The first external fundraising that a company undertakes.
Friends, family, members of your professional network, business angels, possibly SEIS / EIS funds or seed funds, startup accelerators, crowdfunding platforms.
While most seed rounds are between £250k - £750k, it is possible to raise more depending on valuation, your willingness to dilute, the funding requirement of the company, industry in which the company operates and growth potential.
Ordinary equity, i.e. shares in your company.
Once you have prepared your investor materials, a significant portion of the raise is spent meeting with and pitching to potential investors to build up a pool of committed capital. During this process, investors will ask questions that form part of their due diligence. Once all of the funding is committed, the legal documentation is prepared and the round can be completed.
Depending on how long it takes to secure commitments, it can be very quick – as short as a month, but will usually take 3-4 months from start to finish, so it’s good to start the process comfortably in advance of when the cash is needed.
A pipeline analysis is a good way to demonstrate likelihood and certainty of future income and forecasts, and can therefore be helpful to include a summary of in the investor presentation. The pipeline should bring credibility to the near time financial forecasts presented in the model, and it may also help you to set what your future forecasts should be.
It can be seen as a more detailed and specific description of how and why the business will grow. It is most relevant to B2B businesses and harder to apply to B2C businesses. For the latter category, there are other ways to support the company’s forecasts, for example, a restaurant businesses would instead demonstrate the pipeline of potential new restaurant sites.
A customer pipeline analysis is a table that sets out the current and new customer assumptions that underpin the company’s forecasted turnover. It does not have to align exactly with forecast turnover, but can be used to illustrate to investors how achievable the forecasts are and to what extent they are underpinned by secured customers and ongoing discussions.
While each business will have a different pipeline, the common objective is to demonstrate realistic and backable assumptions and strong traction.
This is most relevant to B2B businesses. If you are a B2C business with a significant number of users / customers, we recommend including user growth and price per user assumptions within the forecast financial model.
The extent of variability between businesses means that it is not practical to start from a template – so instead we’ll walk you through how to create one from scratch, to align with your business.
Step 1 – Segment and Describe
In Excel, create a list of all of your current customers and potential customers with whom you are in discussions. In the adjacent column, write a few words describing what the business does or the sector they operate in – investors will be interested to know who your customers are.
Segment customers into categories that represent how progressed they are. We recommend between 2 and 5 stages, for example:
Or:
Sort the list by category so that the most advanced customers are at the top of the list.
Step 2 – Apply Probability Weighting
Allocate a probability of success / conversion to each category, to reflect the reality that not all discussions will result in a sale, for example:
Step 3 – Input Turnover Assumptions
The pipeline should ideally cover a period of two years – the first being the current fiscal year and the second being a forecast year. If you have good visibility beyond that, then you can extend it.
Create a column for “Actual or Expected Start Date”
Then, for each customer:
Step 4 – Aggregate
Create a “Total” column at the end of year one and year two, that sums up the monthly Turnover to give total Turnover for that fiscal year by customer.
Create an adjacent column entitled “Proportion of Total Turnover” and calculate the percentage contribution of each customer to the years’ total Turnover. This is an important metric for investors as it illustrates any customer concentration.
Venture capital investments may be defined in a number of ways, but when we use the term “venture” we are referring to what is usually a company’s first or subsequent institutional investment, i.e. funding sourced from a professional fund. A venture round may follow a seed round, undertaken with individuals or dedicated seed-stage funds.
Venture capital is usually associated with high growth, often technology oriented companies.
One or a group of venture capital funds, EIS funds, VCT funds or other early stage funds.
Typically between £1m and £10m but there are no hard rules and this will depend on the specifics and attractiveness of the investment opportunity.
Equity that may be ordinary equity or preferred equity, i.e. shares with preferential legal and commercial rights attached. Venture investors ordinarily hold minority stakes and rarely take controlling stakes in a business.
Initial preparation of investor materials is important to ensure the investment opportunity is adequately represented. Initial meetings will be held with institutional funds and investors where they will assess the opportunity. If these discussions progress, then you will normally be issued a term sheet setting out the terms on which the investor is willing to invest. If multiple investors are taking part in the round, then usually a lead investor is secured first who then leads the negotiation on behalf of the other investors.
Once a term sheet is agreed, due diligence will commence and the legal documentation will be negotiated and agreed.
Provided that due diligence is satisfactory, the transaction will then complete.
From preparation of investor materials to completion, the process can take as little as a few months but six months is more typical. The greatest variation occurs in the stages before a term sheet is issued and agreed, when initial conversations with potential investors are being held.
These terms primarily relate to the stage and profile of the business raising investment.
