What financial models do? What is the purpose of them for entrepreneurs and startup founders?
You are either the type of entrepreneur who loves and thrives on financial modeling, or who just can’t bear to stomach more than a few seconds of it. Regardless of this, you need financial models as an entrepreneur and founder. You at least need to know how to read basic financial models, know what they are for and how to leverage their findings.
These are just some of the reasons you’ll use financial models on your entrepreneurial journey.
One of the most basic and common reasons for financial models for entrepreneurs is for raising startup capital.
These financial models can be used to demonstrate to investors an expected return at different stages, as well as how much is needed.
They can also be used by founders and current shareholders to better understand the future impact of taking in loans and equity holders.
Remember that storytelling plays a key role in fundraising and you will need capital to scale things up. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
If your business does well and is effective at raising capital, you’ll eventually probably be in a position to make acquisitions of other companies.
When it comes down to what financial models do, they can help you assess the benefit, opportunities, and risks of mergers and acquisitions, as well as what it will mean for your own financial models when others are evaluating your company.
This also applies to evaluate these factors when it comes to acquiring new technology or assets, and how those outcomes can be improved.
Evaluating New Projects
Dynamic financial models are great for evaluating the strengths and weaknesses of new projects and initiatives. They help determine if they are a good fit and worthy of your focus.
For example, Google isn’t going to devote any resources to a project unless it has the potential to become a $5B venture. It just isn’t worth their time. Depending on the stage you are at, this may be $10M or $100M.
Part of what financial models do is to enable you to ask “what if?” What if you invest in more stores or branches? What financial impact will it have? What could the impact on cash flow and profits be from expanding into new markets, verticals, or countries?
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