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The ecosystem for startups has truly arrived. The fact that the startup ecosystem in India is currently the third largest in the world says a lot about how frequently and quickly ideas are turning into businesses here. The goal of this blog series is to delve further into understanding what turns these fantastic ideas into brilliant enterprises. To begin with, I can assure you that it involves a great deal of work and numbers. Let’s take an example of that one passionate entrepreneur we all know who is pouring their heart and soul into building something great - let’s say a fitness app. Our entrepreneur friend is optimistic that it will upend the wellness market. But when it comes to securing funding, her excitement hits a wall. The app’s concept always tends to soar with potential investors, but their faces fall when they see her rudimentary financial projections. They politely decline. This is a common experience among founders. Founders with incredible ideas often lack robust financial projections or let's just say data to support their vision thus leading to a funding roadblock. Here's why every founder needs to build a strong financial model that’s not just a mere deal collateral but a north star to them. It's more than just slick spreadsheets. It's a tool that turns your idea into measurable, understandable data that illustrates stakeholders' true perspectives. A startup's financial model is a blueprint for how it will make and spend money, both now and in the future. At the very minimum, start with the basics. Get your MIS in order and thoroughly track your Income Statement, Cashflow Statement, and Balance Sheet. A strong financial model will help you visualize potential revenue streams, predict expenses, and understand the path to profitability. Let's see how this translates into action for two different startup models: Example 1: SaaS Startup - Product Analytics Platform Say a young founder has a brilliant idea for a user-friendly marketing automation platform. His financial model would focus on: Revenue Streams: Revenue forecasts from monthly subscriptions based on different tiers with varying feature sets. He would also consider one-time setup fees and potential add-on services. A robust financial model will forecast monthly & annual recurring revenue (ARR, MRR) from various subscription plans. It will account for customer churn, cohort projections, LTV and CAC. Expenses: The model will factor in costs associated with building and maintaining the platform, including salaries for developers, quality assurance, potential licensing fees for third-party tools, expenses for providing technical assistance, and user training. This could include salaries for support staff, live chat tools, etc. It will also project the costs of acquiring new users through various channels like online advertising, content marketing, and sales personnel. Having a financial model that incorporates every possible income and expense channel will help a founder adjust pricing strategies, plan resource allocation, and more. Founders can use the model to simulate how different pricing structures for subscriptions, setup fees, and add-on services impact total revenue and customer acquisition costs. Incorporating competitors’ pricing data to simulate projections is also a wickedly smart thing to do. Ultimately, the goal of a detailed financial model is to present solid data to investors to help them evaluate the potential of the plan and a startup’s realistic ability to execute it. It can also help identify potential risks and their financial impact. Let’s take a look at another example of - Example 2: D2C Startup - Sustainable Clothing Brand Say an entrepreneur is working towards launching a D2C (Direct-to-Consumer) clothing brand focused on eco-friendly fashion. Here’s what their financial model should look like - Revenue Streams: Detailed revenue forecasts based on projected unit sales, average order value, gross margins, category contribution to overall sales, and more. The model should also account for revenue from different sales channels like e-commerce websites, online marketplaces, and potentially even pop-up shops or influencer collaborations. Expenses: The model should factor in potentially higher manufacturing costs if the business is to get into ethical sourcing and premium quality of raw materials along with storage costs. It will also account for all marketing costs per channel of marketing used, their contribution to the total cost as well as assumptions on their month-on-month growth, etc. A strong financial model will detail every aspect of revenue & cost to arrive at a well-simulated projection. It will help the founder arrive at data-driven decisions about their capital requirements, GTM strategy, and more. The good news is that models evolve, as they should. It takes several updates led by actual market feedback. Your financial model at an early stage will be much different from what you will need at say Series A. It is also very important to not lose sight of the real value of building a strong financial model. It is to be your north star to help you objectively execute your startup plans. Yes, it is very crucial deal collateral but irrespective of any plans to fundraise, every founder must build an all-encompassing financial model.