Venture capital is usually deployed into highly scalable, high growth and high risk companies. Many venture capital backed companies are technology oriented to enable this rapid growth to occur, but some occupy other sectors.
The traditional venture capital investment strategy involves making highly selective investments into a number of high growth companies. The associated higher risk entails a higher failure rate, and thus each portfolio company must be expected to contribute a sufficiently high return to compensate and enable the fund to generate a return.
Growth capital is usually deployed into growing companies that are not necessarily as high growth or high risk as venture capital backed companies. As a result, growth capital is often invested into non-tech sectors, such as professional services. The lower growth profile entails lower risk, and thus a higher number of portfolio companies are expected to deliver a return. Return expectations for growth capital investors tend to be lower than those of venture capital investors.
There are a number of grey areas too. Companies may be suitable for both venture and growth capital, and the route taken may depend on the risk appetite of the board – does the team want to pursue a higher risk, high growth strategy, or a lower risk, lower growth strategy?
Companies that initially raise venture capital, for example in a Series A, may go on to mature and become suitable for growth capital, as their growth curve flattens. Companies that initially raise growth capital may experience a significant uptick in growth and subsequently seek a subsequent investment with venture-oriented investors to their shareholder structure.
While the majority of funds typically describe themselves as “venture” or “growth”, there are also some that play in the space between. The VCTs (Venture Capital Trusts) are often seen as somewhere in between – some take a more venture-leaning approach while others are more growth oriented.
Investors in a seed round will not be expecting an all-singing, all-dancing financial model; however, they will expect to see basic figures to help them to understand:
Regardless of what your investors may or may not expect, as a founder it’s useful to have an idea of how the business is expected to grow and how much funding it requires to do so.
Our basic seed round template is quick and easy to complete and tailor. Alternatively, it can be used as a guide as to what investors will expect to see and thus what may need to be added or amended in your existing model.
Input your company name and the current fiscal year end – these inputs will change the column headings throughout the model.
The P&L starts with Turnover and allows for 3 different categories, each with their own Gross Profit so that you can model different margins, if desired. Add or remove categories as necessary to suit your business. You may also wish to add sections above Turnover that include the key components of Turnover, again, tailored to your business; for example, price and volume, number of users and income per user.
Forecast Turnover utilises a year on year growth rate assumption, i.e. how much Turnover grows from January one year to the January of the following year, thus taking into account any seasonality. For an annual growth rate of 30%, input 30% in every month of the relevant year. For most small businesses, growth rate steadily declines, so it may start at 150% in January and fall to 50% in December of a particular year.
The model provides for five categories of overhead costs. Add or remove rows here as appropriate and label according to your business.
Input the relevant tax rate – this may be zero if the company is loss making.
There is nothing to add here as it is automatically generated from other inputs, unless you want to model additional balance sheet items.
To keep the model simple and easy to apply to different businesses, it excludes: intangible assets such as goodwill, prepaid expenses, accrued revenue, deferred revenue or accrued expenses. If you wish to model these, add these as extra lines in the Balance Sheet and Cash Flow.
Note that the Balance Sheet won’t balance until all of the inputs throughout the model have been populated. Once this has been done, if there is a consistent error in the balance, for example, 100 every month, then the starting shareholders equity balance must be amended by that amount in the Balance Sheet Schedules tab.
The cash flow statement is generated automatically from other inputs so there is nothing to add on this tab, with the exception of the closing cash balance at the start of the period. The data for the cash flow graph is included in this tab.
The model allows for up to two lines of debt, which could be overdrafts, term loans and/or shareholder loans. If you have more than two, copy and paste one of the schedules and add a line into the Balance Sheet and Cash Flow. Rename each line of debt accordingly, input the applicable interest rates, current balances and any anticipated drawdowns or repayments.
Input the current tangible assets balance and any forecast capital expenditure – these are the expenses that you capitalise as opposed to expense in the P&L, for example, purchase of assets. The model calculates Capital Expenditure as a percentage of Turnover to provide a sense check.
The model assumes a depreciation policy of 20% of capital expenditure per annum, or 1.7% per month – this can be amended as appropriate and is intended to be an approximation, as it is applied to the monthly opening fixed asset balance.
Input the trade debtor balance for each month of the current year, i.e. the balance at the end of each month representing income that has been invoiced but not yet received in cash. The model uses the current year data to calculate average debtor days, i.e. the number of days it takes for customers to pay, which may inform the assumption that you use for debtor days in the forecast years.
Complete the inventory / stock and trade creditor schedules in the same way.
Input the starting shareholders equity balance and any anticipated equity investment or dividends.
