VCs can check a few different aspects of your business by reviewing your model.

First and foremost, they can assess your understanding of your business model (how you generate revenue). The logic in the math should demonstrate the drivers of value for the business. If the model reflects an understanding of these relationships, the VCs can often assume that is focusing on their right objectives.

Second, the model should illustrate the operating plan for the company. Headcounts and expenses should be clear. For example, after a quick look the VC should be able to find the number of sales people over time and office space expenses. As I mentioned in my post, Projections: Nothing To Stress About, one of the most important aspects of these models is that they can demonstrate your team’s ability to think through the operational requirements of managing this business. It should answer some of the ‘How’ questions, such as ‘how many sales people will it take to generate $1M of revenue?’

Third, the model should help VCs understand some of the quantitative relationships in the business. For example, they can evaluate the types of margins that the company generates and the viability of the marketing strategy (making sure that the cost of customer acquisition is aligned with the life-time value of each customer).

This is a very important part of the due diligence process. As a result, it is critical that the model is easy to navigate and sufficiently granular to demonstrate key relationships and assumptions.