The financial forecasts are essential for any business, but in the case of technology startups, the financial model is one of the most important and neglected tools available to a founder.
Supported by risky startups, they work on risky, aggressive capital deployments, often operating at a loss for years as they seek to expand and dominate the market. This means that the track is a critical KPI that the founders must monitor for each individual financial decision.
Aggressive costs need to turn into aggressive growth: revenues can jump by 20% or 30% per month, which makes track valuation an ever-changing goal. The possibility of expanding the team a month earlier can make a huge difference in the long run, or a quick reduction in costs can save the company from running out of money.
When important milestones and deadlines move directly from your finances, you are in a great position to repeat.
However, few founders create their own tools to help make these decisions. We contact hundreds of founders every month and the most common mistakes we see include:
- They have created a financial model just to satisfy investors, but they do not use it for their day-to-day operations.
- They use a revenue-based financial model instead of a leader-based model.
In the fast-paced world of start-ups, fast and trained solutions are crucial. Consider this sample scenario.
The company is looking to raise an initial $ 1 million round to complete the construction and launch of its product. It can set a burn rate target of $ 40,000 / month so that the capital lasts approximately 24 months.
A sure cushion is to assume that negotiations for new investors will take about six months, so by the 18th month the company should be able to start moving towards the next round of investors.
Where should the company be when it wants to raise money? How much of the product should be ready? How much revenue will there be? How many customers? How much will it cost to bring these customers?
Founders need to make sure that their capital development takes into account all these variables. A miscalculation can result in spending too little (and failing to launch the product on time) or spending too much (and not being able to close the next round before the money runs out). The stakes are high.
The problem is, in my experience, the founders of the start-up phase rarely think about these goals when determining how much money they want to raise or how they want to spend it.
Create a model that you actually use
The most common problem I see is that entrepreneurs think of the financial model as “homework”, so they prepare it to satisfy an investor’s request or fill out a slide in the test.
At the preliminary or initial stage, it is impossible for the model to accurately predict revenue. So for an early stage company, the model should serve two main purposes:
- Supervise the track and allow you to make financial decisions to ensure that you reach the next stage of funding.