As you ring in the new year, make sure your financial models are investor-ready with these helpful tips.
As 2011 ends, I’d like to make an appeal that will help aspiring entrepreneurs make money. Get your financial model in investor-ready shape before sending it to potential investors.
I recently met with a newly minted entrepreneur who left a successful corporate career to launch a company that he believes will disrupt a $100 billion industry. I went over the business pitch and, more importantly, the business model. It was a good meeting. The opportunity is compelling and it can make money today, not 10 years from now.
But I was concerned that the founder didn’t have a firm grasp of the numbers behind his business model, even after six months of working on his startup. I questioned some of his core assumptions and asked him to e-mail his Excel model. When he did, I opened a package of Alka-Seltzer.
The model he sent, which had been presumably sent to other potential investors, was not investor-ready. The financial model had key problems, but it was a teaching opportunity for an otherwise talented entrepreneur with potential.
Revenue projection not linked to sales model
At our meeting, the entrepreneur had explained how he planned to acquire customers. Yet, the model contained no calculations for customer acquisition. Instead, the number of new customers each month was hardcoded. He assumed that the budget for marketing would generate X number of customers each month. It doesn’t work that way.
A good model starts with a projected estimate of the number of potential customers per month. Then, it makes a defensible assumption for capturing each customer and details the costs of doing so. For example, if you plan to capture customers with telemarketing sales, you would detail the following for each month (with sample numbers in parentheses):
- The number of salespeople working for you (10)
- How many calls per day each salesperson makes (50)
- How many calls it takes to convert a caller into a prospect (25)
- How many prospects convert to customers (10)
In this example, each salesperson finds two prospects a day. So, after five days, each salesperson is able to convert a prospect into a customer. This process varies tremendously by industry, so you need to know what is realistic for your industry. Don’t show something that is radically different from what every other company in the industry is able to achieve.
No support for key assumptions
You have to support any assumption within a financial model. I like models that include the source within the file.
