By Lior Ronen | Founder, Finro Financial Consulting

Most founders I speak with want to use a financial model to present their business idea and business model during funding rounds or an M&A transaction.

However, most founders I speak to don’t know how to build a financial model.

Either they don’t know where to start or don’t know how to do it simply and clearly without overcomplicating or oversimplifying things.

At Finro, we are the trusted experts in Financial Modelling.

And we have prepared this guide for you on startup financial modeling.

The main points covered in this guide are:

• Why build a startup financial model?

• When to build a startup financial model?

• How to build a startup financial model the right way?

What is a startup financial model?

 Financial modeling involves “the process of combining historical and projected financial information to make business decisions” (CFI, 2022).

The model is typically either a Microsoft Excel spreadsheet or a Google Sheet that breaks down and details all the financial aspects of the business and how they evolve over time.

Why build a startup financial model?

Because financial modeling is vital to your business.

Regardless of the size, stage, or success of your business, managing it successfully requires you to use a financial model.

Financial modeling enables efficient decision-making and helps you to communicate effectively with stakeholders.

Financial modeling is essential to funding rounds and M&A transactions as:

1. Financial modeling helps buyers and investors understand your business.

• How much it costs to run your business

• How do you acquire or plan to acquire new clients

• How many leads are converted into paying customers

• The roles and resources needed to execute your business’s roadmap

2. Financial modeling helps you to build your case before approaching investors or potential buyers.  

You find out exactly how much is spent on different aspects of your business and how much capital will be required to achieve the business goals.

3. Financial models help you know your company better so you can answer investor and buyer questions with clarity and confidence.

Also, a financial model is vital to your business because it allows startups to explore topics they wouldn’t usually explore, such as:

• The cost of acquiring customers

• The average revenue per client,

• The client’s long-term value and growth potential

• Hiring plans and more.

And it can help you make better decisions such as how to go about raising capital (debt/equity), valuing your business, budgeting, and forecasting, how to organically grow the business and if you should sell or diversify assets, and more.

When should I build a financial model?

Many founders think they need a financial model only when investors ask for one during a funding round or buyers require one during due diligence.

Some founders think financial models are only for large companies with many employees, expenses, and revenue streams.

Other founders think they’re only for startups.

Building a financial model early in the process will help you gain valuable insights into your business from the get-go (regardless of its size or success).

If you’re thinking about when you need financial modeling, you probably already need it.

How to build a financial model for your startup

There are a few ways to build a financial model for your startup.

You can either:

• Download a template you find online

• Hire a generalist financial modeler with a cookie-cutter solution

OR

Be wise.

And…

Build a custom-made financial model that reflects your business. Not a generic company.

The BIGGEST mistake I see Tech founders make with financial modeling and how to avoid making the very same mistake.

One of the biggest mistakes I see in financial models is when founders dump a ton of data into a spreadsheet and expect readers to figure out how it works.

It’s tempting but usually a bad idea. I’ll explain why.

Most investors review hundreds of businesses every year, and they can’t give each one the attention it deserves.

Investors will invest more time learning about the business as they continue the due diligence process.

But at the very beginning, you have a very short time window to deliver your message in a meeting or call and go through documents.

Therefore, clarity and simplicity are paramount.

A financial model should be simple, self-explanatory, and help the reader understand your business quickly.

Some models are too complex to understand, and others are just too simplistic.

Top 5 Financial Model Must-haves

This short video shows the top 5 elements every startup financial model should include to elevate it from okay to great.

Have you been Googling ‘financial model for a start-up template’?

If you’ve been Googling any of the following. STOP. STOP right now!

• Financial model for a startup template    Hello generic

• Simple startup financial model template EEK! That sounds like oversimplifying to me

• Startup financial model template free    STOPPPPPP!!!!!!!!!!!!

From our experience, every startup is unique in the way it generates revenues, spends its cash or grows its business.

 A cookie-cutter templated approach won’t cut it!

 What often happens with cookie-cutter approaches is one of two things.

 1. An oversimplification that brings no value to the table.

OR

2. A gross complication that leads to many follow-up questions, requests for a simplified model, or a decision not to invest in your business.

What makes matters WORSE:

Most founders who come to us have wasted weeks, no months building a financial model that simply isn’t workable!

That’s time that could be better spent elsewhere on your business, generating profit.

So how do you avoid this costly mistake?

You could chance it. Try a template. Ignore the expert’s help.

That could well prove to be an absolute time waste!

And I don’t want that for you Dear reader.

So let me give you an expert’s advice.

If you want to look like an expert, contact the experts. Why choose Finro?

After building hundreds of financial models for tech startups in different stages and almost every sector and niche of the tech industry.

We know the ins and outs of the financials behind the Tech industry.

We never use cookie-cutter templates, or one-size-fits-all excel spreadsheets.

Our models perfectly reflect the unique business model your business has.

You simply can’t achieve that level of bespoke by using a template or generalist consultant.

We use KPI metrics relevant to your niche, the right comparables for your industry, and the right financial statements for your business.

And because we solely focus on the Tech industry, we build financial models that speak the language of the sector and use relevant terms. So, you’ll look like an expert during funding rounds or M&A transactions.

By focusing on these two core principles, we help our clients achieve the results they’re looking for:

1. Focus on simplicity and clarity

2. Balance data and clarity.

But don’t just take our word for it.

See the results we’ve achieved for our clients

Isaac Litman

Founder and CEO, Neteera Technologies

I worked with Lior and with Finro to build a financial model for our seed round. Lior meticulously led the forecasting process, analyzing our activity, mapping all aspects of our business, and immaculately creating our 5-years all-around financial model that fits our needs.

The Finro team quickly understood the technology, details of the business, and the primary growth factors, successfully implementing them in the model.

Overall a high-quality and seamless experience that I recommend to every startup founder!

Ivan Goh

CEO and Co-Founder, Avnos

An invaluable asset to all startups!

We needed help to navigate the different financial models that our prospect investors were looking for, and Lior supported us with all the necessary models, forecasts and assumptions - making us look like financial pros in-front of our investors :)

Simon Reid

Co-Founder, Darvis

I have worked with Lior at Darvis, an AI powered technology company, where Lior worked with us to develop a financial model, review pricing structures, cash flow needs and general financial information.

Lior is always insightful, responsive, professional and resourceful, which are key attributes when working with rapid paced entrepreneurial companies.
Lior is really effective at helping organisations development the necessary financial forecasting and management tools needed to grow successfully and attract new investment.

I would strongly recommend Lior to new clients.

Key Takeaways

•  Every business MUST have a robust financial model that is simple to communicate.

• Templates will either simplify or overcomplicate the process of financial modeling.

• Cookie cutter solutions for Tech start-ups SUCK! Don’t waste your time on them.

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The time to build is NOW!