Designing An Investor Grade Financial Model
Series: Building an Investor Grade Financial Model
Everyone has heard the stories of the mythical startup unicorns, bringing in millions in early funding through back of the napkin sketches of their business proposition. These are the outliers. If your last name isn’t Bezos, Zuckerberg, or Musk, chances are people will take your financial predictions with a grain of salt. Communication is key, and as an entrepreneur you must be able to articulate your vision of future growth in a way that instills confidence and clarity. You can accomplish this by creating & sharing an investor-grade financial model.
In this post, the first of a series we are doing on investor-grade financial models, we’re going to discuss the most effective ways to design & format your financial model so that it clearly illustrates your vision to investors.
These tips require NO excel formulas or finance knowledge, and an important tip to remember is that financial models aren’t all about function, design is incredibly important and can impress investors when done right.
Tip #1 – Be consistent in your design throughout your financial model
A good financial model may have as many as 20 or 30 different tabs forecasting various components of your business or showing various output such as your income statement, balance sheet, etc. It’s vital to have a consistent design across all of these tabs, so when your potential investors flip through, they can focus on the important things, like your assumptions, and not have to spend mental energy navigating the document itself.
Here are some examples of good designs / consistent designs:
By design, we mean colors, fonts, font sizes, and row heights, & column widths. Notice how in the above images they are all consistent from tab to tab, with information laid out in an almost identical format. It may sound basic, but we see models all the time that have different fonts, different font sizes, information spread throughout the model without any consistent plan or strategy. This doesn’t “show” well with investors, it makes them work harder to extract value from your financial model and takes away from the vision that you’re trying to convey.
You wouldn’t show disorganized information in your pitch deck, so don’t do it with your financial model!
Tip #2 – Create an Investor Dashboard that summarizes your financial model
Investor dashboards can be a powerful tool for communicating high level vision in just one page.
First, think of what your investors will be most interested in when they look at your financial model (annual projections, team/headcount growth, expense breakdowns, profitability, capital requirements, potential valuations, important model assumptions, etc.).
Next, create a dashboard that links to all that important information housed elsewhere in the model, pulling everything onto one tab that is easy viewable.
Investors Dashboards are great for printing to PDF and sharing with investors in in-person meetings.
Tip #3 – Color Code the cells & tabs in your model to make it easy to find drivers & assumptions
Color Coding your financial model is incredibly easy, and something that most founders fail to do. By using a color scheme, you’re making your model easier to navigate.
Assumptions are the inputs that you hard code into your model by typing a number into a cell; essentially these are the key driving factors to your projections. These assumptions should ALWAYS be color coded. Investors (and you) need to be able to easily distinguish between a hard-coded assumption, and calculated numbers (such as your revenue, which should NEVER be hard-coded).
At Venture First we always color all our assumptions with a blue background and blue text.
We also suggest that you color code the individual tabs of the model.
Here is what we like to do:
- Output Tabs (Financial Statements, Dashboards, etc.) – Main color for your company
- Assumption Tabs – Bright Yellow
- Revenue / Growth Tabs – Green
- COGS / Expense Tabs – Red
- Balance Sheet Tabs – Blue
Hopefully, you can see now that you need not be an Excel wizard or a financial guru to impress investors with your financial model. Of course, the numbers and forecasting methods matter most, and we discuss how to “ace” that in other blog posts, but at a minimum you should design & format your financial model well to pass the initial sniff test.
As always, if you need ANY help with your financial model or have additional questions, don’t hesitate to reach out. We build financial models for a living here at Venture First, and we’d love nothing more than to help you build yours.