When preparing your company’s financial and business models for a VC pitch deck, you need to make them compelling, eye catching, and to the point—they have to get the deal done. Your VC pitch deck should be a great snapshot of your company.
When an entrepreneur goes for funding, he or she needs to present a financing package to potential investors and understand all the details and assumptions behind the numbers. The financial model is the key tool entrepreneurs can use to share their perspectives with investors. The VCs will have their own smarty pants accounting analysts prepare their own models, but that’s equivalent to catalog-level modeling, versus your runway experience. Therefore, your experience in the field should inform your financial modeling assumptions and make them more compelling.
The VCs will create a funding structure element to their model, which will assist them in evaluating the funding terms. Startup management teams should see how a VC’s ROI compares to their modeling scenarios and inquire what assumptions were made so they can compare against what they already have input.
Preparing your financial model
To prepare a financial model for a funding round, you need to have these core elements:
- P&L statement
- Balance sheet
- Statement of cash flow
- Key metrics
If you have accurate bookkeeping, then the P&L, balance sheet, and statement of cash flow should be easy to generate straight from your general ledger system.
Make sure you cover these in your VC presentation
The presentation to potential investors requires due diligence on the following:
- Market size
- Unmet needs
- Value proposition
- Strengths and weaknesses
- Business model (which will have many assumptions)
- Key metrics
- Multi-year financial model
- Historical and future timeline of the business
- Investment rounds, returns, risks, and exit strategies
- Introduction to team
Investors have the mindset “actions speak louder than words,” so do not have too much narrative or fluff in the presentation to attract funding. Show the investors a detailed financial model with the ability to test assumptions and sensitivity, and show how this startup is going to make them money.
Assumptions are key for forecasting the future position of the business. Use historical data or benchmarking of similar businesses to ensure your assumptions are believable. Assumptions vary based on your business model, but some metric examples would be:
- Number of future users
- Percentage of users you will retain
- How much money will you generate per user
- New revenue streams
- Burn rate of expenses
The future of your company
These assumptions are then plugged into the current reporting to generate multi-year financials to show what the future of the company will look like financially. It is important to create a model that allows you to play with the assumptions based on feedback received, or new data that will impact the whole model. Key metrics to keep in mind are:
- ROE (return on equity)
- ROI (return on investment)
- Net profit margin ratio
- Accounts receivable turnover ratio
- Gross profit margin ratio
- Debt to Equity ratio
- Working capital
Once you have your assumptions, key metrics, and financials prepared, it is important that you have short-term and long-term cash flow strategies in place for the existing business, and for the potential capital funding raised. Managing cash flow is an essential function of sustaining a business. Effective cash flow strategies assure that enough cash is on hand to meet financial obligations (e.g. payroll, suppliers, customers, credit, loans, inventory, or any capital expenditures), while maximizing financial returns from excess cash.
The importance of the business and financial models does not end once the financing is complete. You and your management team should continue to work with, improve, and update it. As the business develops, the quality of the forecasting will become apparent. It is likely that you and your management team will be judged on performance according to your forecasts—so achieving the milestones identified in the modeling will be an important factor in your relationship with your VCs going forward. This will become a living document and part of the management toolbox for your business.
So when going to a VC, make sure your presentation looks good, but can also be backed up.