A Model for Financial Modeling: How to Raise Capital as a Startup

Interview with Andy Woojin Kim, the CEO of Business Canvas

Q1. Can you tell us a little bit about your company?
Business Canvas is a company that develops software that solves problems faced by B2B companies. We are best known for our document collaboration tool 'Typed', but we also offer 're:catch' for sales modeling and the 'Typed Finance' B2B service to help startups with financial modeling.

The reason why we decided to add sales and financial modeling to our business is related to the current market situation: unlike just a few years ago, the ability of startups to generate cash flow from sales is becoming an increasingly important consideration for investors. As a result, it is becoming essential for companies to have a funding plan to achieve their revenue goals. Business Canvas is trying to solve the problems of B2B startups in both sales and finance with our customers.

Q2. Please explain how venture capitalists are different from Private Equity (PE) firms and securities firms in terms of investment.
PE invests in a 4-5 year cycle with the expectation of an EXIT (return of principal and profits), but venture capital invests over a longer period of time, at least 7 years and up to 10 years. Furthermore, startups have a high probability of default or bankruptcy, but venture capitalists are willing to invest in companies with great growth potential - even in the early stages - with these risks.

Q3. Do startups still need financial modeling? If so, why?
Financial modeling is the process of determining whether a founder can take on the responsibility of raising investment.

I think if you've received early-stage funding from a VC or an accelerator, you have to conceptualize the concept of shareholder return, which until the 90s was accepted as a corporate business goal, but I think it's become a little bit "uncool" in the startup world. In fact, I don't think there's any other business that's as investor-friendly as a startup. Startups are just like any other company in terms of business and profit, but they're a group of people who are trying to innovate by making hypotheses and testing them, so VCs will always be there to raise capital.

And with today's ESG trends, stock options that used to be given only to executives in startups are being extended to team members, making them shareholders. Financial modeling is essential to explain to shareholders, including employees, and provide a quantitative explanation for company value.

Q4. What should startups looking to raise capital consider when writing their IR materials?
The key to IR is to put yourself in the shoes of the investor. Even if your startup's vision is clear and your product or service is great, you need to be able to explain how much it will cost to fulfill that vision and how much value it will translate into. The value, or the worth of the company, will eventually be demonstrated by revenue.

For example, it is important to be able to forecast the cash flow from future revenue growth due to an increase in the number of active users (users who have accessed the app for a period of time) in advance. And it is important to be able to explain to investors the future enterprise value after forecasting future revenue growth in detail from a quantitative perspective. When conducting investor relations (IR), which is an activity in which a company provides information on its business, financial situation, and achievements for investors or stakeholders, financial modeling can be a good way to convince investors.

Q5. So, what should you keep in mind when doing financial modeling to show investors your company's future growth potential?
If you are a startup that is currently performing well in your target market, either domestically or internationally, I believe that the basis for your future revenue targets should be based on the revenue metrics you have achieved to date, i.e. historical data. In this regard, it is very important to have this data well organized from the very beginning and to always check and track numbers.

For example, if you explain that your company has been growing at 10% per month for the past 12 months, but after receiving investment, it will suddenly grow at 30% per month, it will be difficult for investors to be convinced. Startups need to be able to explain how we are currently operating and allocating funds to achieve our goals, and if we can explain numerically how we will improve corporate management in the future, such as staffing and allocation of funds according to sales targets, I think we can be competitive for investment.

The effort and mindset to accept and improve the results of the company's operation as a data-driven figure must be set from the beginning so that even when the company's expenses and sales increase, it is possible to systematically predict and respond to them.

Q6. Isn't financial modeling difficult for some companies?

It is true that there are some areas where financial modeling is a little easier, such as the SaaS sector, which has a simple cost structure or a subscription model based on recurring revenue. However, all fields, including bio and deep tech, where R&D is the main focus, also need to generate revenue at some point because business is the goal. Therefore, I think financial modeling is a must for startups, except in the very exceptional case that they aim for strategic mergers and acquisitions from the beginning and focus on technology advancement rather than cash flow generation.

Q7. It's a bit harder for startups to get funding these days compared to the last couple of years. Do you have any words of encouragement and advice for successful investments?
I think a lot of startups experience a lot of frustration when they fail to get funding, but even entrepreneurs who are considered successful now have stories of being turned away at the door, so I would encourage you to keep interacting with investors because in the end, it's just a matter of meeting a few people who understand your vision and will bet on it.

It's important to continue to build trust on a human level with your early investors as they are important partners in your startup's path to success. Most of our investors have known us online and offline for 5-6 years, so they didn't just decide to invest in us after one IR.

My final piece of advice as a CEO of a startup like yours, which has been through four rounds of funding and will be three years old in July, is that if you prepare a strategic IR that is more investor-focused and data-driven, the odds of getting the investment you need to fulfill your vision are a little bit better. I think investments happen when you meet the right people, so don't get discouraged and keep meeting with different investors. Good luck and thank you.