Don't Make This Huge Mistake on Your Financial Model
Over the past few years, I’ve worked with dozens of startups through TechStars, General Assembly and the Edge EdTech Accelerator to help founders improve their financial models to secure potential funding. Whenever I ask the entrepreneurs to share their financial models with me, I almost always see one common characteristic: The models are almost entirely focused on expenses.
Now, don’t get me wrong. The ability to convey your forecast headcount, marketing budget and fixed costs is critical to demonstrate credibility and your expected use of investor funds. But VCs don’t really spend much time focusing on your predicted rent expense in month seven of year three; especially because your expected costs are likely to change anyway. That's just a matter of accounting. What investors really want to see is a detailed analysis of the levers that drive your revenue.
Building such a revenue model is much more than just having two rows on a spreadsheet to forecast customers and revenue.
The best entrepreneurs spend many weeks or even months modeling and validating the dozens of drivers that feed into those important top-line numbers. They know how to convey how sub-metrics like site visits, conversion rates, retention rates, virality, repeat purchases, unit marketing economics and different customer cohorts interact to tell a story about growth.
The best financial models clearly bridge the story of past revenue with the story of future revenue.
Too many first-time entrepreneurs maintain separate spreadsheets for the past and for the future (or for accounting and growth). This makes it hard to maintain a consistent row and column structure in two different places and really difficult for investors, acquirers and other stakeholders to see how your progress-to-date can translate into future progress.
Your goal should be to have a single hierarchical model that shows, from left to right, the clear transition from past to forecast (perhaps with a vertical dividing line for "today"), which allows you to input different spending assumptions that lead to predictable differences in your expected growth in those future months.
Having a streamlined revenue model is one of the fastest ways to close new investors (in addition to many other benefits of being metrics-driven). For more information on how you can build strong business models, check out my complete guide to building a metrics-driven business.
Have fun in spreadsheet land!
Andrew Cohen is the founder of Brainscape, a web and mobile education platform that helps people study more efficiently. Brainscape originally grew out of a personal project that Cohen created to help him improve his Spanish, while working in Panama for the World Bank. It later inspired him to seek a master's degree in instructional technology from Columbia University and transform his pet project into a fundable startup that can help people study any subject. Brainscape has since raised several million dollars from top venture capitalists.