March 26, 2021

Educational episode #8 - how do you construct financial models? By Rami Essaid, CEO of Finmark.

Educational episode #8 - how do you construct financial models? By Rami Essaid, CEO of Finmark.

This educational episode is about constructing financial models on early stages - what exactly do you need to have, what do your investors expect to see on the pitch deck and what are the major mistakes that founders make while constructing financial models? All this is discussed in this short educational episode with Rami Essaid from Finmark.


If you are one of those who need to get a decent financial model for your startup, here is the link to Finmark: https://finmark.com

 

Transcript

So, for those of you who are trying to figure out, what kind of numbers do you need to put up on your pitch deck? What kind of numbers do your investors expect to see there? How much time should you spend developing those?

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How much money should you spend hiring people who are going to develop those? This is the opposite for you. We're going to cover this topic today and.

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Today,

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our speaker is Rami Side's,

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who is the CEO and Co,

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founder at Mark that is doing those financial us real simply so today we're going to talk about that,

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Rami,

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let's kick it off by giving us a little bit of background on financial model.

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So 1st question, what stage should you care about financial model? So, at what stage of the company should the founder? Like all right now? I need to take my time to develop those financial models.

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I think as soon as you either start raising money or making money, you should care about financial models right? At 1st, it's about getting a prototype figuring out what you're going to do.

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A lot of a lot of founders are focused on that really, really early on before when it's just you and your Co founders, you don't have employees you're not spending a lot of money.

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No point in doing a financial model, but the 2nd, that you want to turn this into a more meaningful business either, because people have started paying you or because you're going to go raise money to expand the team and take this to the next level.

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You should put down, you should put some numbers together to understand what you're going to spend how much you're going to make and keep yourself accountable to that month over month.

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Right and the, that's the standard structure speaking of structure. What kind of financial model should someone make when they're on the Pre revenues they used to when they basically have no numbers?

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What kind of miles do you think investors expect to see them? Make.

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Well, I think 2 problems with that mentality of preceed and seed stage companies 1 is they think that they have no numbers at all.

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Well, actually, you do because you're spending a lot of money, right? When you're when you're going to raise money that's a number right? How much are you going to raise and then how much you're going to spend and how are you going to spend that?

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That's very important number to convey over to the investors that are going to give you money right? The other point is really around how much I'm not making any money. I'm Pre revenue.

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What do I put down and a lot of people worry and think that, hey, I have to have everything figured out in my revenue model I have to even have my pricing model figure it out and it doesn't have to be that complex right?

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At a Pre seed seed stage,

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it's really about showing that you're going to take your company from where you are today through a series of hires expenses,

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and maybe getting some customers to another stage where you're going to be able to raise more money.

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Right? So it's about going from point a, to point B, and what are the, what are the outflows of cash inflows of cash that are going to get you there that's all you need to show.

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It can literally be 1 sheet at a Pre seed stage or seed stage if you want it to be if you run into investors, I'll be the 1st, to say this if you run into investors that expect a 10 tab model, and they expect you to know.

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Exactly. How to get to a 100Million they're grilling you about the details of that at a Pre seed a seed stage they don't get your business. Those are not seed investors, right? But it doesn't have to be as complex, but it doesn't need to be thought through. Right?

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You do need to think about Here's here's the specifics of why these things are going to happen.

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100% absolutely agreed on on this point. So let's talk a little bit about mistakes. Specially mistakes that founders make.

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While talking to investors, basically about financial models so I appreciate your call you mentioned that's 1 of the major mistakes. There is making Iran assumptions on the milestones that they promised to achieve to their investors can tell us a little more about that.

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Okay, so, 1st of all every model is wrong. There's a, there's a great a statistician George box, right? And he says all models are wrong, but some models are useful. Right?

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And so it's not about it's not about getting the perfect model. That's the number 1 mistake.

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That I think founders do they overcomplicate things they try to get precise to the dollar or 2 years from now and they say, okay, here's the, the exact thing that's going to happen. And they have all these complications, because they think through every single detail.

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Well, if you overcomplicate it.

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The more levers that you create, the more likelihood that you're going to be wrong. Right?

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Every every lever, every decision point, every type of detail that you put in has playing a role of a dice right of how variable you're likely you are to hit that number or go above or below it. Right.

