Does an early-stage startup need a financial model? Spoiler: yes.

written by Managing Partner, Snezhana S.

I dedicate this article to all romantic startup founders who believe that early-stage investors don’t look at numbers but only analyze the idea, team, and product. However, the way entrepreneurs approach the numbers greatly influences both the fundraising process and the result, reflected in the final offer from the investor.

Let’s start with the document you’ve heard of, Pitch Deck.

Pitch Deck

Call it your startup’s passport. I bet you’ve already done something and thought it was a pitch deck. Why just “thought”? Because having seen hundreds of different decks regularly, working with them every day, I can say that about half of the documents are not full-fledged pitch decks.

Let me explain why I am so straight-out. You can easily google many examples and templates of decks and make your own in the image and likeness (that’s what you do, right?). But your product is unique, isn’t it? It may be similar to the others, represented on the market.

However, the combination “Product — Team — Market — Conditions — Specificity” will always be different.

Investors will ask you many questions, and your startup passport should have answers to all of them. There will be questions about the product, the team, but also — many questions about numbers. And numbers are significant. They are like a litmus test, showing your approach to business and even — whether you are building a business at all.

Pre-seed startups may argue, “Where do I get the numbers? I’m just finishing the MVP”. That’s the point — your task is to create these numbers. Now is when the fun begins.

Financial model

Creating numbers is NOT EQUAL to drawing numbers. To create numbers means:

• Conduct an in-depth analysis of competitors: how they grow, how much money they raised, their pricing, etc. It’s not as difficult as it sounds.
• Understand the market you are targeting (the same TAM-SAM-SOM, find more details about it in this article).

Then with this data, start to build your forecast for a couple of years — your financial model.

Recently one entrepreneur told us: “If there’s any interest from the investor, I’ll make this financial model of yours.” — I bet the investors, who read this, are laughing out loud.

Guys, this is not how it works.

You are doing a lot of serious work: you make a product, count the numbers and prepare a package of documents. And then you rush into a large crowd of the same entrepreneurs. To understand how big is this crowd, cast your mind back to the good old pre-COVID days and the lines at passport control at major airports when several planes arrive at the same time. Got it? Now, multiply that number of passengers by 100, or even by 1000.

If your idea is groundbreaking, the investors might say, “Guys, this is a good idea. Go get ready and come back.” It is an optimistic scenario that can be possible if you know the investor personally. Otherwise, it is insanely difficult to break through to investors you do not know personally without a well-prepared pitch deck.

Your pitch deck is not ready if you do not have a properly calculated and structured financial model to answer the investor’s questions about your project.

Your numbers should be adequate and based on logic. Even if your project is at an early stage, you need to know the numbers of competitors, the market and build a plan based on assumptions. Create a plan using the data you find, market analysis, and feedback from active and potential customers.

Take the investor’s time as seriously as possible — prepare, collect the data in a package of documents. It will increase your chances of being noticed. You will be able to get a term sheet on more favorable terms, which allows you to grow and raise new rounds. And don’t forget that your startup valuation is also based on a financial model.

One more thing. If you are not planning to fundraise yet, I still recommend that you do the financial forecast for yourself. It allows you to work through such essential issues as growth scenarios, unit economics, and marketing plan. Let them be an educated guess for now, but you have to start somewhere, so go by from assumptions and logic. It is an excellent exercise for any entrepreneur.