A $20 Investment That Can Make All the Difference
Most investors will tell you that the only certainty about your early-stage startup financial model, is that the numbers are wrong. So why should you bother with the details? After all, you have a brilliant product that your beta customers love. All you need to show investors is the size of the financial opportunity. And that, is simple. Let’s say we have a software-as-a-service (SaaS) business that charges a user $100 per month to access the platform. Your market analysis shows that you can capture 100,000 users in three years. That translates to an annual recurring revenue of $120M a year! Even when you consider your cloud-based computing costs and the salaries of your small and impressive software and support team, you still show that you can clear $100M profit! What an opportunity! Fundraising is going to be easy! Unfortunately, not. When it comes to financial models, the devil lies in the details, and that is where investors look.
Iowa Agritech Accelerator
Sigma0 was one of five companies selected for the Iowa Agritech Accelerator 2019 cohort in Greater Des Moines (DSM). As part of the program, we received expert training in several areas critical for startup success. Included in our program was a brilliant seminar on financial modelling, prepared and delivered by none other than Mike Colwell, the Executive Director of Entrepreneurial Initiatives at the Greater Des Moines Partnership. Mike is an experienced businessman, entrepreneur and angel investor, who deeply understands the importance of building financial models that include the right details and are clear, concise and defendable.
In the seminar, Mike delved into two common business revenue models: the sale of physical products and software-as-a-service. He used example companies (some real with fictitious numbers) to explain the key elements required for each business type. He showed the importance of including the sales cycle for a SaaS business and cash cycle for when your company makes physical products. Mike also used his excel startup business model template to clearly show the impact of the detail on the financial outcome for each business. At the end of the seminar we all clearly understood the importance of including the right detail in our financial model, even when everyone knows the numbers will be wrong.
The seminar also taught us how to communicate our financial model with investors, with confidence. Investors want to see that you understand how your company will make money. Your ability to communicate your financial story clearly and with confidence is essential to get investors to fund your business. Of course, if you don’t want an investor to invest in your company, then send them a financial model that excludes the critical details. The good news is that your communication will be clear. You will be telling them that you lack understanding of your future financials and they should look elsewhere, for good deals.
Looking back at your brilliant $100m dollar opportunity. You decide to include the cost of the sales cycle to your SaaS revenue model and you learn that the cost to acquire and maintain customers is much higher than you thought. The $100m dollar business opportunity is closer to a $10m dollar business, too small for the investors you were hoping to approach. A hard realization, but a good one. You just saved yourself months of wasted time (and investor goodwill). Instead you can use your new tool to help search for a new business model that presents your true big investible opportunity. And when you done, you will have a financial model that will excite investors, even if your numbers are wrong.
Financial Model Seminar for Startups
If you are a small business or startup in the DSM, then you absolutely need to attend this seminar. The good news is that you don’t need to be accepted into the Iowa AgriTech Accelerator to gain financial insight. The Partnership and Mike Colwell will be hosting the Financial Model Seminar in Downtown DSM at the BrownWinick Law Firm on Thursday, March 12. The registration is only $20. It will be one of the best investments you ever make in your business!
Discover more about The Partnership’s tools to help Greater Des Moines (DSM) startups and small businesses develop and grow their ventures with The Partnership’s Small Business Resources.