Editor’s note: Investor and entrepreneur David Gardner is founder of Cofounders Capital in Cary and is a regular contributor to WRAL TechWire.
CARY – Before we make any investment, we spend a lot of time with company founders modeling their venture. We are working together to figure out what the drivers are for each potential go-to-market strategy.
What kind of sales cycle should we expect?
Will the business have seasonal variances?
What level of effort will be required to ensure proper implementation and customer adoption?
What caliber sales persons will we need to hire and at what compensation model?
Until you have a reasonable model and starting assumptions you really don’t have a path forward or even know how much money to raise.
How a founder views the importance of modeling is an important insight for us into what kind of entrepreneur he or she will be. I often say that founders will never know their business any better than they understand their spreadsheet model. This is why we encourage our early stage entrepreneurs to build and maintain their own models rather than handing this task off to an accountant or part time CFO. Our entrepreneurs who don’t update their models regularly are without exception the ones that are perpetually running out of money and having a very difficult time raising additional capital.
An early stage model is a living rather than a static document. We know that the initial assumptions are always wrong to a large degree. What is important is having a model that can then be perfected with data over time. Each month we encourage our entrepreneurs to review and tweak every assumption based on what they have learned that month. Maybe the sales cycle is a bit longer or customer churn is a bit lower than expected. Models can be very sensitive to some assumption where even minor changes can dramatically affect a founder’s model and decision making based on that forecast. A good model becomes the instrument panel by which a good CEO stirs his or her ship at night.
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There is another less obvious but extremely important reason for maintaining a model and regularly updating the assumptions upon which it is based. A major reason a sophisticated investor or acquirer will choose to do a deal with you is based on the confidence they have in the forecast you present to them during diligence.
The real question is always, do they have confidence in your forecast i.e. in your ability to forecast accurately. Entrepreneurs who have maintained and continuously updated their model will notice that their forecast becomes increasingly accurate over time. Showing potential investors/acquirers how you have perfected your model and learned from your data in the past is the best way to convince them that your future forecast is viable and believable.
Being able to predict and forecast the future is a big part of what makes an entrepreneur and his or her venture successful. This is why we encourage our entrepreneurs to create, know and maintain their model religiously.
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