A 101 on financial models for VCs

This financial model template has been prepared by Albert Group Services Pty Ltd (Alberts) for general information only and illustrates a fictitious worked example. Alberts is not a financial adviser and the model should not be taken as constituting professional advice. Alberts provides no warranties and makes no representation that the model is appropriate for your particular circumstances. Alberts and its representatives are not liable for any loss or damage suffered by any person whether due to negligence or otherwise arising from the use of, or reliance on, the information provided or use of this model.

So … you have pitched to an investor and made it past the first few hurdles. Congrats! You’ve come further than most and should take a moment to recognize that.

But – now they’re asking for a data room and along with that a financial model. You’re probably not an accountant and having funded yourself (potentially with family/ friends backing you too) to date, you’re hustling for a way to do it yourself. The good news is – investors are after something a bit simpler than a financial model. The bad news is – it’s still a new skill set and founders often trip up at this stage.

To help you on your way – we’ve made a worked example of what a no-frills financial model should look like for investors. You can download it and plug your own numbers in – or use it as a basis for making your own – huzzah! Time saved.

But before you click send – let’s walk through what investors are looking for from your model and common pitfalls.

What are investors after?

I’m trying to run a business, and we all know forecasts at the early stages are always wrong – so why do investors want this in the first place? What are they trying to learn? Here are some things investors look for:

Are you paying your staff market wages? If you’re not, this cost will go up and/ or you may lose staff. Good staff demand good rewards. Whilst here – don’t forget that wages go up over time and that there are additional costs to the nameplate wage (super for one, but worker’s compensation and other costs also add up)
Have you got the humility to pay your top achievers more than yourself? This is especially important at pre-seed and seed. Big founder packages are an immediate red flag in the early stages.
Are you about to run out of cash? You’re raising – this may very well be the case! This is a test to see if you’ve been transparent (How much detail are you going into? Does it match up to your pitch deck numbers?) / realistic and also helps set the timeline for your raise.
Are you expecting to grow at first-adopter rates into perpetuity? High growth rates are hard to sustain, and most businesses drop their growth rate as they enter the mass market, factor this in! You’ll surprise your investors by forecasting this eventuality. If not – you should have very good reasons to back this up.
Are you expecting operating costs to stay flat whilst your topline grows exponentially? Whilst if you’re pitching for venture capital, we’re certainly expecting the engine to eventually be humming and revenue to grow faster than costs, more customers means more customer support and more product work etc. – factor this into your forecasts. It takes more staff to manage 1 million customers than 1 thousand. You can sense check this by checking your customer-to-customer support staff ratio.
Are you investing in the product and R&D over time? This should relate to your competitive moat. If you want to be a unicorn, you’re going to have to keep innovating – factor it into your costs!
Unit economics – are you earning more from your customers than you’re paying to acquire them? This is a strong indicator of product-market fit. Note this changes over time, it’s not a static number.
Your drivers – what actually brings in your revenue? How does this link to your marketing or product costs? Are you aware of what’s driving your growth?

Tests investors may do to your model:

Graph your revenue vs costs – is this reasonable?
Compare your customers to customer support staff
Check the ratios of where your costs are going – what % is staff, R&D, marketing etc. If you’re pitching product-led growth – this should come through in your model.
Scenario test your model – plug in their own assumptions (e.g. what happens if Covid depresses earnings another year? Can the business sustain a dip in growth? What if it costs more to acquire customers next year?)

We’ve provided a very no-frills model, you may want to consider additions appropriate to your business, and investors would expect the complexity to increase as your business grows. Potential additions include:

Consulting fees – do you use them? Add them in
Upsells – if you have them, put them in with a lag to what % of your customers upgrade at certain points eg. Perhaps 20% of your customers upgrade after a year, 10% churn and 70% stay with the standard package
New products – add them in as separate revenue lines with their own drivers
Have you got big costs not mentioned? Perhaps your company culture is generous with perks or you have monthly drinks – add this in! Spending on culture is important, include it.
Recruitment costs – this will be a growing expense as your business grows
Are you making a physical product? You’ll need to show your balance sheet, and think carefully about shrinkage (product expiration), accounts receivable/ payable and depreciation. Consider making a 3-way financial model with profit and loss, balance sheet and cash flow in separate tabs. You should show both your historical and forecast numbers.
Have you got debt? You’ll need to include interest payments
Are you expecting R&D tax incentives? Add this in.
Have you thought about scenarios? Are there binary outcomes in your business? Consider making separate models for these, or a toggle between the models to explore different scenarios. As an unconscious bias, we find female founders often create more conservative models – challenge yourself to do both a base case and a blue sky model and include both.
Add a charts page – save your investors time by plotting what you’re predicting – if you’re visual this will help you sense check the model too.
Are some of your future earnings already contracted? Separate this out and make it clear – show how much visibility you have in your upcoming earnings.
Have you got seasonality in your earnings? Spell this out and plug this in
Do you have non-recurring revenue lines? Model them separately.
If you have multiple marketing channels, consider modelling out these drivers separately eg. You may have a driver for D2C and another for B2B2C