Entrepreneurs may devise pragmatic strategies, validate their business model to prepare for external funding. Investor pitch deck, Financial Modelling of the business plan and Valuation of the business are part of Investor Pack framework which helps in raising funds.
All Investor Pitch starts with sending out a pitch deck to the investors. As opposed to the popular notion that there is a standard format pitch deck, no single format works for all startups. The start-up business, the stage of funding, the financing requirements and also the product traction are the key things to be considered while preparing an effective pitch. The entrepreneurs should express their vision, competencies and strategies in a more compelling way in the deck.
Financial Modelling refers to the financial projection of the business under different scenarios in multiple iterations to validate the business model. For a start-up, this is fundamental to assess the need and use of the financing needs. This does involve preparation of financial statements – Balance Sheet, Profit & Loss A/c & Cash flow statements for a reasonable period, but is not limited to the traditional ‘Projected Financial Statements’. The modelling is done after detailed internal discussions on the revenue model or in a broader sense, the business model.
While the modelling starts with Rule of Thumb assumptions and intuitions, the fundamental assumptions are thoroughly researched and the further assumptions are corroborated and cross-validated to the original assumptions. The proposed actions are analysed in different iterations with the alternative options available in terms of the business strategies. It is pertinent to consider the suggestions of the Co-founders, Key Employees, Industry Experts, Advisors etc. These suggestions may be different, complementary or mutually exclusive – the financial effect is established in form of different iterations of the financial model.
While the accuracy of the Projections always depend on how reasonable the assumptions are, focus on making sure that assumptions are correlated and cross-validated. Given the assumptions which are fundamental to the model, make sure that projections are realistic to the management actions, its perceived effect and also considering capacity constraints and limitations.
A well built and thoroughly refined financial model provides the start-ups with concrete information on the a) Funding need b) Avenues of Utilisation c) The runway required d) A realistic revenue run rate (given the fundamental assumptions) e) A realistic burn rate (given the fundamental assumptions). Above all, a well prepared financial model provides Certainty to Strategy!
It’s a common question among startup founders – ‘What is the valuation of my company?’ The valuation is fundamental for raising funds and many a time, unrealistic and unscientific valuations reduce the possibility of funding closure.
While time tested business valuation methods like earnings multiple, revenue multiple and discounted cashflows do exist, a startup valuation is peculiar and tough and will not make sense unless valuation is closely tied to the business realities. Startups may not have positive earnings or perhaps not even started billing revenue. Yet, it may still be required to be valued for investment purposes. Valuation is also required to grant stock options. Finally, Startup valuation is not the value of the business per se; it is that value acceptable to investors which can generate a return on exit that matches the risk of investing in the startup.