I’ve been thinking (my wife hates it when I start a sentence this way…) that it would be helpful for non-MBA types who are doing a startup to have a basic financial model that they can copy and customize. So I’m going to create one as a semi-public Google spreadsheet over a series of blog posts and I’d love to get your input and ideas as I go.
First, a note on the relative importance of a financial model to a startup. The primary value you will derive from creating a financial model is that it will help you understand what you know, think you know and don’t know at all about turning your idea into a meaningful company. You will know your business better. That’s it. It won’t make your product awesome, it won’t give you new insights into your customer and it won’t tell you how to handle issues with your team. But if done right, it can be an invaluable tool that helps to inform you as you tackle those issues. It can also be the analytical framework that helps you define the key hypotheses you need to test in a Lean Startup approach.
Second, while spreadsheets do complex calculations with remarkable precision and even though some (old school) VC’s like to see a tight 5 year pro forma model, you need to keep in mind that you have absolutely no idea what your startup will look like in 3-5 years. So don’t get wrapped around the axle about whether gross margin in Year 4 is 22% or 26%. But do focus on the key drivers of your particular business – things like Customer Acquisition Cost, Lifetime Value of the Customer, Unit Economics, all of which have been explained in detail in the startup blogosphere.
One thing you know for certain is that the model is wrong. It’s the act of creating, debating and interpreting the model that makes the exercise valuable.
So, on to the model. The first tab we’re going to make is the Headcount tab. Why? Because it’s an easy warm-up and for most startups, headcount is one of the largest expense buckets in the early years. This is a start. I still need to clean up some things and need to add salary inflation in the out years, but you can see it below and access it here. Let me know what you think!