Fundraising
The assumptions, structure and checks that make a model credible in diligence, and the mistakes that undermine it.
CA Hritik Dang · 7 min read
After the pitch deck, the financial model is usually the first file an investor's analyst opens. They are not looking for a precise prediction of the future. They are checking whether the founders understand how the business makes money, and whether the plan for the new capital is internally consistent.
A model that answers those questions quickly shortens diligence. One that raises new questions on every tab slows it down, or ends it.
1. Assumptions they can trace
Revenue should be built from drivers, not typed in as a growth percentage. For a SaaS business that means new customers, average contract value, expansion and churn. For a product business, it means units, price, channel mix and returns.
Keep every assumption on one inputs sheet, label its unit and note its source: historical average, signed contract, market benchmark or management estimate. An analyst should be able to change one input and watch it flow through.
2. Three statements that link and balance
The profit and loss, balance sheet and cash-flow statement should be connected, not built separately. Working capital, capital expenditure, depreciation, debt and equity all move between them. If the balance sheet does not balance in every month, investors assume the cash forecast is wrong too.
3. A base case that respects your history
The first forecast months are compared with your last twelve months of actuals. A sudden jump in conversion rates or a fall in cost per customer, with no explanation, is the most common reason a model loses credibility. Start the forecast from cleaned-up, reconciled historical financials and make any step change explicit.
Alongside the base case, show a downside scenario. It signals that you have thought about what happens if sales take longer than planned.
4. Unit economics that tie to the plan
Customer acquisition cost, gross margin, payback period and lifetime value should be calculated from the same numbers as the main forecast, not quoted separately in the deck. If the deck says payback is nine months, the model should show how.
A model is credible when an outsider can change one assumption and understand everything that moves as a result.
5. Use of funds and runway
The amount you are raising should come from the model: the hiring plan, marketing spend and capital expenditure needed to reach the next milestone, plus a buffer. The cash-flow statement should then show how many months of runway the round buys, under both the base and downside cases.
6. A clean structure
Separate inputs, calculations and outputs. Avoid hard-coded numbers inside formulas, keep one consistent timeline across sheets, and add a checks sheet that flags imbalances or broken links. These details are what an analyst notices in the first ten minutes.
Common mistakes
- Revenue growth typed as a flat percentage with no drivers behind it.
- Hiring plans that don't match the salary line in the forecast.
- Ignoring payment terms, so cash and profit move together.
- Different numbers in the deck, the plan and the model.
- No downside case.
A short pre-diligence checklist
- Historical financials reconciled and closed for at least the last twelve months.
- All assumptions on one labelled inputs sheet, with sources.
- Balance sheet balances in every period; checks sheet shows no errors.
- Base and downside scenarios, with runway shown for each.
- Unit economics and use of funds calculated in the model and matching the deck.
This article is for general information only and is not professional advice. For questions, write to info@hdangandcompany.com.