You can be on Entrepreneur’s cover!

Don't Make This Huge Mistake on Your Financial Model Investors are curious about projected expenses but your projected revenue is what will decide if they write a check or send you on your way.

By Andrew Cohen

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Shutterstock

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.

Related: How to Keep Leaders Focused on a Company's Most Important Metrics

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.

Related: To See Results, Entrepreneurs Must Choose the Right Marketing Metrics

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.

Related: Use the Metrics That Really Matter in Your Business

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

Founder & CEO, Brainscape; Instructor, TechStars and General Assembly

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.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Business News

Sam Bankman-Fried Sentenced to 25 Years in Prison for Multibillion-Dollar Crypto Fraud

Southern District of New York Judge Lewis Kaplan said that the loss amount to the victims of Bankman-Fried's crimes surpassed $550 million.

Side Hustle

This Mom Started a Side Hustle After a 'Shocking' Realization in the Toy Aisle. Her Product Was in Macy's Within the Year — Seeing Nearly $350,000 in Sales.

Elenor Mak, now founder of Jilly Bing, didn't plan to start a business — but the search for a doll that looked like her daughter inspired her to do just that.

Growing a Business

To Achieve Sustainable Success, You Need to Stop Focusing on Disruption. Here's Why — and What You Must Focus on Instead.

Instead of zeroing in solely on disruptive innovation, embrace a pragmatic approach to innovation, recognizing and leveraging the potential within ongoing industry shifts.

Marketing

5 Ways to Get on the Media's Good Side (and Stay There)

When you're trying to make a name and a mark for yourself and your business, it's really important to get on the media's good side — and stay there.

Business News

Mark Zuckerberg Told Meta Engineers to 'Figure Out' Snapchat's Privacy Protections: 'We Have No Analytics on Them'

Recently unsealed court documents detail "Project Ghostbusters," Meta's project to work around Snapchat's end-to-end encryption to intercept data.