As a startup founder, your mind is never free. Getting the minute details of every project right is hard. On top of that, handling your company’s finances is even more challenging. This becomes an even more humongous task when you’re looking to raise capital for your business.
You need to figure out the amount of investment necessary to take the next steps toward success. Simultaneously, you also want to ensure your company is valued correctly to divest the least number of assets.
Fundraising modelling might be the answer to your financial questions. Here is the what, why and how of fundraising modelling.
What?
All startup founders and even established company leaders know that fundraising is hard. Convincing an investor to trust you and bet on your business’s success is a hard nut to crack. Following a systematic data-backed approach will improve the impact of your pitch manyfold.
When raising capital, you not only need to figure out the amount required to achieve your goals, but you also need to value your company right. This is exactly what creating a financial model for your fundraising needs would do.
Why?
Whether raising a seed round of funding or going for an Initial Public Offering (IPO), building a financial model for your company’s fundraising needs is extremely important. It will help you figure out your capital needs and where to invest the capital you raise.
A strong data-backed financial model and a viable future business plan are vital in gaining investors’ trust. It is also crucial to correctly value and safeguards your company’s assets while fundraising.
A secure fundraising model will allow you and the investor to focus on the fundamentals without getting lost in the hype.
How?
Follow the following steps to build a financial model to determine the mystery amount your company needs to raise :
- Find out the following data points currently and their projection two years into the future :
- Revenue
- Gross Margin
- Contribution Margin
- Operating Expenses
- Calculate the Lifetime Value(LTV) to Customer Acquisition Cost (CAC) ratio :
- Marketing and sales will be your most considerable cash requirements while growing your business.
- For maintaining viability and having steady growth, it is crucial to have a precise idea of how the expenditure will convert into revenue.
- According to the LTV to CAC ratio, figure out how much you can spend on sales and marketing (S&M) without making the ratio decay wildly.
- You should plan for various failures in your calculations, assuming a 3x to 10x worsening as the market changes.
- As you scale your company, the operating expenses will also increase. You should figure out reaching economies of scale and flattening out operating expenses as you grow.
- And the most crucial step of all; talking to your team. Once the financial model is ready, the company’s executive team should discuss the expectations and plans to achieve them.
- To ensure your modelling is correct, turning the financial expectations into quarterly targets is a good idea. This would ensure everyone believes in the model and you have a firm footing in discussion with an investor.
The life of a startup founder or a company head is never easy. Although following in the footsteps of the successful ones, being methodical is paramount.
There are almost ten thousand startups at the seed stage in the US. A data-backed approach to handling your company’s finances is imperative to stand out.
Whether you’re looking to raise capital or setting targets for your company’s future, fundraising modelling can help you distil the clutter and find the answer.
