How to build a financial model for a startup that doesn't exist yet? [VC / Startup]
I've worked in IB and PE but was in 1) a no modeling group and 2) poor deal flow so I've never actually built a model from scratch. I'm going to start a business once my PE program is over and so I want to start building a financial model from scratch.
All of the guides I've found online have been for existing models. Further, I do know the basics of building a model, but not sure how to apply it for a business that doesn't exist.
Here is an example: let's say I'm projecting new ACV growth based on quota attainment of x sales reps. How can I possibly make that projection? The business doesn't exist so I have no idea what a quota would be, what a feasible attainment would be, etc. Same thing with projecting revenue from the existing book of business: I have no idea what retention numbers would be like, so how can I project?
At this stage, do I just make a rosy scenario that gets me to $100mm in 10 years and then outline the 5-6 main levers to pull? How should this be done?
Thank you.
I'm an intern so take this response with a grain of salt.
That being said, I've been part of a few startups, one currently fundraising now. My takeaway has been that a financial model for a pre-seed/seed startup is really the last thing you need if you are trying to get funding. The max work you will need to do in excel is a revenue projection, but even those for startups are laughably speculative.
Another thing is that, if you are going to do any modeling, it might be a benefit to model the market you are going into. There are a few methods for that, just search "total addressable market analysis".
Best of luck, hope this helps. If anyone reading this thinks this is bs, you may be right, please call me out if that's the case.
I mean I just graduated but I was thinking the same thing. I've been reading/watching videos on ecomm and no ones making models
100mm in the first 5 years?? that's pretty lofty. I mean I hope you're able to do it, bc I love seeing people beat the odds but that's a hard target to hit. Especially since this is your first biz.
Honestly I would just get started asap and try to make profit. Once you make profit, you can scale and down the line you can think about levers and stuff.
I might be way off though- I think m_1 started his own biz before transitioning to lmm pe so maybe he can help
I mean, no, I don't actually plan on it. I plan on growing to a healthy middle market business with as little equity financing as possible.
Anyway, meant to put 10 years, but point being - build the model for the idea realistic outcome (sure there are companies like Chime that get to $X00 in ten years but I'll just model $100 to show a "great-but-not-once-in-a-lifetime" outcome.
Ideally, you've seen enough businesses in whatever space you're launching yours and have a rough idea of how unit economics breakdown. If not, find a public comp or dig around forums/other corners of the web for those unit economics. I worked in MM IB/PE before launching my business in the sector that I spent most of my time in M&A in, so I knew what rough metrics should be for my business. I was conservative with my metrics for myself and wanted to see if the business was viable even under atrocious LTV and CAC assumptions. From there, I put some marketing dollars to work and saw what type of returns I got out of it and adjusted my following months off of that initial performance. Rinse and repeat for future months as historicals went by.
Damn, though, dude... Assuming you can get anywhere close to $100mm in 5 years without some serious capital, differentiated USP and/or rabid M&A strategy is a little out of touch. I'm not saying it's impossible and to not shoot for the moon but if your calculus behind starting a business is predicated on tapping $100mm or even $50mm that quick, I would step back and think through it all. Best of luck.
Thanks, yea meant to say $100mm in 10 years but as the "model to show" not the actual case. I am more thinking about, model around fundraising. Because then you can quickly pull back levers to get to another assumption. I've spent my college / IB / PE years around this industry so I do know it cold even without the good modeling reps. But maybe the idea would actually be (like you did): model the most piss poor metrics and see if you still have a viable business.
The business has no comps so M&A is totally off the table, I would ideally want $100mm in... 15-20 years.
Super helpful answer. Thank you.
Bullcrap.
If you have an idea that creates a good business, 100mm in revenues in year 5 is attainable and should be your goal.
My only piece of advice on modelling is this: Every input/assumption is on a seperate page. NO HARD CODING. Every output metric is on a seperate page. That way you can run scenarios with ease.
Please do not make a model. Ignore my title (it's not true--I've worked in VC for many years), but you need to be focusing on product-market fit. Talk to users. Iterate.
Then talk to more users. Then iterate more. Do this again until you want to rip your hair out. And then do it more.
I don't want to sound harsh, but to be a company that scales to $100mm in 5-10 years (i.e. high-growth, scalable, tech-enabled businesses), you're going to have to think a lot less like a banker. If you're building a middle-market industrials business in Wyoming, then sure, build your model and plug all your random numbers into it, but realize you're definitely not hitting $100mm in 5-10 years either.
Thanks. I agree with what you're saying. What if I took a step back and said: I need to make a model to prove to myself that this can be an attractive RR business, to see what it has to look like in an end state. I think that might be worth doing (1-2 days) before I go out and actually start narrowing in on PMF. I'm familiar and appreciate what you're describing and I say that in earnest - please believe me there - but I just mean on the model standpoint, I worry that maybe I will go down this rabbit hole spinning up a business and it doesn't actually have a long term viable model. I think it will force me to think through inputs and which parts of the business I want to focus on (currently there is a tech piece and a services piece and frankly I'm not sure exactly what the "run rate product" looks like (although again I appreciate that's a moving target)... I'm just wondering if a model will help me think through mathematically what could or couldn't be. Does that make sense? Feel free to stop me and say you're overthinking it, but would welcome feedback on this point.
Same poster as above.
I wouldn't worry about what the product can look like 5-10 years down the road. Some of the most iconic businesses today start in what like small TAM industries, but they built a fantastic product, and they are now multi-billion dollar unicorns. Just make sure there are customers who want your product, and make sure there are a decent amount of customers, and you will be in the right ballpark.
The only kind of financial analysis you should be doing that's worth your time (building a model for growth companies is always a form of mental masturbation, but it's especially so at your stage) is unit economics. Make sure you can deliver your product for less than what it costs. Think about how costs scale. Think about your GTM approach and how you will onboard customers.
If your unit economics are viable, and if you have customers who want your product, you will have a successful business.
Godspeed.
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