Early stage startups & detailed (financial / KPI) models

The idea of an early stage startup drafting up a detailed financial (and / or other KPI) model and everyone expecting it to pan out that way is of course silly. There can be a lot of tensions between VCs and entrepreneurs if this is what you are doing it for – i.e. when the signaling is ‘please make the plan as steep and ambitious as possible, but hey we are also going to hold you up against this in 12 months’. To be fair, at later stages it does become increasingly important as the VC role switches more to an asset manager role and other kinds of valuation metrics etc become feasible.

We use a really broad approach to measuring if our companies are ‘on track’ – of course hard KPIs such as revenues, active users, cash burn etc are important. But we also look at product milestones, the team being able to make good hires, progress vs other players in the market, the ability to attract further capital, etc. Very rarely the picture is clear, most startups – even the very successful ones – have some things that are going very well but other things not so much. At the end it really boils down to our faith in the team being able to ‘pull it off’.



Having said that, if done the right way, coming up with a detailed KPI and financial model and discussing it prior to investment with your VC can have benefits. It all boils down to a healthy discussion around the resources you want to build up (i.e. how do you want to allocate your funding) and what you can likely achieve with this (users, product milestones, revenues) to put yourself in a spot to raise another round 6 months before the round you are raising flames out.

Here’s an example of how you could review your model with your VC and what kind of input you could expect. Every business is different and this example is based of a consumer web company with a freemium model:

User Growth

  • What paid channels have worked for other startups and at what cost (CPI, etc)

  • What free channels have worked and how

  • What are realistic viral coefficients for the mechanics we’re applying

  • What are reasonable activation, retention, DAU, MAU ratios in relation to registered users for our type of product

  • Etc

So ultimately you are cross-checking how your expected user growth vs resources committed to user growth stacks up against what else the VC has seen.


  • What are conversion benchmarks for various phases of the product

  • What are key conversion mechanics that have worked elsewhere

  • What kind of churn can we expect on various platforms (e.g. Mac Apps have huge churn as users need to re-subscribe every month vs iOS, Android or web where users don’t)

  • What are pricing benchmarks for these types of products, what packages / models have others offered

  • What are reasonable payment costs for our various channels
  • Etc

The point here is to cross-check if your free-user-to-revenue assumptions are in line with key benchmarks, assuming you apply the right mechanics.


  • How many developers have others needed for this kind of product (e.g. 1-2 for every platform + 2 backend, etc)

  • How many product people would be ideal (e.g. 1 product manager, 1 designer, 1 QA, etc)

  • What kind of growth / marketing set-up do we need (e.g. SEM / SEO manager, general marketing, etc)

  • How many other overheads would be typical (support, general admin, etc)

  • What have others outsourced, at what cost

  • Etc

There are many more. My point just being if you run through a detailed model like this and have an exchange on those topics it should be a meaningful exercise. It should help both sides to form a better picture as to e.g. who the company needs to hire and when, if the round size is adequate to build up resources to drive the desired growth, what the cash situation will look like if say revenues are a few months delayed, etc. Of course the model will most likely turn out to be entirely wrong, but that’s OK.

16 Comments on “Early stage startups & detailed (financial / KPI) models”

  1. CM says:

    Excellent article! Could you recommend any literature which focuses on valuation models especially for tech start-ups and quantifies the factors mentioned?

    • berlinvc says:

      Thank you. At early stages (say up to Series B, maybe Series C even) most traditional models such as multiples and DCF are not used / applicable – mainly due to the underlying fundamentals not being there and high uncertainty around the projections. Valuations are usually based of a combination of i) market benchmarks ii) VC return requirements iii) round size the company can raise (so supply & demand) and many other – its ends up being a little but more art than science. Let me think about a few good sources and I may write a post on it

    • CM – this may be what you’re after:


      20 questions. 2 mins. Free; and includes feedback.

  2. Andreas Cser says:

    Exactly right. This shd be read by many “VCs”, who are trying to apply private equity style due diligence and incentivisation/ penalisation structures to early stage deals… Instead of taking a holistic view…

  3. Hi, why do you write user don’t need to re-subscribe every month on iOS? Doesn’t Apple allow auto-renewal subscription only for publishing content in the Newsstand?

  4. Christian Stanke says:

    Thanks for sharing!

  5. Christian TW says:

    fundraising at the very early stage is often a triangulation of funds needed, valuation and dilution.

  6. Good article. You may like to see Invrep- platform made for startups and SMEs ti report to their investors. Covering many of the key aspects you’ve raised.

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