Financial Model Nonsense

I’ve recently been asked by a number of founders about financial models for early stage startups. I gotta say, I think the process of modeling out the next three or five years for a company with limited operating history is straight-up a waste of time. I guess there is some value in the thought exercise, but I would be shocked if any of these models ever turn out to be true in the real world. As an investor, I honestly don’t even look at them for Seed or Series A companies beyond a quick glance at the next 6–12 months.

When I ran a healthcare FinTech company, we were deep in discussions with VC groups and strategics. I bet I did 100 or more versions of that stupid model. There were so many assumptions in the spreadsheet I was working from that there was no way anyone except me had a clue what was going on. I could tweak some tiny assumption, like number of pitches each salesperson made each month or hit rate on pitches or average deal size, and the entire outcome for the company would swing wildly. Towards the end, the whole exercise became farcical.

My two cents to founders on this topic is “Keep It Simple Stupid”. Build something high level that allows investors to understand the key drivers of your business and your thoughts on how quickly things might scale. If a Seed investor is driving you nuts about the details on your model before you have serious customer and revenue traction, I got sad news for you, they ain’t interested in investing.

Now this advice certainly changes when your business is scaling. After that Series A round, investors are going to be writing you bigger checks and will expect more sophisticated and accurate financial modeling. All good at that time, but before then don’t waste the effort.

Thanks for reading today’s post, I hope this helps you allocate your time to more productive endeavors early in your startup process.