Financial models do not have to be complicated to be effective. What they do have to do is reflect the key drivers of the business at a level of detail that helps operators make business decisions. As companies get more mature, larger, and complex, the scope of decisions increase and the range of business decisions expand, making complex financial reporting and analysis more valuable. But for companies raising early-stage investment capital, complicated financial models may distract from the key decisions that operators need to make and make it harder to communicate to potential investors how operational decisions will drive financial results.
Which is why the frame of "vibes" v. Excel is interesting:
Discussing vibe vs excel rounds with @jordihays https://t.co/U27um8HxTf pic.twitter.com/zVX4Z6BIeV
— John Coogan (@johncoogan) October 4, 2024
As Jordi notes:
... does a company have product market fit or narrative market fit? And you actually get crazier multiple for narrative market fit. ... The real crazy multiples come when it's both.
An "Excel round" is shorthand for a fundraising round where the business's numbers - some mixture of top-line revenue growth, gross margins, unit economics, operating metrics - are used to justify product market fit, and the valuation is justified by those numbers.
A "vibe round" is something different, where the business's narrative - the story of the business, the vision for the future, the team, the market opportunity, the product, the go-to-market strategy, the competitive positioning, the traction - is used to justify the valuation.
lol
— Matt Turck (@mattturck) September 20, 2024
Or something like this where x = valuation pic.twitter.com/CamlH1XBDc
The combination of the two - vibes and Excel, narrative and numbers - is the goal. Financial models help to the degree that they help operators understand, communicate, and leverage resources (e.g. investors, employees, customers) to drive the business forward. Far too often I see complicated financial models that are not helpful to founders and investors achieve those goals, but it's not as simple as "complicated is bad", because some businesses, operators, industries, and stages of growth require and value the nuance that a complicated financial model can capture.
The key in those situations is to make the presentation of the numbers as clear as possible, focusing on the key numbers that demonstrate the business narrative. Or as I prefer to say it, party up front, business in the back. [1]
The flip side to "business in front, party in the back". ↩︎