Why (Some) Early Stage Investors look at Financial Models

This blog by Henry Ward probably got a spike in traffic yesterday when Fred Wilson linked to it.  It is a thoughtful and intelligent bit of writing, and lots of it made sense to me.  The bits that particularly resonated were:
“Fundraising is a filtering exercise, not a popularity contest”.  As an entrepreneur, you are not going to convince an investor who doesn’t like you or your idea that they are wrong.  As a VC, I see one of my roles to be clear about whether I am interested or not.  The whole Episode 1 ethos is built around Being Frank, but as Henry writes, as an entrepreneur, you should be starting to develop some EQ and sussing out whether this is an investor you should be devoting your precious fund-raising hours to.
“Ask for feedback other than the market isn’t big enough”.  Guilty as charged.  I confess to sometimes using that old chestnut to avoid being more critical.  But as an entrepreneur, in the spirit of customer development, once you have worked out that this is going to be a “no”, use the time to get some useful feedback and maybe some intros, or suggestions how to improve the deck, the idea.  Something.  Anything.
But.  One thing he wrote did cause me to raise my overly large and greying eyebrows.  “Beware investors who ask for unit economics or a financial model.”
OK, so I confess, I like to look at a financial model.  Not because I am a spreadsheet jockey, well, not JUST because I am a spreadsheet jockey.  Why else, other than a peverse affection for a Balance Sheet and working capital movements?
Err…Because I like to know how long my cash is going to last and whether the amount being raised is enough to achieve something meaningful to appeal to Series A investors, but not so much that it forces too much dilution of the entrepreneur.
I see lots of plans where the cash flows bear no resemblance to how funds will actually flow, where the assumption is that there will be no more hiring for 6 months after investment when the product plan is for loads of feature development or where entrepreneurs – particularly first timers – fail to differentiate between bookings / revenue and cashflow.
Maybe the team is trying to raise more money than they need because of unrealistic hiring plans (We’re going to hire 25 people in the first 3 months even though we are a founding team of 2).  Why raise more than you need to and get diluted even more?
And at some point, this thing I’m investing in does need to pay attention to profitability, right?  So I’m interested in how the entrepreneur thinks about her business from a financial perspective.
You’re going to raise some money to grow your business.  Someone should be paying attention to cashflow – I want that someone to be the entrepreneur, and how am I meant to assess whether they are capable of doing that without looking at the plan?


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