How to Impress VCs with your Startup Model (Part 2): Communicating Your Model the Right Way
By: Claire Biernacki, BBG Ventures Investor
This is the second of two posts on building startup financial models for VC investors.
At BBGV, we’re investing in great founders with big ideas that are changing the way we live — the model is just one aspect of the fundraising process. While the model is not necessarily a prediction about the future and the business may change over time, it is a helpful tool for us to understand whether a company has the ability to hit fund return targets, and what levers can be adjusted to get there. In Part I, I covered how we use the financial model in the BBGV diligence process. Now that you’ve built a fundraising-worthy financial model that withstands the pressure test of a bottoms-up analysis, you’re ready for the second critical part of the equation. In this post, I’ll provide communication tips and best practices to help founders nail their investor conversations.
Use the Model as an Opportunity to Re-engage with the VC after the First Meeting
We recommend sharing the model after the first meeting, which creates another touch point to have a conversation with the investor. Rather than just sharing the model, trade information for additional facetime. Mark Suster wrote a helpful post for founders about managing the dataroom and how to have a conversation on the model as part of the process. Setting up a meeting with potential investors to review the model can be more favorable for the founder than emailing it, because it provides an opportunity to tell a story about where the business is heading. In particular, sharing your key assumptions helps investors to build their case around whether and how your company could become a multi-billion dollar business. New markets, product expansion and other growth opportunities should be reflected in the model and explained during this meeting.
Show an Understanding of KPIs
As mentioned in the last post, we work closely with our companies to set KPIs and milestones for the Series A. Including a slide that summarizes the metrics that are most important to the success of the business shows that the founder is proactively thinking about the levers for growth. Founders should have a clear understanding of the assumptions in the model that have the greatest impact on revenue (i.e. what is most critical to nail for success). The best KPI dashboards I see compare KPIs today vs. targets; the most impressive founders are not only able to speak confidently to their KPIs but also able to provide context about how KPIs will evolve as the business scales. A KPI dashboard shows that a founder has done their research and knows that their metrics are on par with (or even better than!) industry standards.
Quick Tip: In a few cases, I’ve seen entrepreneurs calculate their metrics from a top-down perspective based on the growth rates that VCs target. For example, rather than calculating LTV/CAC directly, the founder would calculate what their LTV needs to be in order to reach the >3x that investors typically target. While this can be a helpful internal exercise for founders, I would not recommend sharing it with potential investors. Investors want to understand the assumptions from a bottoms-up perspective. (More on bottoms-up vs. top-down modeling in this post by Visible VC and in this post from Pear VC that I referenced in Part I on market sizing).
Having a few scenarios can help to preempt investor questions and show that a founder is thinking through potential outcomes. An investor will likely run a downside case on your model (and sometimes an upside case if the model is too conservative!). For example, what happens if CAC doubles or if MoM growth declines? While you don’t need to have these scenarios modeled out — and we actually suggest that you project confidence in your numbers rather than being overly conservative — you should know under what conditions your model breaks and be prepared to speak to those should the conversation arise.
Include a Visual Representation of the Model in the Pitch Deck
We often see founders include a bar chart to show revenue projections broken out by product type. This can be much more effective than words to show how the product roadmap and mix evolves as well as what areas of the business will drive revenue as the company scales. It also helps investors to visualize how the business will grow over time and to conceptualize the big vision.
General Tip: Make the Deck Easy to Navigate. A table of contents in the pitch deck can help investors to skip to the sections they have questions about and come prepared to your pitch meeting. If you find that you’re getting a lot of the same questions from investors, preparing an FAQ document can be a helpful way to proactively address these questions. We would recommend sending this as a follow-up for investors who are interested in moving forward in the process after the first meeting.
Be Able to Speak to the Numbers in the Model and have Confidence in the Assumptions
Although we don’t expect founders to have a finance background, they should be responsible for the assumptions that go into the model and understand how the assumptions translate to both growth and cash flow. When we ask a question about historical or projected performance, we expect the founder to answer rather than redirect to another member of their team. This ultimately helps founders tell their story and show that they understand how the company’s vision translates in terms of revenue growth and unit economics, both of which ultimately drive VC returns. Walking investors through your model is an opportunity to highlight the most compelling financial aspects of your business such as above average AOV or ability to reach profitability in the near-term. Think of yourself as a financial tour guide in this conversation.
If someone else on your team built the model or if you outsourced the model, we would recommend setting up time before and after the model is built to review and iterate on the assumptions. During pitch conversations, the founder is ultimately the one who will be responsible for speaking to the assumptions and should have confidence in them and what they are based on.
Note on Outsourcing: Outsourcing the model works well in the first few years of a startup’s life (see this post on some of the benefits — one important one being that managing the model is not the best use of the founder’s time). The right time to hire a full-time CFO varies based on a startup’s goals but becomes more of a consideration after the company has raised a few rounds of fundraising and has more layers of financial information to track.
For anyone needing support on a financial model, below is a list of outsourced CFOs as well as links to a few helpful templates:
- Outsourced CFOs: B2P Partners, Graphite Financial, FullStack Finance, Kruze Consulting
- SaaS Templates: Senovo Template, S3 Ventures Template
- E-commerce Template: Lightspeed Template
- Marketplace Template: Version One Ventures Template
- CAC / LTV Templates: Matrix Partners Template, Visible VC Template
Finally, Show Attention to Detail
We’re impressed with founders who are detail oriented; having a clean financial model helps demonstrate this trait.
- Numbers should be consistent across all sources (i.e. numbers in the pitch deck should tie to the model and historical performance should tie to internal accounting documents).
- Investors are reviewing the model to understand the assumptions, so they should be laid out in a clear manner. We suggest putting inputs and outputs on separate tabs. Using clearly labeled tabs can also help investors navigate the model (e.g. output tab, assumption tab, KPI tab).
- Using color coding can make the model easier to understand. Investors with a financial background are accustomed to seeing hardcoded values in blue, links to numbers in green, and formulas in black.
- For companies that are post-launch, we recommend showing a clear separation between actual vs. projected results in the model.
We hope these tips are helpful to anyone who is preparing for an early-stage fundraise. We also encourage founders to ask their current investors or entrepreneurs in their network to review the model before sharing with new investors. Focusing on those in your industry may be most helpful to understand best practices.
If you’re a female founder building in health & wellness, climate, future of work & education (or an investor looking at financial tools for startups), I would love to talk! I was fortunate to have a great female mentor when I was in investment banking who taught me the tricks of financial modeling but I know it can be intimidating at first. I’m happy to answer any questions on this post or company models along the way. Feel free to reach out on Twitter @ClaireBiernacks