Hey friend,

I recently had the pleasure of hosting Jenny Fielding from Everywhere VC on our podcast. Jenny, a seasoned industry veteran with seven years as an MD at Techstars, has invested in unicorns and funded over 350 companies globally at the pre-seed stage.

She tweeted something that ignited a flurry of discussions, making me wonder, “Why should founders worry about financial planning in the early stages when they’re already swamped?”

Let’s be honest, even VCs know you’re likely to pivot several times, and at the pre-seed stage, your figures are essentially about selling an idea. But compiling a financial plan is crucial—not just an exercise in Excel. Despite the temptation to skip it, I strongly advise taking this step for the sake of your future investors.

If you’re between post-seed and pre-Series A, you’re probably already doing this. The real debate applies to pre-revenue, pre-seed startups.

Forecasting years into the future might seem over the top for early-stage startups due to the high level of uncertainty. However, building a model to project the success of your business can be incredibly valuable. It helps catch and correct faulty assumptions about your business’s economics early on. These might include your capital needs and the economics of potential future directions.

Here are some compelling reasons why early financial planning is crucial, especially if you’re fundraising:

Concrete Benefits of Early Financial Planning:

1. Improved Financial Health and Sustainability: A well-crafted financial plan helps you monitor your burn rate and manage cash flows effectively, preventing the common startup downfall of running out of money.
2. Enhanced Decision-Making: Financial forecasts enable you to make informed decisions regarding hiring, marketing, and product development, reducing risks and paving the way for success.
3. Increased Investor Appeal: Investors are more inclined to back startups that demonstrate a thorough understanding of their financial trajectory. A solid financial model not only shows your commitment to profitability but also your readiness to tackle financial challenges.
4. Strategic Resource Allocation: When resources are scarce, knowing where to allocate funds efficiently can mean the difference between growth and stagnation.
5. Regulatory and Tax Compliance: Early attention to financial planning helps you meet tax obligations and regulatory requirements, avoiding penalties and complications as your startup grows.

Understanding the venture capital perspective is also crucial, even if the model is imperfect. Venture capital thrives on a power law dynamic, meaning only a few out of many investments will yield significant returns. Annually, a typical pre-seed investor might see over 10,000 pitch decks, especially in hubs like NY or SF. They can’t fund all, so they filter aggressively to select a few that align perfectly with their investment thesis.

Elizabeth Yin shared her insights when I asked why some great companies don’t get funded:

EY: “Understanding the power law and the dynamics of the VC business model is crucial. At the pre-seed stage, I can only issue smaller checks. Even if I narrow it down to 10 companies I like, I can realistically invest in just one. It’s tough, but necessary to focus on those aligned with our thesis.”

In essence, investors look for reasons to say no to filter down to the best fits—the outliers. When VCs see your financial model, they recognize the effort you’ve put in. This alone might make them more likely to engage further.

Investors primarily use financial models to understand a founder’s vision, funding requirements, and the assumptions behind their goals. They appreciate straightforward, realistic projections more than complex quantitative analyses.

For instance, if you’ve raised $300k and your plan suggests hiring more developers, this clearly demonstrates a commitment to building a robust MVP.

From a VC’s perspective, they want to de-risk their investment by understanding your assumptions, intentions, and how you plan to use the funds.

As a tip, consider keeping your detailed financial model in the data room but include a snapshot in your pitch deck—this is my preference, although I don’t have the data to back this.

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