Startup Financial Modeling: What is a Financial Model? (2016)
mathventurepartners.com
mathventurepartners.com
This looks like a series on how to build a relatively straightforward operating model with a focus on cash balance and "founder value" (I guess that's attributable equity to the founder)
If you're interested in valuation, it's worth checking out Prof. Damodaran's work or an online resource such as Macabacus modeling guide: https://macabacus.com/operating-model/introduction
Damodaran is good for understanding valuation - not necessarily financial modeling.
And yes you are right that Damodaran - although the spreadsheets on his site can be useful as well.
And then take a look at integrating actual data sources; hopefully some quantitative with APIs.
Uncertainties supports mean±"error" w/ "error propagation": https://pypi.org/project/uncertainties/
Sliders etc can be done in Jupyter notebooks with e.g. ipywidgets: https://ipywidgets.readthedocs.io/en/latest/
I do wonder how many of these 'signals' there are, and what weight they really carry for investors.
There’s certainly still some preference towards Excel in 2020, but in no way using sheets will mean that you’re not “financially savvy.”
It’s not rocket science, it’s adding up a bunch of imaginary cash flows, explaining where they might come from should be the important bit.
It's just BAD advice to begin with.
What it signals is lack of tech savvy in the investors. It does not in any way shape or form signal any lack of financial savvy on the part of the founder.
If you're starting a tech company, do you REALLY want to work with an investor who can't open a cloud spreadsheet ffs?
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 the article that says "Why Should Founders Care about Building a Financial Model?"...I think a more important question is "WHEN"?
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 attempts at creating value, rather than the constant copycatting you currently see.
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.
Sure, but when is "too early"?
I often tell people that Facebook's early business was an "underpants gnomes model". ie, it was:
Step 1: Acquire lots of users
Step 2: ???
Step 3: Profit!
But that this model was actually enormously useful to Facebook because it brought alignment over what to focus on and what not to focus on and where there were areas of high certainty and where there was, intentionally, areas of low certainty.
A business model of "???" is a valid and useful business model because it tells people that we know that we do not know anything about the business model yet and this is an intentional choice and we are aware of it. The key is, even if it is "???", you still need to write it down and have everyone agree that this is, indeed, the business model right now.
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.
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.
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.
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."
Investors don’t have much time and can misconstrue stuff easily. When you walk through it, you get to answer questions in real-time and learn about any weaknesses they perceive in the modeling or the underlying biz.
Why wouldn’t you do it that way?
Also, formulas are what they are. You can try to tell me what they do, but the formula speaks the truth and I don't want noise when reading formulas for the first time. Again, you can comment any non-obvious formula, but let me read the formula on my own.