Creating a financial model is a critical component for any startup looking to attract investors. However, many founders fall prey to common mistakes that can jeopardise their chances of securing funding. To help you avoid these pitfalls, we’ve identified five of the most common startup financial modelling mistakes, and provided tips on how to avoid them.
- Treating your financial model as just a numerical pitch deck
Your startup's financial model should be more than just a tool for internal planning. Investors use it to assess your growth potential, scalability, key drivers of revenue, and the quality of your team. Neglecting your financial model can be detrimental to your fundraising efforts. Give it the same level of care and attention as your pitch deck.
- Not considering your audience
Make sure your financial model is easy to read and understand by a third party. Clearly present your assumptions and use formulae to show your work. Avoid using hard-wired numbers and label your resources correctly. Remember that investors have financial training and can spot formula errors easily. Audit your financial model and get someone else to review it for you.
- Lack of clear logic for growth
Your financial model should tell a logical and persuasive value creation story. Use it to showcase your startup's growth potential while striking a balance between conservatism and exuberance. Avoid growth assumptions that lack credibility and focus on presenting an attractive growth story based on sensible assumptions.
- Inconsistencies between your pitch deck and financial model
Inconsistencies between your pitch deck and financial model can undermine your credibility with investors. Ensure that your model and pitch deck are consistent and use the same terminology. Make it easy for investors to connect the dots from one document to the other.
- Not telling the story the investor wants to hear
Investors want to see numbers that generate typical target returns. Highlight how their funding will be deployed, over what time period, and what your business will achieve as a result of that investment. Present profits as well as cash flow, but ensure that cash is highlighted. Investors are concerned about cash, and your financial model should reflect that.
Building a great financial model is not easy. Seek out advisors and consultants who can help, and use online resources to guide you through the process. Your financial model is just as important as your pitch deck in presenting your investor proposition. Take the time to get it right, and always have it audited and sense-checked by a friendly advisor or mentor. Avoiding these common financial modelling mistakes can help you secure the funding you need to take your startup to the next level.
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