41–50 of 51 posts
You should be able to describe your model on paper or a slide or two. The spreadsheet as a working version of the model is necessarily more complicated. Having both allows anyone to verify that the model is working as intended.
"I can't explain it" is not the same as "You wouldn't understand it."
My experience was that I have a much better command of the important levers in my business -- and can more easily scenario plan -- with a robust model that I built myself. Much easier to derive key metrics out of it too. And once you have a starting point, it's easy to iterate and expand it as the business grows.
My limited experience with the "financial model as a service" apps are that they make a bunch of assumptions for you and make it a lot harder to ad hoc plan. i.e. What if we delayed our hiring round of 5 headcount 2 months? What's the impact on ending cash balance? What's the impact if I move part of my ARR pricing into an up-front setup cost? What if we offer quarterly payments instead of annual pre-paid, and 30% of our clients opt for that (where does that leave cash)? etc. These are things that you could do in Excel in about 10 minutes with even a basic model, but would be challenging to do in another person's app.
IMO an early-stage SaaS startup's initial model should be focused on ARR/cash burn, looked at Monthly, with true planning cycles quarterly or maybe every 6-months if progress is more or less on plan.
I don't think I was asked in a single board meeting until $4M ARR or so about Revenue. ARR and cash are king.
a financial model is a document that you spend weeks creating, which is then ignored in the countless pitches you will do in front of VCs, possibly shared with other companies they already invested in.
Next time you want to make a financial model, instead of spending weeks making it try out Finmark (YC S20). We want to make creating a model turbotax easy without forcing people to use a template. Instead, our modular approach allows every company to create their own unique model in under an hour.
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This may have been true in 2016, but since then, I’ve seen CEOs raising multimillion dollar rounds using Google Sheets, financial modeling software, and Excel alike. There’s certainly still some preference towards Excel in 2020, but in no way using sheets will mean that you’re not “financially savvy.”
Back in 2016 google sheets couldn’t do circular calculations, so many financial modeling tasks were impossible.
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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 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.…
> almost never too early Sure, but when is "too early"?
Earlier quoted context omitted.
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.…
The exercise is useful since it makes you think. However, from personal experience working with several startups, the actual numbers are generally pure fiction.
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.
Is it useful to have a startup financial model if you're still at the early stages? I've analyzed over 480 founder interviews (mostly for their acquisition channels [1]) and there's 1 adjective that defines their growth: "messy". They pitched a bunch of journalists, did a trial & error for 100s of ads on FB/Google, had search traffic after 6 months of trying (but 0 before that) and so on. There's a sub-headline in th…
Most startups have a financial model before they start doing business, because most startups aren't in tech. Tech is the only market where you have the luxury to not know what your revenue model is, or even what your product is, for months or years after you have "launched." Given the high rate of failure with tech startups, more financial modeling in the early stages would probably have resulted in more meaningful a…
When you do stuff that nobody ever tried you both get some leeway on experimenting how to interact with the market and is unable to predict how the market will react to it. If you are doing the same thing everybody does, you are expected to know beforehand what is your product.
That is true whether you do those things in a computer or not.
But you are pointing on some confusion of investors that think they are getting into a tech company when the company is actually just a copy of something else. That may be widespread for all that I know (I still somewhat doubt it), but most product development does consist on copying nearly everything of another existing one, this does not make it any less tech.
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The exercise is useful since it makes you think. However, from personal experience working with several startups, the actual numbers are generally pure fiction.
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…
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.
Earlier quoted context omitted.
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 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.
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.
Is it useful to have a startup financial model if you're still at the early stages? I've analyzed over 480 founder interviews (mostly for their acquisition channels [1]) and there's 1 adjective that defines their growth: "messy". They pitched a bunch of journalists, did a trial & error for 100s of ads on FB/Google, had search traffic after 6 months of trying (but 0 before that) and so on. There's a sub-headline in th…
Most startups have a financial model before they start doing business, because most startups aren't in tech. Tech is the only market where you have the luxury to not know what your revenue model is, or even what your product is, for months or years after you have "launched." Given the high rate of failure with tech startups, more financial modeling in the early stages would probably have resulted in more meaningful a…