Startup Rocket here, and written by Will Little and Troy Henikoff.
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