HQQA048 What are the key assumptions in your model?

What are the key assumptions in your model? – Your assumptions reflects your potential

Here’s what they mean…

If you didn’t see the previous question, model means financial model, or fundraising model. But now we are addressing the big question “What are the key assumptions in your model?”

They can be pretty large. A lot of investors aren’t super amazing at Excel (Really) so they might be loathe to delve into the trees of your Excel file. They might just want to get your key numbers, track growth, see if your metrics make sense.

Now, your model is a sales model, like all your material. You need to tell a VC scale story… but.

If you read nothing else, read this:

Under no circumstances tell investors your numbers are conservative!

This is super cliché. Everyone says it and it’s total bullshit. Investors will smirk when you say it. Just don’t even if your numbers are. The only exception is if you are getting on really well with the investor and they something like ‘your numbers are huge, how could you make them larger?’ Then you can say, well ‘TBH, we are trying to be realistic and conservative. We actually think we can do more but we’d rather give you something we can exceed as the next stage investors would love to see a chart of how we overperformed what we said we would do!‘

Another key think to learn is that ‘all models are wrong, but some are useful.‘ Your numbers will not be right, they can be really wrong though, so mitigate looking dumb.

In order to answer this question (“What are the key assumptions in your model?”), you need to know what the assumptions are in your model, surprise! Tell the key ones. Double shock!

You can tell a story with numbers, so do that. Maybe start with your goal, and then what key things you are going to do to hit that goal. How will spending money drive the top line? What will be your contribution margin after explaining the component of your COGS. How do you think the evolution of your CAC will play out depending on the channels you are going to leverage. What will be the impact of churn? etc.

You do not need to list every simple assumption. The investor asked you what the key numbers are! Remember your meeting is max one hour, so stay on track!

What you need to say

“Cool, our goal with this round is to get to $10m ARR. So, let’s focus on the key drivers on how we are going to get to that in 18 months from where we are at present.

We are a SaaS company. We generate revenue by the number of customers we have, how much we charge them per month and how long we keep them, meaning the churn rate and finally expansion revenue through up-sell.

Our profitability is determined by our COGS, to get to gross profit, we deduct our operating expenses. The key component of our OpEx are our staff.

Given the stage we are at, the top line and our COGS are our biggest focus. We want to move our contribution margin from 65% to 85%. Our new CTO is working on a new architecture which will use considerably less API calls. Now on the revenue side, to be more specific, we have three pricing packages. We are going to more heavily promote the share of middle packages which will bring our ARPA from $600 to $1000 over the next 4 months. Our churn rate is presently 4.5% monthly. We are going to bring this under 4% through a more aggressive customer success programme. As we are still sub scale, we assume our OpEx will range between 100-120% of revenue for the next 16 months.”