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So the more variables that you introduce, the more the more variability you're going to have in your model, which means that you're going to be, you're more likely to have it to be wrong.

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So 1 of the 1st, mistakes is keep it as simple as possible early on until you really know that this is exactly how this is going to play out. Right? The number 2 mistake that I see. People make not updating their model. Right?

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If you think about a model really literally quite literally has a 30 day half life, right? A 1 month halfway for every single model. After a month it's half as useful at an early stage. Things change so much after 3 months.

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It's less than 10% useful. And then, by 6 months, it's completely useless. So, if you don't keep your model up to date, then there's no point in putting together a model and the 1st place and that. It goes back to your original point, which is how do you keep models?

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How do you keep your investors informed right? To the things that you told your investors?

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Well,

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if you update your model every month,

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and then share with them the update,

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then it doesn't feel as drastic change between what you said was going to happen what actually happens over a month period is less drastic and they understand and they can see and go along with you now,

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if you don't update them for 6 months,

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and you don't update your model for 6 months,

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and then come back to them,

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there's gonna be a pretty big discrepancy between what you said 6 or 12 months ago.

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And what actually happened. Sometimes. It's a good surprise more often than not. It's not a good surprise. Right? So keeping your model up to date and keeping your investors up to date. That's the number 2 mistake that I, I see the 3rd 1.

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Being unrealistic with your forecast, right? I don't think anybody starts a business. Nobody starts a start up thinking they're going to fail.

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Right I think it takes a certain level of.

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Tying the sky optimism to be a founder in the 1st place right?

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And so realize that about yourself, realize that you are coming into this with optimism, you don't think you're going to fail, but the numbers are stacked against you 9 out of 10 startups don't do well, right.

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So realize that discrepancy and try to temper yourself right? Think meditate before you put your model right? Drink a cup of tea. Something bring yourself down her reality when you're building your models.

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So that you don't get to be overly optimistic. 1 trick to do is to create 3 models. Right? Start with what you think is a realistic model.

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And then build what your optimistic model is. Right?

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And if there's not a big difference between the 2, that maybe you should temper your more realistic model, and then build your worst case scenario throughout the worst case scenario that you can into a model, and then have that and have all 3 ready.

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So that you can, you can kind of see a vision and adapt more quickly as things may be paying out better or worse than you thought you, they would in your main model.

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And, yes, especially the last advice is absolutely great building 3 different models from 3 different perspectives as absolutely great apps and working multiple times. When you have all those 3 visions ready, you are prepared for every single scenario.

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Basically,

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I mean,

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of course,

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there's there's a startup world,

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so everything can go and the 4th model,

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which doesn't exist yet,

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so be ready for everything we're living that world right now who put a model together that expected a pandemic.

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Exactly. Or, at least, I hope, no, 1, for say that, because then that would be just weird. So, yeah. Be ready for this stuff.

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But again, having 3 milestones, just to greatly increase your chances of being ready for this stuff that's coming up. So now, can you give us a little bit overview off what's been Mark and who should use it?

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Okay, so Fin, Mark is software to help you build your financial model. Typically, financial models are done in Excel.

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They've been executed in Excel since since Excel started and it's worked really, really well for a long time. However.

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It is very, very hard to do and it's very, very easy to make mistakes and it's very, very hard to collaborate on a static document in Excel, passing around documents, keeping it up to date. All of those things make it a pain.

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So we wanted to move it over to software to make it easier less error, prone and better for collaboration. And that's what Mark does.

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We make it simple for any founder, whether you have a finance degree, or not to get started and build a financial model. We have building blocks that allow you to put them together. We have content to teach you how to do it.

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And the most important thing is, we're not a template right? So many companies rely on a template because they don't know what they're doing, but templates are trying to shoehorn yourself into something else. Right? And it's not a perfect fit.

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I'm not a big fan of templates just because the founder at the end of the day doesn't necessarily understand how that model works. Right? They're just plugging things in and they don't really understand the mechanisms and mechanics.

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The, the levers that are driving these numbers. What does is allow you to understand those and use those and building blocks. We just take care of the math. Our educational videos are educational content teach you about the inputs the outputs.

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So that you can build a better model. Nice. And by the way, I'll make sure to leave a link to dot com and it's tripping this episode. So people while you're listening to this episode, just click on it, go through.