Here are a few house-keeping checks:
A balancing balance sheet
Make sure your balance sheet balances, i.e. that total assets equal total liabilities plus shareholders equity. If it doesn’t balance, the model will show you what the delta is each month. If this delta is consistent every month, there is likely an error in the starting shareholders equity balance. If the delta increases each month, then it is likely that one of the items included in the balance sheet does not have a corresponding entry in the cash flow or vice versa (which may occur if you have added extra line items).
Cash headroom
A review of the cash graph will give you a sense for whether the model approximates your anticipated cash flow and for how much funding you need to raise.
Turnover and margin trends
Check that the trends in turnover and margins look sensible, realistic and there are no unusual movements. There is an annual summary to the right of each statement to provide the macro view. Ensure that the figures fairly reflect what you intend to achieve as a business and can be relied upon by investors.
Growth capital is raised by established, growing companies that utilise it to accelerate their growth. These companies issue new equity to private investment funds, which may be alongside or instead of other forms of financing such as bank loans.
Unlike the traditional venture model, in which multiple rounds of financing are raised, growth capital may be the first external equity injection into a business, and may also be the last, depending on the cash needs of the business.
It is also common for existing shareholders to realise a return on their own investment to date and sell a portion of their shares to the new investor, depending on how established the business is. This is sometimes referred to as “cash out”.
It is usual, but not always the case, that the new investor holds a minority equity stake, in contrast to the more traditional private equity model in which the investor holds a majority stake and controls the business. As a result, the investment represents the formation of a partnership between the old and new shareholders, and the management team.
Institutional investment funds are the primary source of growth capital for businesses. These funds may be structured in a variety of ways, for example:
Co-investment is less common for growth-stage businesses, as the entire round can usually be sourced from a single fund; however, occasionally funds do invest alongside one another. It is relatively rare for more than two funds to participate.
Typically, between £1m and £20m depending on the specifics of the business and opportunity.
In its simplest form, growth capital is structured as equity, i.e. new shares, in the company. The equity will ordinarily be structured as a new class of share to allow for the fact that investors often require certain “special” rights that other shareholders do not.
In practise, growth capital investments can be structured across a spectrum of instruments that vary in their level of commercial risk and return:
Each investment can be structured as one or a combination of the above, to provide the right balance of risk and return to the new shareholders and existing shareholders.
Initial preparation of investor materials is important to ensure the investment opportunity is adequately represented. Initial meetings will be held with institutional funds and investors where they will assess the opportunity. If these discussions progress, then you will normally be issued a term sheet setting out the terms on which the investor is willing to invest.
Around this time, the investor will prepare and present a paper to their internal investment committee. There may be one or multiple sittings of investment committee throughout the transaction.
Once a term sheet is agreed, due diligence will commence and the legal documentation will be negotiated and agreed. Provided that due diligence is satisfactory and agreement has been reached on the legal documentation, the transaction will then complete.
This can vary considerably based on how long it takes for the business to prepare investor materials, how initial discussions with investors go and whether any issues arise during due diligence. Assuming no significant roadblocks in the above, a process typically takes 6 months from start to finish.
A financial model is an essential tool in undertaking a fundraise – it helps a business to understand how much capital to raise and when to do the raise. It portrays the business plan to prospective investors, enabling them to sense check forecast performance against recent historic trading, assess the riskiness of the investment thesis, calculate the cash burn rate, assess and sensitise key driving assumptions and model their expected returns.
We have built a simple Excel template that covers the basic figures that investors expect to see across all business types. This resource provides step by step instructions on completing the template for your business below (as well as prompts inside the model). Alternatively it can be used as a guide to amend and improve your existing model.
We recommend adding a tab that displays the key KPIs for the business – this cannot be templated as it varies for each and every business. These KPIs may also be linked to the turnover and cost assumptions in the model, if applicable.
These KPIs may include standard financial metrics, such as Turnover Growth and Gross Margin (included within the model), and key drivers of growth and return, such as number of users, price per user, volume, number of sites / locations, cost of customer acquisition, customer payback, return on investment etc.
The model includes two years of historic P&L data from Turnover to EBITDA. It does not require historic balance sheet and cash flow data as this is rarely held by early stage companies and is not always required by investors (although the cells have been left populated with “n/a” in case you want to include this). Instead, the closing balance sheet for the most recent fiscal year end is used as a starting point for the cash flow forecast. Historic P&L data is of particular interest to investors for the purposes of assessing the pace of growth to date and sense checking the forecasts. The balance sheet and cash flow data are of greater relevance to the future funding needs of the business. Investors may wish to diligence the historic cash flow of the business later in the process – at this time, the historic cash flow data can be added to this model, or a standalone model may be built to specifically address their question.
The first step is to complete and tailor the template for your business, or use this as a guide to review and amend your own financial model.
