I've spent much of my career in financial modeling deal with pre-seed startups. This means startups that are looking to raise their first round or may have raised a small amount from friends and/or family. They may not be well capitalized, but they are some of the most energetic, enthusiastic, and positive clients I have. I'm going to talk about some of the considerations I look at when building a pre-seed financial model template.
Feel free to browse all the financial models I've built.
Financial modeling for pre-seed startups is a crucial exercise that lays the foundation for strategic decision-making, fundraising, and financial management. At this early stage, startups typically operate with limited historical data and a lot of uncertainty, so the financial model needs to be both flexible and realistic. Here are some of the primary tenets of financial modeling for pre-seed startups:
1. Simplicity and Clarity
Keep it Simple: At the pre-seed stage, the financial model should be straightforward. Avoid overcomplicating with excessive details that may not be relevant yet. Focus on the key drivers of your business. The best startup models will focus on their go-to market products/services and not worry about ancillary income or adding income streams that are barely an idea.
Transparency: Clearly labeled assumptions that are separate them from the outputs is helpful. This helps investors and stakeholders understand the logic behind the numbers and ensures that the model is easy to update as more information becomes available. For this reason, I often include many tabs and each tab sticks to a theme so the user knows what they are doing.
2. Realistic Assumptions
Ground Assumptions in Reality: While it’s tempting to be overly optimistic, your assumptions should be based on realistic scenarios. This includes estimates on market size, customer acquisition costs, growth rates, pricing, and expenses.
Data-Driven Where Possible: Use any available market research, industry benchmarks, or early traction data to inform your assumptions. This adds credibility to your model when discussing it with potential investors.
If you have a key assumption that is far better than what public data suggests, have a good reason why.
3. Revenue Projections
Conservative Estimates: In the early stages, it’s better to be conservative with revenue projections. Pre-seed startups often face uncertainty, so creating a buffer in your estimates can help manage expectations. I always allow for flexible bottom-up inputs that make it easy to accomplish this.
Multiple Scenarios: Include different scenarios (e.g., base case, best case, worst case) to showcase how revenue might vary based on different factors like customer growth, pricing strategy, or market conditions.
4. Cost Structure Understanding
Fixed vs. Variable Costs: Clearly differentiate between fixed and variable costs. Understanding how costs scale with growth is essential for managing cash flow and planning for future fundraising needs.
Detail Key Expenses: Outline key expenses such as salaries, product development, marketing, and overhead. Pre-seed startups should particularly focus on burn rate to understand how long their initial funding will last.
5. Cash Flow Focus
Cash is King: Cash flow management is critical for pre-seed startups, as they typically operate with limited capital. The financial model should track cash inflows and outflows to ensure there is enough runway to reach the next funding milestone or profitability.
Runway Calculation: Calculate how many months of runway your startup has before needing additional capital. This helps with strategic planning and timing your next funding round.
6. Break-Even Analysis
Identify Break-Even Point: Even at the pre-seed stage, it’s useful to understand when the business might break even. This helps in setting realistic goals and demonstrating potential profitability to investors.
Revenue vs. Cost Dynamics: Highlight the point at which revenue will cover all costs, which is crucial for long-term sustainability.
7. Fundraising Requirements
Capital Requirements: Clearly define how much capital is needed and how it will be allocated. Investors want to know how their money will be used and how it contributes to reaching key milestones.
Milestone-Based Funding: Link your financial projections to specific milestones (e.g., product launch, customer acquisition targets). This shows investors that you have a clear plan for how the business will progress with their investment.
Here is another reason to have assumptions that easily adjust over time.
8. Scalability
Growth Projections: While the initial focus is on surviving the early stages, it’s also important to illustrate how the business can scale. Show how revenue and expenses might evolve as the business grows, highlighting scalability potential.
Unit Economics: Demonstrate positive unit economics (e.g., customer acquisition cost vs. lifetime value) as this reassures investors that the business can scale profitably over time.
9. Stress Testing
Sensitivity Analysis: Include a sensitivity analysis to show how changes in key assumptions (e.g., pricing, customer acquisition costs, growth rates) impact the financial outcomes. This helps identify the most critical factors for success and prepare for potential risks.
Contingency Planning: Model different scenarios to understand how unexpected events (e.g., delays, cost overruns) could affect the business, allowing you to build contingency plans.
10. Pitch-Ready Presentation
Investor-Focused: The financial model should be easy to present and discuss with investors. Ensure it tells a compelling story about the business’s potential while being backed by solid data and logical assumptions.
Visual Summaries: Include charts and graphs that summarize key financial metrics (e.g., revenue growth, cash flow, runway). Visuals can help investors quickly grasp the business's financial trajectory.
Conclusion:
A well-constructed financial model for a pre-seed startup is essential for navigating the early stages of business development. It serves as a roadmap for decision-making, helps in setting realistic goals, and is a key tool for convincing investors of the startup's potential. By focusing on simplicity, realism, cash flow, and scalability, the model can provide valuable insights and set the stage for future growth and fundraising success.
You can hire me to consult with you and get your own startup financial model built and/or help you use one of the templates I've already got.
Article found in Startups.
