Navigating Financial Modeling, Startup Growth, and Venture Capital: Insights from Taylor Davidson

In December, our team had the privilege of sitting down with Taylor Davidson, founder and CEO of Foresight. Foresight is a product and service company that helps entrepreneurs and investors build operational and financial forecasts. 

In this in-depth conversation, we delve into the evolving landscape of financial modeling and venture capital over the past two decades. From the importance of deeply considering tracked metrics to the nuances of pitching to venture capitalists, Taylor shares valuable insights gained from his extensive experience building financial models. Discover key considerations for founders entering the VC raising process, insights into the evolving dynamics of venture capital, and recommendations for mastering financial discussions to optimize startup growth and fundraising success.

What inspired you to start building tools for financial modeling, and was there a pivotal moment that led you down this path?

Dedicating myself to learning spreadsheet models might sound weird to most, but it is truly my passion project. I initially worked in finance reporting during the dot-com bubble in 2000. Consulting on building models for startups followed. After realizing the repetitive nature of creating models from scratch, and thought to myself ‘Why do I have to redo everything from scratch every time? Why can't there be better tools to standardize this process?’ So, I started building tools for standardization. Over the last 15 years, the landscape has evolved, and my approach has shifted based on customer feedback and personal interest. It's been a slow evolution, starting as a side project to eventually becoming a full-time commitment.

How have you witnessed the discipline of financial modeling change over the 20 years you've been involved?

The landscape of financial modeling has transformed significantly. When I started, tools like Google Sheets didn't exist. But, I think the biggest change has been data, we have more data about the performance of companies than ever before. Today, the abundance of data has led to a demand for better tools and standards. Now, the emphasis is on integrating operational data into the forecasting process, broadening the scope beyond pure FP&A. Finance's role has evolved into a function integral to business decisions, moving away from a siloed model. There's a shift towards the continuous use of models, emphasizing real-time decision-making over the traditional manual approach.

Could you elaborate on the changes you've observed in financial modeling, especially concerning the integration of operational metrics?

With increased access to data, operational metrics play a crucial role in financial modeling. Startups now have a wealth of information at their disposal, allowing CFOs to collaborate with various functions like sales and marketing to optimize performance. Financial modeling has evolved beyond being a siloed function, becoming an integral part of overall business decisions. Finance is now focused on leveraging data across functions for strategic decision-making.

How do you approach the evolution of tracked metrics as a startup progresses from early stages to maturity?

The essence is using data and models to inform decisions as the critical decisions a startup faces change with its growth. The metrics that matter shift over time, and they vary for every company. Crafting data analysis to facilitate decision-making is crucial, considering factors like what metrics are vital for the business, how often to update data, and the strategic thinking behind metric calculation. The challenge lies not only in identifying the right metrics but in understanding their implications for the business. Metrics aren't one-size-fits-all; strategic thinking is required to calculate them in ways that provide meaningful insights. The process involves continuous refinement, adapting to the business's needs and decision-making cycles, which differ based on the nature of the enterprise.

Why is it important to deeply consider the metrics tracked and their calculation methods in business reporting?

Without careful consideration, tracking metrics becomes a checkbox exercise, diminishing the value obtained. This issue arises with templates, tools, or any generalized reporting approach for companies. While calculating numbers is essential, understanding and utilizing them is the crucial step. Simplifying standardized elements while making unique metrics more complex helps in decision-making. Templates suit standardized components like financial statements, but allowing room for individualized operational decisions ensures a more hands-on approach, adding value to the model.

Could you discuss the FAST standard’s relevance to setting standards for financial modeling?

FAST stands for flexible, appropriate, structured, and transparent. The FAST Standard, initiated by a group in the UK, outlines best practices for structuring financial models. It emphasizes creating a real structure, allowing customization in calculations while maintaining a standardized approach. Kenny Whitelaw-Jones wrote a handbook providing a technical yet accessible case study on building models. The focus is on developing a structured approach applicable across various clients and sharing these approaches to showcase effective model-building practices, whether using spreadsheets, web apps, or other methods.

