Tip No 2: Financial models and projections : keep it simple

May 11, 2009
by Thanasis Delistathis

I had a discussion last week with a very successful entrepreneur which reminded me of some of the follies I have seen over the years with startups and financial models.

Here is the basic idea: keep it simple! No one can predict the future. Adding pages and pages of assumptions and complicated calculations doesn’t provide more fidelity. The basic idea is that a model should provide investors with a good understanding of the drivers of the business. In every business, no matter how large or small there are a few key drivers that determine profit potential. Investors want to understand what those are and what the profit sensitivity is to changes in those drivers. And the level of detail should be appropriate for the maturity of the business. A seed stage business should have a simpler model than a more mature business. There is less information known.

A thoughtfully designed and explained model communicates maturity in understanding the business. It says you understand the business and have spent time distilling what drives it.

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Originally published at navfund.com.

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