What Do Investors Look For In a Financial Model?

1. What Do Investors Look For In a Financial Model? Numberly

2. What Investors Want to See: The Basics According to DocSend's report, investors spent 2 minutes and 18 seconds on a pitch deck in December 2022. That means you have less than three minutes to make an impression and convince investors to continue reading your pitch. Thus, having a well-structured, comprehensive financial model is essential to give investors the information they need to make an informed decision. Investors look for several key components in a financial model. Below, we look at them in detail. Before getting into the nitty gritty of a financial model, it’s important to include the basics. It includes your assumptions, projected financial statements (income statement, cash flow statement, and balance sheet), and other relevant data.

3. Investors want to get a clear understanding of your business model, growth strategy, customer acquisition and retention tactics, competitive landscape, and industry dynamics. To do this, you need to include assumptions on key metrics such as: Revenue growth Cost of Goods Sold (COGS) Sales & Marketing (S&M) expenses Operating expenses Capital Expenditures (CapEx) Research & Development (R&D) expenses Taxes

4. Basically, investors want to see the following: Which KPIs will push your growth? These include conversion rates, customer lifetime value, product pricing, and more. Is your financial model based on realistic assumptions? It includes assumptions about revenue, expenses, and other key metrics. Are your financial projections in-line with the industry averages? A good way to check this is to look at the historical performance of similar businesses. Are you financially sound? Investors want to see that you have enough cash to sustain your operations until you become profitable. How do you use your cash? Investors want to know what you are doing with the money entering and leaving your business. Are you aware of any potential risks? Investors also want to see that you are aware of any risks associated with your business model and have strategies to minimize them.

5. What Should You Include in the Financial Statements for Investor-Friendly Financial Models? Financial statements are the crux of a financial model, and investors want to see a few fundamental things in them. Here's a list: Net Profit: The net profit of a business is one of the most important elements for investors to analyze. Net profit is calculated by subtracting expenses from revenues and should be included in the financial statements. Cash Flow: Cash flow is a measure of how much cash a business generates and uses over a given period of time. Investors want to know if the company has enough cash to keep operations running and can pay off any outstanding debts. Sales: You must include sales figures in the financial statements to give investors a clear view of the company’s performance. Break down by relevant categories, such as product type and region.

6. Margins: The gross margin and operating margin are important metrics for investors. These figures provide insight into how efficiently the business generates profit from sales. Customer Acquisition Cost: A SaaS or ecommerce startup should include customer acquisition cost (CAC) as a key metric. It shows the investors how much it costs to acquire a new customer and helps them evaluate the company’s long-term growth potential. Balance Sheet: The balance sheet shows the company’s financial position at a given point in time. It should include all assets, liabilities, and shareholder equity relevant to the business. Income Statement: The income statement summarizes revenues, costs, and expenses for a certain period, such as a year or quarter. You can also include a section for non-cash expenses like depreciation and amortization.

7. Cash Flow Statement: The cash flow statement is a reconciliation of the inflow and outflow of cash from operations, investing, and financing activities. Include it in the financial statements to show investors how much cash is coming in and out of business. Cash flow is also critical in determining your runway - or how long you can operate before running out of money. Investment Valuation: If you’re raising money from investors, include an investment valuation section in the financial model. This section should show investors how well their investment will appreciate over time and how much of a return they can expect. Assumptions: The assumptions section gives investors an idea of the key drivers of your business. For instance, you can include assumptions such as revenue growth, cost of goods sold, or marketing spend. Financial Ratios: Financial ratios are important for investors to assess the company’s performance and risk. Include a section that shows key financial ratios such as debt-to-equity ratio, return on equity, or operating margin.

8. What Do Investors Want In a Startup? You can only create an attractive pitch or financial model if your startup has what investors need. According to Serial founder and Entrepreneur Dennis Tracz, angel investors fund 1 out of 400 pitches only. How do you ensure your startup has a better chance of getting funded? It all boils down to the fundamentals that investors look for in a startup. Here's a checklist: A solid business plan Past performance data The market for your service or product Innovation and scalability Team of experts & advisors Competitive edge (over other startups) Proof of concept Experience & expertise of founders Financial projections Exit strategy for investors Ability to use technology as a competitive advantage If your startup has these attributes, you can create a compelling pitch that will draw attention from investors. The key is to demonstrate how your product or service can provide a unique solution that meets the needs of your target market. That’s what will get investors to open their wallets.

9. Get Your Investor-Friendly Financial Models Ready Early-stage startups have to manage a lot of things, from product development to marketing. While you certainly have the expertise for the administrative side of things, it's best to work with a professional to create a sound financial model for investors. At Numberly, we help you do that. We've been working with startups for years. Thus, we know what investors look for in a financial model. We can help you create a customized model to meet their expectations and demonstrate the potential of your business. Since we include dynamic assumptions in the model, you can easily adjust them in line with changes in your business. Our financial models also come with a sensitivity analysis and a summary dashboard to help you put your story in the best light. Schedule a 30-minute call with us to learn more about our services.

10. An important aspect of business financial modeling is that it allows you to see the future outcomes of various decisions you may make as a business. This includes both positive and negative outcomes, so that you can make an informed decision on what to do moving forward. Building Financial Models provides you with the essential concepts, tools and techniques that you need to learn in order to create financial models. For more information, visit our website now.