Build a “Pro” Pro Forma

If you want to effectively communicate your financial vision to investors, you're going to need a pro-forma model. But, where do you start? And what’s a reasonable expectation given the stage of your company?

To help you communicate your financials in a way that is defensible, digestible and compelling, we sat down with Natalie Volpe. Natalie is an advisor and fractional CFO to early stage climate tech startups on fundraising, non-dilutive capital strategy, market entry and growth.

Start with your unit economics

At the end of the day, your startup’s success boils down to the relationship between your revenue, cost of goods/materials, and operating expenses. These are the building blocks of all businesses, startup or otherwise.

Don’t overcomplicate your model. Investors first need to understand the basic levers/assumptions that will drive financial performance over the next 3-5 years. These include: how many units you sell, at what rate, and how quickly that rate grows. You want to raise $50 million? Your model will need to show investors how you are going to use that money to grow your revenue or reduce costs.

Like always, do investors’ work for them. Don’t hide behind complicated model-ese — be transparent, candid and concise. Ultimately, your focus on these fundamentals will make you look more sophisticated than if you build a complex model that’s difficult to navigate.

Are you top down or bottom up?

If you have clear line-of-sight on how your unit economics will work, build your model from the bottom up, focusing on how inputs convert to outputs in the near-term (capital in, conversion to revenue, growth and expansion). If you don’t have clear line-of-sight and you are super early in your business development, you will probably have to build from the top down instead. Work backwards based on an assumption of future capture of your TAM.

Include your go-to-market strategy

Who are you selling to? Selling to utilities, EPCs or power plants will have very different pricing structures, sales cycles, etc. What you present to investors in your pro-forma must clearly reflect that, in particular if you are selling to several different types of customers. The best models will have these types of assumptions clearly laid out in a separate sheet, which allows investors to play around with key inputs and see the results on top-line performance.

Focus on driving conversations, not predictive accuracy

Only one thing is certain — your predictions will be wrong. No model can predict the future, let alone any model you manage to build for your early stage startup. Your energy should instead focus on defining defensible assumptions about how inputs convert to outputs.

Don’t be paralyzed by trying to create the perfect model. Your model will inevitably change– even in the middle of a raise. The point is not to be right, but rather generate meaningful discussions. To do this, be thoughtful about the story your pro-forma tells about trajectory and vision. Then, demonstrate that you’ve done your homework in a straightforward, easy-to-follow model. Keep in mind that the ultimate goal of your pro-forma is to tell the story you want investors to see so that you don’t lose control of the narrative. This will save you time and effort during your raise.

Use the model to have discussions with your team as well

Beyond conversations with investors, your model can serve as a starting point for other strategic planning and budgeting. It can be an important guide towards your north star (e.g. “we said we’ll hit this in revenue, what do we need to get there?”). It can also drive important ongoing discussions. For example:

• What investments do we need to make to hit our revenue goals?
• Who do we need to hire to ensure we stay on track?
• How do our products need to change to hit targets over the next 3, 6, 9 months?

Back up the pro-forma with a solid pipeline

While your pro-forma is a key tool to communicate future performance to investors, you should also produce clear documentation of pipeline to support the model. What does the top of funnel look like? What is your sales cycle? Your close rate?

Investors will cross-reference your financial model with your customer pipeline to make sure they align. Remember that investors are always looking for ways to say no. Providing support materials that preempt their questions can keep them saying yes.

If you’re early stage, you won't have a lot of historical data and will need to rely on assumptions based on customer interviews. This is fine, but be transparent about how you built your pipeline and what data/information you used to get there.

Get your house in order from the start

One of the best things you can do for your sanity and future performance is to invest early in financial management. It’s cheap and easy to hire a bookkeeper. The longer you go without good records, the more expensive and painful it will be to correct in the future, especially if your business is asset-intensive or spread across multiple corporate entities. Good record keeping from the start will support better financial modeling over time and help employees and investors navigate the financial aspects of your business in the future.

Natalie is an advisor and fractional CFO to climate tech start ups where she supports companies on fundraising, capital strategy and growth. She has raised corporate equity and non-dilutive capital for companies across electric vehicles, carbon capture, alternative fuels, industrial decarbonization and geothermal. Prior to her advisory work, she invested in sustainable infrastructure projects at Generate Capital and SunEdison and advised companies within the utility, logistics, and oil and gas sector on corporate strategy and M&A. She has spent the majority of her career working in climate finance and investing and is incredibly excited to witness the momentum happening within the climate ecosystem!

Natalie has lived in the Bay Area for 10 years and when not working, enjoys swimming in the bay and cycling in Marin as often as she can.