After VCs have evaluated your financial model they may ask you to consider some additional scenarios. They may ask if there are scenarios whereby your company can extend its runway on a fixed amount of capital, increase revenues with more capital or operate with less capital under management.

Investors typically ask these questions for three reasons:

1. to understand the drivers of the business,
2. to identify investment structures that are a fit with their investment strategies, and
3. to ensure your company takes an investment that will be helpful to the business.

By understanding the drivers of the business, investors can help management teams ensure that they are operating the business to perform optimally. For example, if reducing the company’s burn doesn’t substantially impact its ability to generate revenue, there may be too much ‘fat’ in the company’s spend – an issue worth evaluating.

VCs also need to make investments that are consistent with their investment theses, while ensuring that the company has enough runway to achieve milestones and be positioned for its subsequent capital raise. Furthermore, VCs may ask you to evolve your capital requirements to align the investment opportunity with their investment strategy.

You should try to accommodate these types of financial model reviews as they

1. will help investors better understand your business,
2. position you to develop a productive working relationship with future board members, and
3. help ensure that you are deploying capital most effectively.

It’s worth noting that in order to engage in these types of scenario discussions you must ensure that your financial model is driven by variables that enable the creation of scenarios.