Subscribe to receive the next fundraising blog posts
Chapter 5: The Fundraising process : Preparation phase - preparing a financial model
Listen to the audio version here:
In our previous blog post, we showed you how to prepare a good pitch and investor deck, while you are in the preparation phase of the fundraising process. In addition to preparing a good pitch and investor deck, it’s also important to have a solid financial model.
In this blog post we dive deep into why a financial model is a critical aspect of the fundraising process, the purpose of a financial model, and the story it should tell.
What is the purpose of a financial model?
The financial model translates your business plan into numbers over a period of time. Building a well-structured financial model is an important part of the fundraising process for the following reasons:
- Tell a story with numbers
First and foremost, the financial model should tell the story of where you've come from, where you're going and how you'll get there. Because you’re seeking funds from investors to carry out your plans, it’s critical that you provide them with a well- rounded view on the feasibility of those plans. Your financial model should inform the investor about how much money your company requires and when it requires it.
- Reveal what drives your business
In addition to telling a story, your financial model should help investors understand the core drivers of your business. This includes demonstrating the unit economics (e.g., units sold per month) and how they interact with one another to result in a viable business. To demonstrate the core business drivers, you must make key assumptions about how your business operates and performs, which should be based on historical data and/or reasoned logic.
- Scenarios
Because key assumptions must be included in your financial model, having a well-built model allows investors to run a variety of scenarios. Investors want to know they're putting their money into a good investment, so they'll question your assumptions and key metrics to see how your business will be affected. When presenting your financial model to investors, it is common practice to include at least a base, conservative, and optimistic scenario. Aside from the fundraising use case, your financial model can be a powerful tool for business decision-making. For example, the financial model can be used to compare your actual performance to your budget and, if necessary, you can make adjustments (either on the model or the budget). - Build credibility
Finally, the financial model helps build credibility and trust between you and potential investors. The model is a window into your company and its inner workings. The financial model enables the investor to determine not only whether they have a strong investment case, but also whether you have the right team to carry out the business plan. The assumptions you make in your model, as well as your ability to describe your business plan in numbers, reveal a lot about your team. Investors are busy, and if the financial model is not credible, they will likely pass on the opportunity.
What story should your financial model tell?
The financial model is made up of three main parts:
- a profit and loss statement
- a cash flow statement
- a balance sheet.
These components should work together to tell a story that the investor can believe in, while also supporting and aligning with your other investor materials, such as the investor deck and pitch deck.
The first part of the story should focus on historical data. Historical data (typically the last 12-24 months) shows where the business has come from and where it is now. This data should support the position that your company is ready for venture investment. The historical data should also show that you have achieved sufficient product-market fit and customer adoption such that the cash injection can be used to scale. Furthermore, your historical data should indicate what your revenues and costs are.
The second part of the story is the forecast. Forecasting by its very nature (especially in the early years of the business) is unlikely to be accurate, being based on assumptions. Don’t let issues of accuracy cloud your mind when planning the model. Defining your objectives will set the level of accuracy required. The investor’s goal is an exit at a valuation based on key metrics such as revenue or profit multiples. The financial model gives you an opportunity to show the journey of how the business is going to mature towards these metrics. Some company-specific metrics to think of while preparing a financial model are annual recurring revenue (ARR), monthly recurring revenues (MRR), churn rate, customer acquisition cost (CAC), lifetime value (LTV), etc. These metrics allow an investor to benchmark.
Furthermore, the flow of money is an important part of your story. The financial model should be able to show when cash enters and leaves your company. It should also show how you intend to use the investment and when you expect the business to require additional investment, if any.
PwC Pro Tip
- The quality of your assumptions matters more than the level of detail of your model.
- Make sure you can defend the assumptions you used in your model: it can be based on internal (e.g. historical figures) and external variables (e.g. market research, consumer surveys, etc.). It is important you save the reference sources for your assumptions as this might be needed during the due diligence process.
A well-structured financial model serves as a good foundation for knowing what your company is worth. In the next blog post we will be discussing how to value your startup.
For more information on how PwC can support you in your fundraising visit our website.
Download the full PwC's fundraising whitepepaper here
Preparation phase
Preparing pitch and investor decks
Preparation phase
Startup valuation
Connect with PwC Belgium
Contact us
International Tax Partner, Platforms and Market Positioning Lead, PwC Belgium
Tel: +32 476 87 52 24