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So,

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for right now,

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maybe the questions that you're going to have immediately are going to be answered in this episodes in the upcoming 2 questions,

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so next question is,

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what kind of numbers should founders have to have to get something that we can go get financial mile good financial predictions for their company.

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Are there any base requirements for the numbers that they are supposed to have?

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So, we'll talk about the inputs and the outputs and inputs are, you should have have a vision of who you're going to hire how much you're going to pay people. Right mark helps you with that.

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We help you understand how much average salaries are for different areas. Then, then what other things that you're going to spend money on, right? So you need to understand, or have a vision of your inflows and we have articles to help you think through that.

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Right a lot of people don't think about,

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for example,

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what happens when the Amazon credits run out or did I did I remember to put in accounting fees for filing my taxes every year those kinds of things we have a list of those for you and then the other thing that you need to think about is how I'm going to make

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money.

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Right. What is what is the the mechanism that I'm going to attract customers? Right? What does that what does that motion what drives that motion? And then, how does that convert into customers and what are those customers look like?

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It could be just as simple as, you know, I'm going to spend money on Google and then those are going to convert into some customers that pay me 25 dollars a month.

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Some customers that pay me 500 dollars a month, or could get a lot more complex with, hey, I'm going to have and salespeople and then their salespeople converted into customers and those customers could be all sorts of different prices.

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But the average value is this, there's a lot of different ways to build it up, but you need to understand kind of the process in which you acquire customers, turn them into into cash and what that whole mechanism looks like.

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Was discussed the most important part of its pricing. So, how much can the founder expect to spend on fee mark to get the financial model down and sustain it?

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So, with Finn, Mark, our pricing is really geared towards being helpful for early stage companies, and making our money as you grow. We want to be on the journey with founders as as they grow.

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So, our pricing is actually is based off of the revenue of the company. If your Pre revenue, it's as little as 25 dollars a month. But once you get to be a 10 or 50Million dollar your business, that's when you're going to pay us thousands of dollars a month.

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I like to think of it is very similar to a consumption based model. Right? The more revenue that you have, the more data that you're going to be modeling the more people you're going to have collaborating on your financial model, and the more value that you're going to see from.

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And so, as your revenue grows, our price tag grows with, you.

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Nice and I absolutely love this financial model for you guys and I'm losing my voice now. Take your voice. I want to tell people how I'm using fin mark today.

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I'll just add in since I know that was 1 of the questions that you wanted to ask, we use Fin, Mark Mark dashboard isn't something that I just use personally to manage the business.

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I actually share it with my Co founders, and we look at it weekly. I share it with my investors, they get that that dashboard monthly, but I actually, once a month, sit down with all of my company with all my employees, we have 33 employees now across the board.

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I walked through the financial dashboard. That's an output offend mark. It keeps everybody aligned your financial model, should tell the story of your business. Right? And even though most of my employees are engineers, right?

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And you wouldn't think that engineers would care about financial modeling, but when I walk them through, and I say, hey, we have this runway, we run out of money at this point.

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Right, but we need to need to start raising money 3 to 4 months before that and to be able to raise money, we need to close these deals 3 to 4 months before that and these deals need these features. Right?

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And so I walked them through the decision making steps, I don't have to explain to them why, we're not going to do the quality of life improvement on the code. We're not going to spend extra time doing this.

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They are sprinting twice as hard to hit our releases, because they're aligned with me. They understand the repercussions of what happens if we missed this timeline. Right? And so it keeps everybody on the same page.

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Your financial model, I think is an important resource across the board for the entire company.

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Nice a love that approach and.

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Yes, sounds great. So this is the ending after this educational episode I have to mention that this episode is not sponsored by Mark is just we got to know each other with Romney based on the introduction.

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We had another episode and then I realized that Rami has an enormous amount of knowledge and a space of financial modeling and fin Mark seemed like a great fit. So, people, this is not sponsored.

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If you're going to click on the link, that's in the description. That this episode. I'm not going to get a sense. If that's going to make you feel any better fundraising redo. I repeat as a nonprofit. So, take a look into the description says episodes, enjoy framework.

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If you have any additional questions, I'm going to leave a few links to get in touch with Rami or someone from marketing. So, check it out and.

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I completely lost my voice so have a good day.