How Financial Modeling Can Help You Build Trust With Investors

Illustration: A founder and an investor together

In the COVID age, financial modeling isn’t the first thing on most founders’ minds. The pandemic has created an environment unknown to the modern world, and many founders are facing unprecedented operational change.

To make matters worse, public equity markets have been volatile. Today’s investors are increasingly risk averse, which makes fundraising for businesses even more challenging.

With such high-risk equity markets, why would investors take on the gamble of a startup?

To succeed in this environment, you must take extra steps to build trust with investors and allow them to see why your startup is less risky than the alternatives.

Illustration: A founder in a financial model

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Building Trust With Investors Is Key

For investors to keep investing in today’s economic climate, they want to maximize their return against a mitigated risk.

This is an attempt to optimize their Sharpe Ratio, which is a financial formula that compares the return of an investment to its risk. In an ideal scenario, the higher the Sharpe Ratio, the better the investment.

So how can you, as a founder, leverage this challenging investor environment and differentiate yourself against competitors who are also trying to raise funds?

The following strategies work together to ensure that your financial model, and your risk, are as clear as they can be.

Illustration: A founder and an investor together

Financial Modeling Is the Way

Financial modeling is always crucial, but, right now, it is a pivotal factor that allows you to showcase your projected business outcomes.

At a time when uncertainty about the future is driving investor decisions, a solid financial model that accounts for multiple likely scenarios can be your ace in the hole.

Investors are relying on you to provide stress-tested scenarios of their investment. This should include at minimum a forecasted Income Statement, Balance Sheet, and a Statement of Cash Flows.

Financial transparency through clearly modeled visuals and projections is more important than ever with investors wary of taking on the ambiguous risk of a start-up.

Pro Tip: Model Different Marketing Scenarios

A successful financial model will not only show investors exactly how their money will be spent across the organization, but also includes a growth plan showing exactly where your marketing dollars will go.

If you can demonstrate a direct correlation between marketing spend and expected results, it would be wise of you to make sure your investors understand this.

Objectively, this proves to investors that you have planned thoroughly for an unstable market while it simultaneously builds trust in your team and your partnership.

Illustration: Different scenarios in a financial model

Monthly Updates Are Critical

Email lists consistently produce better engagement and clickthrough than nearly any other marketing platform.

Email is a hugely underutilized and highly impactful engagement tool in our startup community. You have likely observed this yourself as a founder.

So what’s the point? The effectiveness of emails translates to fundraising as well.

Email your prospective investors a monthly update. Openly sharing progress, even areas of struggle, keeps investors engaged and builds their trust.

We’ve seen many startups have success with tools like Paperstreet, which provides templates that outline specific sections of your model and showcases best practices for investor updates.

The Easy Way To Start Financial Modeling

The bottom line? Fundraising is about engaging with your investors and building a foundation of trust. Transparent communication is key.

Your financial model showcases your financial transparency. Monthly updates communicate operational transparency.

Most founders don’t have the time it takes to build out an impressive financial model in Excel. And even if you do build a model in Excel, your capabilities to handle scenarios and relationships are still severely limited.

Forecastr is a financial modeling tool that lets you build a great financial model as efficiently as possible. We pair every new partner with two expert analysts, who work alongside you and your team to build your model from your actual financials.

You can sign up for our public Beta here: Apply for Forecastr Beta

Trust begins and grows with total transparency and a robust model. And building trust with your investors is more important today than ever before.

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