How to make assumptions and determine the financial model for seed round at minimum viable product stage

7 min readFeb 19, 2019

Every founder at some point faces this situation during a networking event, startup fest, or that elevator wherein you stumble upon an investor narrating your million dollars worth elevator pitch. Then they ask you the very obvious question on the basis of which they will decide if you are an affordable investment or not:

How much money are you looking to raise?
What’s your valuation currently?
What are your projections like?

An answer like “I haven’t figured it out yet” or randomly throwing a number is not the type of answer that will make you comfortable when you lose that potential investment.

Especially, if it’s seed money that can kickstart your startup’s journey to launch your one chance to success — the minimum viable product.

It’s highly confusing at the start when you have absolutely no data about your customers, how much it will take for operations and what are those god damn formulas that the finance profs are writing on board in Coursera or EdX courses on financial modeling?

Being already busy and multi-tasking in an already dynamic environment at the initial stages of a startup, pulling off an MVP by bootstrapping is not easy. It’s natural to not be able to look at the nitty-gritty of financials in between all customer research and product strategizing. It’s rare for founders to have a core finance background when the hard truth is the fact that financing is the core of the business.

I have been in this position, and it’s embarrassing. So here, I have shown you how I calculated financials for my own startup — Merrative during its MVP stage.

The process to determine how much money you have got to raise is actually iterative. The values keep changing as your startup grows and you get better data on your customers and expense needs.

1. To gather data using secondary and primary market research

Don’t try to invent things here — simply dig as much as possible on your competitors or similar businesses' market size, revenue models followed, and their traction. That’s the easiest way to get data that you can use in your assumptions. App downloads, traffic data, and conversion rates of your competitors will give you an idea of the target market size. If you have your own survey data from primary research, then nothing better than having in-house data for the projections.

Questions like:

How much market share do they hold?
How many people are using their platform?
Check reviews of both customers and employees working for that competitor organization.
In what all geographies are they operational?

If you have answers for these, you’ll get a fair idea of where at a minimum level your startup can reach by positioning yourself accordingly.

2. To identify your major milestones and set up a timeline

In order to know for how long you need to carry out your projections, you must ask this question:

How long did it take for your competitors at each stage of their startup — from launching their MVP to acquiring the first 1000 customers to becoming the unicorn that it is today?
Till what stage do you want to reach and gather funds?

The answer to these 2 questions will give you an approximate idea about the time it will take you to reach the stage for which you wish to raise funds.

Once you are done determining the timeline, you need to first set up milestones for the execution of your startup MVP. Investors will first look into your project milestones and how much you will be needing on each milestone basis and then decide till what milestone they can fund you. It becomes easy for them to gauge how the startup will unfold with the money they will be putting in each step.

The milestones should be determined on a month-by-month basis. Every startup has 3 stages for launching their MVP for which you must answer the following questions:

MVP making: How much time will it take to make your MVP? Consider development time, testing, and bug fixes for a software product else all the stages of manufacturing for other products.

MVP launch: When do you plan to release your MVP to your audience — determine the course of action and the time it will take to do your launch activities

MVP till revenue generation stage: How much time should it take to start generating revenues when you launch your product to market?

Create an excel month by month wise. Keep hard yet achievable deadlines — do not loosen the dates so that even if you mess up you can have some buffer time.

3. To determine tasks to be carried out for each milestone

Once you determine the timeline to accomplish the 3 tasks in step 2, you need to start to determine the tasks you need to accomplish for each stage as per the time required, marketing, and operational activities to be carried out.

What do you need to do to develop your MVP? For example, if your MVP is a landing page or video or an actual product, determine what resources, human skill sets, and execution strategy will be required to do so. This also includes tasks to be done for maintaining the said MVP. How do you fit this in the time frame you decided above?

Once you develop your MVP, what activities will you perform in order to launch it? This is the place that actually takes maximum cost unless you have a clever guerrilla or organic marketing strategy. Channels like social media promotional campaigns, offline events, blogging, hiring content writers, approaching influencers can help you to reach your early adopters. The launch activities should be bang on and must be directed in such a way that it promotes word of mouth.

When you start getting users on your platform, how do you retain them? What will you be doing to ensure they keep using your platform? What are you going to do to get revenues out of them? What models are you going to follow in order to have your revenues?

4. Determine the costs involved to execute each of the above tasks

Once you are done listing out all the tasks to be performed in view of all HR, marketing, and operations perspective — you must add a column in your excel sheet to determine the costs that you have to bear in order to execute them. With whatever number you decide, add 30% (minimum) to it to have a buffer.

How much is it going to cost in total to develop your MVP? Think of ways to reduce the costs — do you have the budget?
How much will it cost to launch your product?

How much runway will you need for your MVP to survive before you start earning your revenues?

5. Revenue model calculations

Now that you have determined your expenses, it’s time to calculate your favorite part — revenues.

The first step obviously is to determine your sources of revenue and then answer the following:

What channels do you have knowledge of apart from ads? Research on various common and innovative revenue strategies people use.
Determine calculation formulas or steps to determine the projections for your chosen revenue model.
Carry out the projections using the conversion rate, market size, etc data that you gathered in step — 1. Project the calculations till the timeline you had decided in step — 2.

Be hard while determining your revenue projections. Don’t escalate those dollars by making an assumption that 100% of your target market will convert!

6. Iterate!

Now you must be having a clear picture of how much your activities are going to cost you and how much potential revenue you can generate. Answer the following questions:

Till what stage can you bootstrap?
From what stage will you be requiring money and how much?
How much revenue generation should occur to reach breakeven?
How can you cut costs?

When you start answering these questions, you start becoming creative and better and your execution strategy. Start devising ways to launch on a limited budget — get coupon codes, fire up your networks, etc. Try bringing those costs to a limit where you can perform side gigs to finance yourself.

Most importantly, you will start thinking harder on how you can generate more revenues at the minimum viable product stage itself.

7. Project Cashflows

The difference between your expenses and projected revenue at each stage is the amount of cash you will require at each stage. Add those values and that is the amount you need to raise in order to survive.

Perform breakeven calculations. Get the time required to achieve a break-even point. Done!

It’s important to determine how much you can bootstrap.

Take a cue from this brilliant post from an Instagram channel lessonstopin:

You have (finally) successfully determined the financials for your startup.

Yay! All the best :)

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