We routinely create financial models for startup founders and also seasoned entrepreneurs who are getting ready to face investors. What they want is obviously to present their company in a way that is going to land them an investment, and a financial plan is one of those must-haves, at least in many of the more sophisticated startup hubs (it’s not the only must-have of course, as investors look for a variety of characteristics in the company and founders). Founders want the peace of mind of knowing that they are investing in a document that will be accepted by investors.


Projecting customers is the point where most make big mistakes, and it’s understandable since it’s a complex exercise. Some choose the bottom-up approach, and some choose the top-down approach. The important thing is that it should be realistic: make sure that you can roughly explain the market penetration and save the sources used.

When using the top-down approach, typical mistakes are assuming that you can address, or even obtain, 100% of the Total Available Market, whereas this should be reduced to the SAM and SOM (Serviceable Addressable/Obtainable Market). Another typical mistake is assuming that there are no competitors just because you are bringing innovation to the market: others might be preparing for the same market opportunity, and substitutes are also usually present.

Another figure that is inescapable is the Customer Acquisition Cost. There are costs involved in a variety of different marketing activities that are different from industry to industry. These figures are difficult to find, but we know, for example, that B2B customers cost more to gain than B2C users in many cases, and that often the CAC is directly related to revenue per customer. It is possible to extract these figures from stock-listed companies, using the number of customers gained per year if publicly available. Or even better: hire a marketing agency that knows these figures for your industry and can help you set a marketing budget and growth expectations. The CAC costs are an essential part of validating a business model, and therefore testing these figures in the market before raising funds can provide founders with more confidence and also a more realistic go-to-market strategy to present to investors.


Churn is one of the metrics that investors want to see at the early stages. New business owners sometimes forget that churn, meaning losing customers over time, is normal and should be accounted for. This is what makes some business models, for example mobile apps, difficult, as the low-cost customer acquisition is not accompanied, except for a few winning apps, by a retention that is high enough to make the business model a good investment. Not only churn, but also the frequency and number of products bought by customers, are some essential parts of the business model that are often overstated. Some of these figures, if lucky, can be found through desk research, but in many cases direct market testing would provide the necessary user behaviour inputs to create realistic financials.

In case questions come up, it’s worth being prepared. Even when market data is hard to find (the issue is always present with new types of business models), try to draw on figures observed in the market regarding user behaviour such as frequency of purchase, volume, prices, customer acquisition. These figures can come from desk research, industry experience, market testing, competitors, offer by suppliers or potential clients.

If you have an already established business, investors would want to know that you have been able to analyse past customer behaviour and that your financial projections draw on this past experience.


Whether it’s right or wrong, investors bet on companies that excite them and can really win big, since the return on investment is most likely going to come only from those companies that become big players in their market. So founders know that they need to show the upside potential, and a big enough revenue after the initial phase, to demonstrate that they are aiming to play big. It needs to be explainable and achievable of course, but showing your company as a good investment is not enough in many cases, you need to demonstrate that it is a great investment if you are facing VCs. However, more traditional investors such as private equity, or investors that invest at later stages, don’t have the exact same goal as their fund return model is different and they don’t carry the same risk that is involved in early-stage investments.


While an unrealistic growth in revenue usually jumps also to the founders’ eye, what usually goes unseen is the unrealistic growth in costs. As the revenue grows fast, cost will also grow fast (even when the company reaches profitability fast), and not simply at the inflation rate: gross margins are likely to remain fairly stable, marketing costs will grow with new users, and the staff will expand, while salaries will increase.

Ambition is good, but if the growth figures have no connection to the state of the market, or if the company is growing at a faster rate than VC-funded competitors, there must be an explanation. Claiming a long-lasting great competitive advantage before market entry is a difficult thing to do. A better performance compared to current market players is possible, of course, through innovation, but analysing the achievements of other companies that have gone the same way before (even if the information is not easy to find and sometimes has to be deducted), helps understand what it takes to achieve certain goals, how fast they developed, how much funding they needed and what mistakes they have made. These are questions that an investor might ask if you present an above-market performance.

To make this easier, it’s good to include some metrics that would make it obvious when projections start becoming unrealistic, such as sales statistics per customer or target group, market penetration achieved, revenue per employee, breakeven analysis per revenue stream and any other industry-specific metric.


Having direct experience in the industry where you are building your new business is a big plus for investors. If this is not the case, research, test the market and contact suppliers to have a more in-depth knowledge of costs. Without direct experience, it’s easy to bypass some costs that could have a large impact on profits. On top of one-time costs related to market access, such as licences, prototyping, equipment needed and other market-entry costs, founders may underestimate some direct costs such as logistics and customs, transactions fees and other specific direct fees. Additionally, when producing physical products, an inventory build-up could be expensive for startups, as suppliers would request pre-payments of 2-3 months and minimum order quantities.





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