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![\"Ryan](\"https:\/\/gust.com\/wp-content\/uploads\/2022\/02\/ryan-nash.png\")
<\/span>\n <\/div>\n\n Ryan Nash<\/span> \n This write-up was originally sent to subscribers as a part of our Mission Control weekly insights, a series where we share wisdom and quick breakdowns on topics from our entrepreneur support network.\u00a0<\/em><\/p>\n Yes, founders essentially invent the numbers in their initial financial models and forecasts. But the discipline and methodology behind creating these projections delivers genuine value to both the founding team and potential investors. Your financial fiction should be hard science fiction\u2014built on logical principles and plausible assumptions\u2014rather than pure fantasy.<\/p>\n A startup without customers, revenue, active users, or even a product can still get a ton of value out of putting together a financial model even though most of the assumptions and formulas will be fabricated. A well-conceived model can demonstrate the potential scale of the idea, provide sanity-checks on growth channels and expenses, show when and why fundraising is needed, and establish a healthy relationship between customer acquisition, revenue, and margins. If your hard sci-fi story demonstrates enough rigor and reasonableness to be plausible, you\u2019re way better off than just charting a \u201cnumber go up\u201d fantasy, or never telling your tale at all.<\/p>\n Investors and founders both know that an early startup\u2019s financials are aspirational at best. So why would a founder spend their time creating a fictional 5 year forecast of their nascent startup\u2019s imaginary financials? Because it helps you build your own belief in your business and be able to communicate it to potential investors. Here are some of the bigger benefits about taking your own fiction seriously:<\/p>\n With startups, investors and founders are both looking for a significant return on their investment. For investors it is a clear financial gain (30x+, etc.) and for founders it is a return on their efforts that results in life-changing kinds of money. If the potential growth of a startup does not point to significant returns for either party, why are we doing this? This is why 5 year projections\u2014while seemingly outlandish when just getting started\u2014are the norm. If after 5 years your projected growth is only 2x investors won\u2019t be interested and maybe you won\u2019t be either.<\/p>\n While anyone could chart out 5 years of 10% month over month revenue growth and say, \u201cthere, huge growth potential\u201d, having a more rigorous model allows you to find the limits of assumptions and reality. If you build your revenue projections based on their fundamental drivers (acquiring customers, how much they pay, over how long, accounting for churn, etc.) rather than just top line growth, you can see when the model \u201cbreaks\u201d or when your big vision is based on impossibilities.<\/p>\n Chart a path to $100M and then look at the underlying drivers, does it require you to have 8 billion customers? With 0% churn? Or does it imply you\u2019ll need to hire 100,000 sales reps in 5 years to build that kind of growth? These are the impossibilities that easily creep into abstract modeling or just looking at market sizes and assuming you\u2019ll capture x% and we\u2019ll all be rich.<\/p>\n<\/blockquote>\n You can also look at industry wide stats and see if you\u2019re being too ambitious or conservative. A great metric is average revenue per employee, many founders undershoot headcount and end up projecting they\u2019ll have 1\/10th the staff of where Google or Mailchimp were at the same revenue numbers\u2014unlikely to say the least.<\/p>\n Since a good model has both revenue growth and expenses it can clearly illustrate when funding would be required to continue operations or seize an opportunity. Additionally, it can show how the funds raised will be spent which builds confidence for investors as it shows you\u2019ve thought out\u2014even if just as a hypothesis for now\u2014how you\u2019ll use the money to grow, e.g., \u201cIf we can raise $X by the end of the year, we can hire these sales and marketing roles and start to scale revenue on these channels\u201d. It\u2019s still a guess as to how it will really work out, but it\u2019s an experiment now, not magic growth.<\/p>\n A company needs not only to grow revenues, but to eventually become sustainable and profitable in order to provide those fabled returns. You can easily \u201cmake\u201d $1M by paying every customer $2 for their dollar, but you\u2019ll never actually make money\u2014you\u2019ll lose $1M. That sounds like a silly example, but swap raw cash with a product that costs more money to make (over its lifetime) than people will pay for (over their lifetime as customers) and you\u2019ll find many founders can delude themselves for a long time even when \u201cmaking early sales\u201d.<\/p>\n Putting the work into the unit economics of your product and services and how they\u2019ll change over time can provide a lot of insight into uncertain areas of a new business. You can find floors and ceilings of important components like price, customer acquisition cost (CAC), cost of goods sold (COGS), and churn.<\/p>\n Founders often wrestle with how much to charge and spend on advertising, or even how many calls\/emails\/events to tend to. By modeling them out and playing with the assumptions you can have both solid starting points as well as known \u201cbreak\u201d points where a given channel isn\u2019t worth continued investment or a price you\u2019d lose money at. It can even let you know how long you can sell at a loss to get into a market before running out of cash, or when you need to raise prices.<\/p>\n \u00a0<\/p>\n There are many more benefits to modeling even before you have actuals coming in. It takes some work, research, and creativity, but it is usually well worth it and often a great differentiator from other startups in the space who haven\u2019t.<\/p>\n It\u2019s not easy! Projecting things is far easier when you have past data to rely on. In sci-fi land, you\u2019ve got to pull from multiple sources, hedge some assumptions, and work with ranges more than absolutes. That\u2019s why we do regular financial model review sessions in our Mission Control program. Founders can get expert and community eyes on their assumptions and help spot red flags, impossibilities, and opportunities.<\/p>\n
\n , COO<\/span>
\n , Gust INC<\/span>\n <\/p>\n
\n 23 Apr 2025 <\/span>\n <\/p>\n<\/p><\/div>\n<\/p><\/div>\n<\/p><\/div>\nYour pre-revenue financials are<\/em> made up, but they should at least obey the laws of unit economics.<\/h2>\n
Why your pre-revenue financial model matters, and what it can show investors:<\/strong><\/h3>\n
What are the benefits of financial modeling as an early stage startup?<\/strong><\/h2>\n
Scale that Drives Returns:<\/h3>\n
Scale that Doesn\u2019t Rely on Insanity:<\/h3>\n
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Fundraising Justification:<\/h3>\n
Building and Analyzing Healthy Unit Economics<\/h3>\n
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<\/p>\nGust’s New Corporate Diligence Review Tool can identify preventable corporate structure issues that come up in diligence, and help guide founders towards fixing them. <\/h3>\n<\/div>\n<\/div>\n<\/div>\n
Take the Time to Build A Sane Financial Model<\/h2>\n