Scalable Economics

Reading Time Time to read: 4 minutes

Maths, modelling & financial literacy for founders

Matthew Bradley

Investor @ Forward Partners

So you want to raise some money from an investor...but...maybe you’ll have to talk through your projections and growth assumptions. You might be expected to talk with confidence about the components of metric formulas. You might be worried that you might not come across as fluent, or get something wrong. Does it matter? What can you do to mitigate this?

Key takeaways

  • It’s important
  • It’s not everything
  • It’s relatively easy to get to the level you need to impress
  • Having a quantitative plan makes your business stronger

Even if you have a ‘numbers person’, being able to talk about your business quantitatively is a real plus in most investors eyes. As a result, this is is probably most true in the case of the solo founder. The good news is that this isn’t as hard as you may think.

Why a bit of numeracy is important

Firstly, it’s important for you and for your business. Understanding the unit economics of your venture and having a quantitative plan, targets, metrics and KPIs makes a business stronger. No question.

Secondly, it’s important to investors. When they look at opportunities to invest there are lots of anxieties on their side of the table. They wonder whether entrepreneurs will spend money wisely, stick to ‘the deal’, be frugal, etc. By and large, when investors are able to have confidence that founders can keep track of the pennies, they’ll be more sure with investing their pounds.

This plays into the wider theme of classic and romantic quality. Whether it’s articulated or intuitive we’re all aware of these two categories of quality. Classic quality in founders is manifested by analysis, reducing wholes into parts and developing tactics and strategies tailored to that environment. Romantic quality  is often represented by understanding the whole rather than the components focusing on the feel and emotional resonance of the product. If you’re able to play both hands here, you’ll come across as a great founder.
 

What do you need to do

In a sentence: understand your unit economics and be able to document your business as a process flow. Tom wrote a great post on estimating your unit economics here but here’s a template to get you started.

Once you’ve completed this, you’ll want to beef this up a bit with direct labour costs, other costs which vary in line with orders and maybe more granular cost-of-goods-sold / commission figures to get your fully loaded Customer-Acquisition-Cost (CAC). Likewise as time moves on and the business grows customers will return and transact again. This will give you an understanding of the Customer-Lifetime-Value (LTV). Having a clear understanding of where your business stands today allows you to begin forecasting where it may be in the future.

To move to a forecasted ‘model’ of your business, I think that it’s helpful to think of your start up as a process flow. I’ve taken this diagram - describing a car sales process - from Google. Every stage of the sales process here has a cost associated with it and is a point of conversion. At the end of the process revenues are realised.

 

If you map out your own business into key stages, you have the structure for a financial model. You can, more or less, take the excel template above, adapt it to the process stages and then you’ll have a bottom up understanding of your conversion funnel, acquisition and order processing costs and revenues for each business line that you have. From that point, make some assumptions about where you expect your CAC, LTV, direct labour costs (time per order), etc. to be in 6 months, 1 year and so on. It’s ok to make assumptions - it’s expected. Provided that you’ve thought through why CAC will have decreased by 40% within 9 months, that’s usually good enough. Fill in the gaps with a rate of (presumably) improvement that you think is reasonable. That might be a straight-line, even level of improvement month-on-month or an accelerated/decelerating curve. Again, provided that you’ve thought through why and how you’re going to optimise your business, no one is going to ding you.

You’ll now have a monthly forecast which you need to subtract fixed costs (salaries, offices, other) in order to know what your cashflow/financing requirement will be over the period. And you’re done! This takes time and effort, of course, but having this level of understanding of your business isn’t beyond anyone and it definitely helps every stakeholder: the entrepreneur, employees and investors.

Just a couple of final notes. If you’re not familiar with excel, this might all be a bit daunting. It needn’t be. It’s just another one of those things where you’ve got to not be scared of the unknown, open a sheet and start typing in numbers. Putting a model together is often a very satisfying experience - particularly for qualitative minds. And finally, mental arithmetic. If you’re really worried about this, I’d suggest two things. Firstly, saying “I’m not good at doing maths in my head” isn’t a crime. Secondly, we love Peak - and it’s great for exercising those muscles.

 

Further Reading

Matthew Bradley

Investor @ Forward Partners

Matthew used to work on trading floors at Lloyds and BarCap before seeing the light. Following an MBA at SDA Bocconi and before joining us he became an entrepreneur and investor in his own right. He’s focused on sourcing and executing deals. His other interests and activities include investment strategy, writing and emoji.

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