Why you need financial models for raising capital

“If you don’t define how you’re going to achieve your goals, you don’t have goals, you have dreams.”

When you’re trying to raise capital, you need to have a vision.  Most founders don’t have a problem there.  However, investors, as much as they want to see ambition, they also want to talk about how it works. 

The founder is expected to be optimistic.  Afterall, why would they even try if they didn’t think there was large upside?  The issue is not that the upside potential is there.  The investors are talking to you for a reason.  Often time, it’s because you’re promising to execute on something that they would like to invest in. 

Great, you and the investor now have aligned objectives, goals, and vision. 

Once you’ve agreed on that, you get to the next level: the numbers. 

“Let’s talk numbers.”

This is where most founders get tripped up.  This is where the long vague answers come out.  This is where trust is destroyed, and where a million-dollar opportunity becomes a million unanswered questions.

Why is that?  Simple: you have a feeling that your vision will become reality, but you don’t actually know how.  Not specifically at least.

You might have an idea of revenue.  And optimistic one surely.  That’s why you’re taking action.  But you don’t really know expenses.  You don’t know the taxes.  You don’t know the net income.  You don’t know the dividends.  You don’t know the behavior of assets.  You don’t know how debt and equity will be leveraged.  You don’t know what cash flow will look like.  And without a complete financial picture, you don’t really know how much capital you need. 

In exploding markets, sometimes you can raise capital despite this, but you are not setting yourself up for success.  I’ve seen founders raise capital only to realize that it’s not enough, and then they have to go back and ask for more.  No bueno.

Look, your optimism and bravery, competence, and charisma are not a substitute for the numbers.

So here’s the projections and models you need:

·       3-Year P&L

·       3-Year Balance Sheet

·       3-Year Cash Flow Statement

Then, you’ll make 3 versions of these reports:

·       Best case

·       Worst case

·       Most likely case

And you’ll adjust as you progress.

This comprises 9 living and changing reports.  I suggest updating this quarterly if possible, or semi annually if practical, or annually at the least.

It’s not easy, but it will cover every point in conversation that you’ll likely face, and will address the concerns of optimistic and conservative investors alike.

This is how you actually discuss the numbers with people.  And this is how you turn a dream into a goal, and a goal into reality.

I hope that helps.

Stay smart,

Jonathan Sussman CPA

P.S. if you want us to build you a model for your capital raise, book a call here and let’s get started