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Comment by justiceforsaas | Hacker News Reader

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 the article that says "Why Should Founders Care about Building a Financial Model?"...I think a more important question is "WHEN"?

[1] https://firstpayingusers.com

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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. I’m not sure how you can reasonably start working full time on a business or idea without at least a rough model to play with.

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. 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.

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.

That's fair enough. I think a good measure of how an early stage startup is doing is to see how the thinking is evolving.

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.

> almost never too early

Sure, but when is "too early"?

It's definitionally never too early if you consider "???" as a valid business model.

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.

Before you have an idea what your first product actually is?

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 attempts at creating value, rather than the constant copycatting you currently see.

As long as you don't mix the meaning of "tech" with "informatics", yes, that seems correct.

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.

tech investors are not interested in value, they are interested in disrupting what is already there and profiting from it.

The saying goes: "Plans are useless but Planning is invaluable" - and it goes well with "No business plan survives first contact with the customers" (which was adapted from IIRC Churchil's "No battle plan survives first contact with the enemy", even though customers shouldn't in general be regarded as enemies)

I prefer Mike Tyson's version; "Everybody has a plan until they get punched in the mouth."

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