Five Key Questions Investors Will Ask You About Your Financial Model
Your financial model is a vital element of any pitch to investors. And that can seem worrying, particularly if you’re not a numbers person. But spending time on that model and anticipating what investors will want to know won’t just boost your confidence in the pitch – it will help you understand your business better. Here are the key questions investors will ask you. How many can you answer right now?
What are your unit economics?
Know your UE and know your business. Put it plainly, a ‘unit’ is what you sell, whether artisan bread or airline seats. The ‘economics’ part comes when working out how selling that unit turns into profit. If your business model is failing, the cost of acquiring a customer is always going to be higher than the revenue you get from that customer. Investors are never likely to be interested in that. But if your business model shows that the lifetime value accelerated by customers is greater than the cost of getting those customers, investors will be interested.
Curious to learn more about unit economics? Our co-founders, Sara Green Brodersen and Andre Karihaloo created this insightful and entertaining video on ‘Everything you need to know about unit economics’ video. Watch it
Where’s your P&L statement and your balance sheet?
A warning: not every potential investor will be happy with just your unit economics. Old-school angels may well want to see a traditional profit and loss statement and a balance sheet. Of course, there’s no harm in going through this process if investment hinges on it. But when you’re faced with this question, explain why simple profit and loss don’t necessarily tell the whole story about how your business might be profitable – then explain how your unit economics work.
Who will your customers be in five years’ time?
Hopefully, if you’re already up and running, you’ll know something about who your customers are and where they found you. You’ll be tracking which platforms are most effective, and which products work well. If you haven’t yet started, you’ll need solid evidence that there’s a need for what you’re offering. But you also need to think about how you’re going to scale up – investors are looking for profit, after all – and transition from your initial startup success to a resilient business model and how it will profit in the long-term.
And if you want to bulletproof your financial model, check out our downloadable guide. We tapped into the strategy secrets of leading investors and financial advisors and collated their insights for successful fundraising
✔️ Don’t go it alone - how including others brings value to the process
✔️ Importance of understanding expenses and revenue
✔️ Identifying important KPIs
✔️ How best to approach valuation
What will you do when the unexpected happens?
Covid wreaked havoc in terms of revenue, teams and costs, with many companies having to find extra capital and dissect every expense. The companies which did well when the pandemic hit were those which could adapt quickly. And while it’s never possible to deal with every scenario, you can make certain assumptions and move forward with those.
Consider what the Monte Carlo Simulation taught us. In that methodology, you build a distribution model of what could happen based around an initial set of assumptions made. For example, you could assume that your growth rate might be 5%, but it could also be 7% or 2%. Feel confident enough in your numbers that you can play around with them and build different narratives around different possibilities.
Why should I invest in your company?
Finding an investor isn’t just about the money. It’s also vital to find the right investor for you and your business. Every investor is different: they have their preferences and priorities, and, likewise, every business is unique. But while there’s no correct answer to this question, this is when honesty and knowing your financial model back to front will pay off. Know-how and why your company will be successful, communicate that and stick to that. Don’t be tempted to mess around with your model because you think that’s what the investor wants.
Want to raise your game in 2021 and plan your financial forecasting in real-time and delivered through a dynamic, intuitive dashboard, discover Canaree today.