Three Reasons Why Building Financial Models in the Seed Stage is Essential
I am a big financial model guy. They are essential to building, especially in the early stages. However, when I request them, I get tons of eye rolls from founders because they state, “there are just too many unknowns.” I, of course, agree with this; however, there is a reason to spend the time to dig in and understand how the founder is looking to burn your capital. The three most important reasons are as follows:
It codifies the assumptions made by the founders regarding the fundraise. Assumptions can be changed, of course, but it at least gives you a starting point. I like to have the founder color code the assumptions (green, yellow, red) to identify their certainty level with the assumption. This allows for more intellectual honesty around the model.
It makes the founder really consider their burn as it pertains to ramping up expenses. If the revenue assumptions are red (low level of certainty) and the costs ramp up significantly, the runway can change from 18 months to 6 months.
Putting your business in excel is a thoughtful exercise- any resistance to doing so makes me question the founder's ability to operate the business.
Do you believe in financial models?
As someone who consults for a lot of startups and is the one putting these together I can attest that they are both 1000% necessary and at the same time based in fantasy land. An excellent way to sniff out the dreamers from the doers.