Ask a VC: how to model a P&L — Part 4/6: the J-Curve

Rodrigo SEPÚLVEDA SCHULZ
6 min readJan 20, 2024
Photo by Zyanya BMO on Unsplash

Note: the content of this post was taught in a 7-hour class at HEC Paris Business School in May 2024.

In the first 3 articles of this series, we looked at how to build a P&L: Revenue, Variable Costs, and Fixed Costs, and that took us to calculate the EBITDA, and with simple assumptions, to calculate the company’s Free Cash Flow.

This is more information than what a VC usually gets on a slide in a deck : 3 to 5 years of top line (Revenue), and corresponding operating profit (EBITDA). These are always very good numbers to communicate because they show the VC that you have done your homework, thought about your unit metrics, and show your ambition with the year 5 revenue.

The beauty of a financial model is that we just a little tweaking, you can extract so much more information from your model. You can now learn how much money your business will need to get to profitability, when that will happen, and what your financing strategy should be. Really? yes!

Let’s go back to our model. I am now going to treat it slightly differently, and add at the bottom of it, 6 new lines, taking NOW as the moment t0 of your model.

The sum of all cash IN per period: this is pretty easy, it’s the sum of all your revenues (top line). If you already have cash in the bank, add it too. If you are planning on getting any other cash in (grants from the government, investor capital that is already committed, loans from the banks, VAT paid back, backlog of revenue, etc.) just add them to the corresponding period. Of course, if your working capital requirement produces cash (you are getting paid this period before paying your suppliers next period), add it too.

Then, another line for SUM of all cash OUT per period: easy again, it’s the sum of all COGS, and all fixed costs (Sales & marketing, technology, HR, General & administration).

Now the trick is to add everything up, on 2 new lines from the moment t0 (now), meaning I want to know at any moment, how much money has come in since t0, and how much money has gone out since t0. Say, if you were asked those questions in month 13, just look at the numbers in column 13. Or if you consider cash as water in a tank, how much water have you consumed in showers, washing up, etc. since t0. Easy! Just add the current month's cash in/out, with last month’s total cash in /out, and drag the formula to the right.

Final row to add, you want to add (sum of all cash in)-(sum of all cash out), and that will give you the amount of cash produced or consumed in that period, cumulatively. Doing it just per month, without the cumulative formula will give you the “burn” per period (month).

Adding formulas to display cash in and cash out.

Of course, it’s hard to read, but you can find the lowest number in this formula, and it will show you the maximum amount of cash your business will consume; and when!

An easier to display the information is to graph it!

Getting to the J-Curve (in grey)

This J-curve here is not very steep or pronounced, as it depends both on the hypothesis of your model, and of the axis used. But you see that the lowest point is in month 48 (I could have seen that on the table as well), and that my total financing need for this business is close to 1,073m€.

The information is also in the model
Changing the axis to read the J-Curve more easily

The good news is that we have a bottom value (about 1.1m), and the curve goes back up, which means the business is starting to produce cash. If it doesn’t, then either your business model is flawed and you will never make money (but maybe a terminal value for an asset that you will be able to sell), or you need to adjust many of your hypotheses to make the model work: either require less cash for expenses or make more revenue. There is also a variation in which you can try to make your company profitable (cash flow positive) faster: here it is on month 48 which is a bit late; try to aim at month 36, and with uncertainty, you might get to this point between years 3 and 4.

Now, we discussed how much money to raise in a previous article. You could decide to raise 1.1m here to cover your cash needs for the next 4 years (48 months), and never raise again. More commonly, the cash need is much higher, say 5m, and if you were only willing to part with 20% of equity, that would imply a 5m/20%= 25m post-money valuation, hence a 25m-5m new money = 20 pre-money valuation. If you are a repeat entrepreneur, or very famous, or any combination of voodoo tricks, you might convince investors that you are worth 20m already without having done or proven anything. More likely, you will not be able to command this valuation. Therefore, you need to raise, less, say 2m, with a 10m post-money, ie 8m pre-money valuation at this stage. Let’s assume you want money for 18 months. My graph shows you that you will need 363K€ to finance these 18 months. It would be more prudent to ask for 400K€ at this stage, probably with a convertible note or SAFE note. Much easier to do.

Cash necessary at month 18

In 12 to 14 months, you will have built more of your team, and your product, gotten maybe some revenue, proven some assumptions about your costs (customer acquisition), and overall, will have reduced risk and shown execution capacity. This will facilitate talking to investors then, and get to a yes faster, and probably to a higher valuation, hence reducing your dilution had you raised your money all at once. You will need (if nothing has changed) to raise 1,1m (the original need)-0,4m (the pre-seed amount you raised) = 700K€ to finance the business for the next 30 months (48 months is the lowest cash point — 18 months money requirement). You could decide to only raise for the next 18 months again instead to reduce dilution, and again later for the remaining 12 months. This is called raising in tranches.

You can add these 6 lines as we have shown to any P&L that is sent to you for analysis, and almost immediately get a feel for the financing needs of any business (assuming no other CAPEX), and deduct a proper financing strategy. What if your assumptions are incorrect, or something happens not according to plan along the way? That will be the topic of part 6/6 when we discuss sensitivity analysis. Next time, we will look at the model and at a way to quickly check whether it makes sense or not.

I consult with corporates and startups and help them address issues like this and many more. Don’t hesitate to reach out at www.rodrigosepulveda.com or book a video call with me on intro.co.

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Rodrigo SEPÚLVEDA SCHULZ

Senior Technology Executive with global experience as an Investor, Board Member, 5x Founder, Consultant.