Why you need a financial model – shape up for investment in 2022

Investors are funding businesses who are creating opportunities within the uncertain times. Preparation is key, read on …

Despite the media’s often bleak portrayal of business at the current time, investors and entrepreneurs are still hot on the heels of making their concepts come to life. In terms of gaining investment, having a financial model and plan broken down is crucial to your success.

Why do I need a financial model?

If your business is right at the start, when your idea is still just a concept, you might be thinking – there is no cash why do I need a financial model?

Yet, outlining your business’ plan right at the start builds confidence in you as an entrepreneur that you know how to lead your business moving forwards. It shows investors that you care to consider the financial details and don’t shy away from them like many people do.

If you’re mid-way through your business life, it shows your ability to analyse what’s good and bad in your business and encourages a sense of clear leadership moving forwards.

The good news is that your model does not have to be 100% correct. Mark Suster of Upfront Ventures (LA-based venture capital firms) makes this point in his blog:

‘See I don’t care if your projections prove wrong over time. I care about your assumptions going in. I care about the thought that you’ve given to the customer problem. I care about how much you’ve thought about market share, competitors, adoption rates, etc.’

A considered and accurate model shows what is achievable, and what can be expected from your business. It paints a picture of the size of the market you’re looking to tap into to and shares your ambition to potential investors. You are the sole driver of your business. Even a great idea will not be invested in if the finance model is incorrect or the entrepreneur isn’t passionate enough. 

Evidence of sales or intended sales

This is crucial to fundraising. Testing your marketplace, taking feedback on the price point, customer opinion and then using the feedback to re-work your product, price point and marketing strategy if needed before releasing it again. 

It’s vital, when going into funding rounds to achieve investment for your business, to show sales or intention to purchase from companies.

In case you didn’t know … investors want to see a 10x return on their investment so demonstrating market demand, price point and a significant USP over your competitors as well as sales and letters of intent are of vital importance.

Track everything. Get as much data and evidence as you can.

Check the list and check it again

Go over this check list to ensure you’ve covered off everything, from an investor’s point of view, that they need to see.

  • That you know the revenue drivers of your business.
  • You can demonstrate the evolution of your costs and expenses over time as compared to revenue growth rates to ensure that your business model profitable and scalable.
  • That you are realistic about growth potential.
  • That your financials are complete and presented clearly.
  • A detailed plan of how their investment will be used and whether more will be needed in the future and at what particular point.
  • Demonstrate the key milestones you’re going to meet and give deadlines explaining, where necessary, why they are in place – what is key to the market at that time.
  • Show how your business has the ability to achieve a 10x return on their investment.

Displaying this in a pitch deck

A version of your financial model will sit within your pitch deck. If you’ve leapt over the hurdles and finally have the opportunity to pitch for investment, instead drowning under the pressure, really aim to channel your thoughts into ‘which top ten elements shall I share about my business?’

Why ten?

Because that’s how many slides you’re going to make for your presentation. No more, no less.

Investors see thousands of these a year, there are no prizes for lengthy presentations, you’re not at school. In fact, the quicker your pitch deck shows the information the better – you want the investor to feel engaged with your product or service idea and then be interested in how it will work and the financial model behind it.

Every single piece of information must add value to the investor in some way. Chances are high that you’ve heard of Guy Kawasaki, well he’s summed up perfectly the ten slides you need to create for your fundraising pitch deck. From underlying magic to your competitive analysis and even to what font size your deck should be and why, get reading and then get writing on your own.

The investment you need is out there, just ensure you give yourself the best lead start possible in order to attain it.

Cherry Martin

Cherry Martin

Cherry is Associate Editor of Business Matters with responsibility for planning and writing future features, interviews and more in-depth pieces for what is now the UK’s largest print and online source of current business news.
Cherry Martin

Cherry is Associate Editor of Business Matters with responsibility for planning and writing future features, interviews and more in-depth pieces for what is now the UK’s largest print and online source of current business news.