There are no magic numbers

by | Sep 20, 2018 | Hustle and Fire

There is a pernicious and harmful belief in the startup world that financial models are worthless. A founder toils away, wasting time putting in a bunch of magic numbers into a spreadsheet, with the end goal of showing exponential growth over the next three years. Every financial model has a J-curve showing success, so what’s even the point.

This kind of thinking overlooks the simple fact that financial models are exactly designed to demonstrate how a startup will win. It’s a model for growth and success. So of course it shows exponential growth.

The value of a financial model isn’t in the outcomes, it’s in the inputs.

What are the assumptions the founders are making to reach that kind of growth? How many of those assumptions have they tested and validated already? What is their plan to test and validate the rest of the assumptions? Where are the greatest risks in their model? What kind of backup plans or alternative scenarios have they modeled, in case their assumptions are incorrect?

THESE are the questions that a financial model should be able to answer. The work put into identifying, describing, and measuring those risks is exactly why financial models are critical to the early stages of venture building.

Assumptions clearly outlined in a financial model aren’t magic numbers. They are a plan.

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