Why do VCs Really Want to See Your Financial Model?

Hint: It’s not about the numbers.

I recently tweeted about the importance of financial models in evaluating seed-stage pitches:

💳 Capital Needs

Some businesses are just more capital efficient. While this is obvious in many cases, it’s not always so. Founders often have a sense for how much cash they’ll need to really prove things out and scale. At @fcollective we like capital efficiency.

💸 Capital Timing

Understanding when inflows and outlays hit the balance sheet is critically important. Too many founders just do cash models and disregard the impact of lagging collections for example, which has a cascading effect on the rest of their decisions.

🚪 Data Access

A model is only as good as the data/assumptions that underlie it. I find it helpful to be able to review a data room that documents historical financials and other quantitative data.

🔬 Detail Orientation

I don’t like to see models that count cost down to paper clips, but evidence of detail is nice. For example, the way a founder accounts for seasonality or churn is a helpful insight into their attention to detail or lack thereof. 1–2 sheets is usually enough.

🎯 Accuracy

A compelling founder can handwave away a lot of objections to their business in a pitch, but all is revealed in a Google Docs workbook. E.g. It’s worrying when a founder doesn’t know the going rate for an engineering hire or realistic CAC costs.

😎 Savvy

Being able to model the strengths, and weaknesses of your business demonstrate that you understand it completely.

🔀 Contingency Planning

The best models are interactive. Entrepreneurs can walk you through their thought processes and use their models to demonstrate how adding a dozen new reps, or a product extension will alter their future.

🌊 Business Dynamics

Is this a “cash business” or a rapidly appreciating “asset?” The former will show linear revenue growth, the latter, at least the potential for algorithmic expansion. FYI, “businesses” are still investable, but require different conversations.

🥇 Authenticity

It’s always encouraging to hear a founder talk about their financial model in a way that makes it clear it’s actually a tool they use to manage their business. Too often, it’s an exercise meant to appease VCs rather than the heartbeat of their business.

🎰 Financial Literacy

We don’t expect most founders to be quants, but a lack of sophisticated financial knowledge on the founding team is worrying (though not disqualifying). We’re not looking for expertise on spreadsheet macros, but a sense for the math behind the biz.

👻 Respect for Unknowns

There are always some unanswered questions at any stage of a startup. Decks allow you to tell stories, but models force decision making. Those decisions, while almost certainly wrong, are revealing and produce useful data for discussion.

🐛 Start Small

If you’ve never made a financial model before, start by simply modeling the basic unit economics of your core offering.

⏬ Download some samples

There’s no shortage of templates you can study. Here’s one from an MIT Sloan prof:

👑 Learn from the pros

A great resource is “MBA Mondays” a blog series by @FredWilson which is a great crash course in understanding entrepreneurial finance.

Our mission is to be the most aligned VC for founders at seed. #ProudInvestor in @Uber @TheTradeDeskinc @Buzzfeed @Cruise @Diaandco @PillPack @SeatGeek & more.

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