With your extensive experience building financial models that facilitated raising millions in venture capital over the last two decades, I want to explore different aspects of the venture capital ecosystem. Specifically, what do you believe is the most commonly overlooked aspect by first-time founders entering the venture capital raising process?

I see a couple of dimensions to consider, primarily financial operations and the structure of venture financing. On the financial side, understanding the company's goals for each funding round is crucial. Differentiating the goals of raising money from friends and family, securing a seed round, or a subsequent round shapes not only strategic decisions but also influences the financial reporting structure. For instance, in the early stages, the focus is often on finding a viable business model or achieving product-market fit, but this goal evolves over time. 

One key aspect founders often miss is the significance of defining milestones and the timing needed to secure the next round of funding. While it's essential to understand how money will be spent, intricate revenue forecasts may not be as critical, especially given the uncertainties associated with an immature business and market understanding. Presentations to VCs sometimes reflect this misunderstanding, with founders overly emphasizing complex revenue forecasts that may not add meaningful value, particularly in the early stages. As companies mature and secure subsequent funding rounds, the goals evolve, highlighting the relationship between model complexity and strategic focus.

What aspects of the financial piece of a pitch you would prioritize when talking to a VC? Considering your goal is to make them want to learn more and potentially say yes to an investment, what key areas should one focus on during the financial discussion?

When pitching to VCs, the primary goal is to pique their interest and prompt them to delve deeper. The focus should be on addressing what the investor needs to know to make an informed decision. In initial conversations, it's not crucial to dive into detailed financials. Instead, emphasize key aspects such as the addressable market size, the viability of the base business model, and the company's operational plan for utilizing investor capital. The financial side should revolve around what the investor needs to grasp about the business's potential for success, rather than delving into intricate revenue forecasts.

When considering the differences in building a model for fundraising compared to its use in operational contexts, how do you approach this distinction?

Fundamentally, the model itself remains the same; it's more about how we present and utilize it. For early-stage conversations and presentations with VCs, emphasizing operational details might not be meaningful. Separating inputs, calculations, and presentation is crucial. Early on, the emphasis should be on storytelling—using the presentation layer to communicate the narrative, key decision points, and the story you want to tell. Summaries, metric dashboards, charts, and graphs become vital tools to convey the story effectively. This stands in contrast to a more detailed operational breakdown that becomes relevant in later stages and due diligence.

The challenge often lies in guiding stakeholders on how to understand and use the model. Startups sometimes present a model without clear guidance on its interpretation. This is where the separation between business planning and fundraising becomes apparent. While the capital structure is integral to operational aspects, simplifying the presentation for different audiences at different stages of the fundraising process is key. This applies not only to startups but also to venture funds when presenting to potential LPs. Initial conversations require a focus on strategy and thesis, with detailed models becoming more relevant during the due diligence process.

How do you perceive the evolving landscape of venture capital over the last two decades, and what are your thoughts on its future trajectory?

The landscape of venture capital has undeniably undergone cycles of change. Drawing on my experience since 2000, there's a noticeable shift in my understanding and knowledge about venture capital processes. However, despite improved understanding, elements such as opacity and exclusivity persist in the decision-making process. Looking forward, my hope is for more openness, diversity, and alternative funding paths. While there are emerging alternative funding methods, the industry's inherent slowness to change poses challenges. The structure of funds adds a natural delay to these sorts of shifts. Despite this, I hope for increased information transparency, enabling individuals to make informed decisions about venture capital suitability for their businesses and encouraging diverse funding strategies. The future remains uncertain, but fostering greater awareness and accessibility is a positive step forward.

Could you recommend any resources for understanding spreadsheet tools, finance and accounting knowledge, and business operations?

Absolutely. Learning financial modeling is indeed multifaceted. For understanding spreadsheet tools, I highly recommend Excel Jet (exceljet.net), a fantastic resource that provides insights into using Excel functions effectively. For broader financial modeling skills, Grid Lines offers a Financial Modeling Handbook, which is more advanced but still valuable. They also provide classes, including a free course on financial modeling. Unfortunately, the URL may have changed, so you might need to explore it a bit. Additionally, I've compiled a list of training and tools on my site, covering various aspects of financial modeling.