Model Behavior

The Butterfly Effect

In the early 1960s, meteorologist Edward Lorenz built a simple computer model to simulate weather patterns. The model was based on several equations but far simpler than the real atmosphere.

One day, Lorenz reran his model using rounded-off inputs (e.g., 0.506 instead of 0.506127). He expected similar results but the outputs diverged wildly.

This tiny change in starting conditions produced dramatically different outcomes. It predicted everything from sunny skies to violent storms.

This led to his famous insight:

Tiny variations in initial conditions can produce massive differences in outcome.

This concept is what later became known as the butterfly effect.

Named so as a butterfly flapping its wings (tiny initial condition) in Africa could cause a hurricane (massive outcome) in the Caribbean.

Lorenz’s research improved our ability to forecast complex systems, including the climate and global economies.

For those of us modeling comparatively simple businesses, the lessons are more practical.

Whether your modeling a business or the next hurricane season—the real value of modeling comes from understanding assumptions, sensitivities, and leverage points not an end number.

In other words:

Don’t trust your forecast, trust what it’s teaching you about the system—your business.

Models Aren’t Crystal Balls

Good financial models should force you to answer the question, “What conditions must exist for my forecast to be true?”

Assume a founder projects their business will grow revenue by 7x.

Current business reality:

• $12 per month SaaS product

• 1,000 monthly subscribers

• Current annual revenue $144,000

• Monthly churn is 5%

• Subscriber growth is 30% annually

At $12 per month, the company would need almost 7,000 monthly subscribers—7x what they have today—to earn $1.0 million annually.

To get there would require the following:

Scalable Acquisition Strategy

How will they obtain that many new subscribers?

• What are the current acquisition channels and can they scale?

• What are the customer acquisition costs (CAC) today? How does it expect to change?

• What are the potential marketing levers (ads, content, partnerships, etc.)?

• Will there be a new distribution channels or products?

Efficient Conversion Rates

Can they convert interest into paying customers at scale?

• What’s the current conversion rate from lead to subscriber?

• How will conversion rates change with broader or colder audiences?

• Are onboarding, pricing, and messaging optimized for different segments?

Stable Retention & Churn

Can they retain customers once acquired?

• What’s their monthly churn rate today?

• How does retention vary by acquisition source or customer type?

• Are there signals of product-market fit across their expanding audiences?

• Will the life-time value (LTV) be different across different segments or customer types?

Sufficient Operational & Technical Capacity

Can their infrastructure handle the 7x load?

• Do they have sufficient backend and support resources to scale?

• Will their customer service or onboarding team need to scale?

• Are there regulatory, compliance, or regional barriers if entering new markets?

Adequate Financial Support

Can they afford to grow this fast?

• Is there enough runway to fund the CAC needed for 7x growth?

• How does CAC compare to LTV under the new model?

• Will unit economics hold at scale, or are they dependent on subsidizing growth?

Answering these types of questions sharpens your understanding of:

• Leverage—What variables drive my business? Might they change in a new growth environment?

• Conflicts—Are your assumptions consistent or in conflict? (For example, not forecasting enough customer support resources at scale.)

• Constraints—What bottlenecks might appear as you scale?

You can’t predict exactly how much revenue you’ll do next year or how much your CAC will vary as you scale.

Your model will be wrong the moment you save the spreadsheet.

A good model helps you ask better questions, not give perfect answers.

Models Should Be Aligned To Business Goals

At the risk of stating the obvious, let me elaborate further.

A few years ago, when money was essentially “free” and interest rates hovered near zero, capital poured into venture funds and startup bank accounts.

Growth alone was the priority.

Fast forward to today: interest rates are higher, uncertainty has increased, and the new mandate is smart growth.

Profitability now matters as much as—if not more than—growth at all costs.

Modeling for a single objective is straightforward.

Modeling for two often conflicting objectives? That’s where I’ve seen both founders and investors struggle.

So what’s the solution?

Gain Clarity and Alignment on the Objective

Often, the important work of financial modeling is done outside the spreadsheet.

When balancing growth and profitability everyone should be aligned on:

• Priority: If forced to pick one, growth or profitability, which would you choose? The question helps you:

  • Consider long-term tradeoffs when other metrics might be unclear.

  • Reveals biases. Everyone might be saying “smart growth” is the objective but to what degree are they bought in?

• Timing: When is each most important? For example, is profitability the goal for the next twelve months, with the focus shifting to growth afterward?

• Metrics: Make sure everyone agrees on the most important metrics to track.

Model Multiple Scenarios

Instead of one model, create two or three:

• Growth Mode: Aggressive acquisition, higher CAC, longer payback

• Profitability Mode: Slower growth, lower CAC, shorter payback, focus on retention

• Balanced Path: Controlled growth, steady margin improvement

Multiple scenarios helps you:

• Compare tradeoffs

• Stress test assumptions

• Present options to the board and or potential investors

Use Unit Economics as the Bridge

While top-line growth and bottom-line profit may seem at odds, unit economics tie them together.

Sensitivity test:

• CAC (Customer Acquisition Cost)

• LTV (Lifetime Value)

• Gross Margin

• Payback Period

A company can grow unprofitably in the short term if unit economics suggest profitability at scale.

Time-Phase the Priorities

Break your model into phases, for example:

• Phase 1: Customer acquisition focus (high burn, fast growth)

• Phase 2: Optimization and monetization (improving LTV/CAC)

• Phase 3: Margin expansion (reaching profitability)

Show when and how the shift happens and what metrics signal the transition point.

Models Tell the Story, Not Just the Numbers

A good financial model isn’t just a forecast, but a storyboard for decision-making and communication.

It should help all stakeholders—you, your employees, investors, and the board—understand:

• What you’re prioritizing (growth vs profit) and to what degree

• How you’ll transition between them

• What early signals will validate your approach

• Where the forecast is most susceptible to being wrong

• Spot inconsistencies in your story

• Build investor confidence (even if they know it’s wrong)

• Avoid blind spots in your burn and runway

The Next Step

The biggest mistake I see with models is focusing on getting to the right answer instead of to the right understanding.

I have built hundreds of models in my career to analyze everything from complex mortgage-backed securities to startup pro-forma financial statements.

More than a spreadsheet, models are a thinking tool.

Whether you have a working model or want to build one, do the following:

1. Obtain alignment and clarity on your business goals before you open the spreadsheet.

2. Validate your assumptions by asking yourself, “What must be true for the forecasted state to exist?”

3. Discover the leverage, conflicts and constraints in your business model.

4. Build your model as a key communication piece for the story of your business.

5. Reassess as you receive new information about your business’ performance.

My goal with The Leap is to provide you each Saturday with the knowledge, tools and lessons learned to help you get started and keep going toward building your future. 

Whether you are making the leap to startups, solo-entrepreneurship, freelancing, side hustles or other creative ventures, the tools and strategies to succeed in each are similar.