Input the company name and the current fiscal year end – these inputs will change the column headings throughout the model.
Input historic P&L turnover and costs for the past two years (if applicable) to demonstrate recent trading history.
The P&L allows for 3 different categories of Turnover, each with their own Gross Profit so that you can model different margins, if desired. Add or remove categories as necessary to suit your business.
Forecast Turnover utilises a year on year growth rate assumption, i.e. how much Turnover grows from January one year to the January of the following year, thus taking into account any seasonality. For an annual growth rate of 30%, input 30% in every month of the relevant year.
Forecast Cost of Sales are based on a percentage of turnover.
The model provides for five categories of overhead costs. Add or remove rows here as appropriate and label accordingly. If you would like to include more detail, we recommend adding an additional “Overheads” tab that includes assumptions such as growth rates, to calculate forecast costs. It may also be helpful to provide a breakdown of salaries by employee.
Input the relevant tax rate – this may be zero if the company is loss making.
The key line items here are driven by separate schedules on the “Balance Sheet Schedules” tab and therefore do not require editing.
Lines are also included for Prepayments, Other Debtors, Accrued Revenue, Deferred Revenue, Other Creditors and Accrued Expenses. These line items may not be applicable to the business and will depend on your working capital cycle and the nature of certain payments, such as rent. To keep the model simple, these can be removed or left blank. If removed, make sure to remove the corresponding line items on the “Cash Flow” tab.
Below the balance sheet is a “Difference in Balance” row that should show “0” in every month, i.e. Total Assets should always equal Total Liabilities and Equity such that the balance sheet balances. Note that this row may show a delta until all inputs throughout the model have been populated. Once this has been done, if there is a consistent error in the balance, for example, 100 every month, then the starting shareholders equity balance must be amended by that amount in the Balance Sheet Schedules tab.
The cash flow statement is generated automatically from other inputs so there is nothing to add on this tab, with the exception of the closing cash balance for the most recent fiscal year. The data for the cash flow graph is included in this tab.
The model allows for up to four lines of debt, which could be overdrafts, term loans, shareholder loans or venture debt. Rename each line of debt accordingly, input the applicable interest rates, current balances and any anticipated drawdowns or repayments.
If you have more than four lines of debt, copy and paste one of the schedules and add the corresponding lines to the Balance Sheet and Cash Flow.
Input the current tangible assets balance and any forecast capital expenditure – these are the expenses that you capitalise as opposed to expense in the P&L, for example, purchase of assets. The model calculates Capital Expenditure as a percentage of Turnover to provide a sense check.
The model assumes a depreciation policy of 20% of capital expenditure per annum, or 1.7% per month – this can be amended as appropriate. This rate is applied to the monthly opening fixed asset balance and thus is an approximation and assumes ongoing capital investment. To model this accurately, create an additional tab called “Fixed Asset Register” and create a schedule for each individual asset. The depreciation row should take the opening balance of the asset so that the value decreases to zero by year 5 (assuming a 20% annual rate of depreciation). Note that this level of detail is not likely to be required by investors because depreciation does not impact cash flow, EBITDA or equity returns.
A goodwill schedule is included for businesses that have undertaken acquisitions in the past. If this is not the case the schedule can be left blank or deleted (if deleted, remember to remove the corresponding amortisation and acquisition lines in the P&L, Balance Sheet and Cash Flow).
Input the trade debtor balance for each month of the current year, i.e. the balance at the end of each month representing income that has been invoiced but not yet received in cash. The model uses the current year data to calculate average debtor days, i.e. the number of days it takes for customers to pay, which may inform the assumption that you use for debtor days in the forecast years.
Complete the inventory / stock and trade creditor schedules in the same way.
Input the closing shareholders equity balance for the most recent fiscal year end, and any forecast equity investment or dividends. It is common to exclude the current fundraise from the model until negotiations with investors are more advanced and the specific commercial terms can be modelled.
Here are a few house-keeping checks:
A balancing balance sheet
If the balance sheet doesn’t balance, the model will show you what the delta is each month. If this delta is consistent every month, there is likely an error in the starting shareholders equity balance. If the delta increases each month, then it is likely that one of the items included in the balance sheet does not have a corresponding entry in the cash flow or vice versa (which may occur if you have added extra line items).
Cash headroom
A review of the cash graph will give you a sense for whether the model approximates your anticipated cash flow and an idea of how much funding you require.
Turnover and margin trends
Check that the trends in turnover and margins look sensible, realistic and there are no unusual movements. There is an annual summary to the right of each statement to provide the macro view. Ensure that the figures fairly reflect what you intend to achieve as a business and can be relied upon by investors.
