Startup Financials
What's the point if a company has no revenue?
Happy Thursday, 👋
Earlier this month we participated in reviewing presentations for several start-ups as part of an accelerator program. Most of the companies were early stage and working toward an angel or seed round investment raise within the next six months.
Several teams decided against including financial data in their presentations and those which did had only limited metrics. Startup financials can be disheartening when there is no revenue and only expenses, but investors understand this is common in the start-up phase. The idea of outlining the financials along with forward estimates helps for several reasons we discuss below.
📈 Why Should We Forecast?
Why provide a financial forecast if there is no basis and the data presented is unlikely to be accurate? It is easy to agree with this line of thinking and skip the process, but as an investor we find forecasts provide much greater detail than just numbers.
The process provides insight into the team’s thought process and strategic planning. Building a basic forecast requires understanding all aspects of a business and how operations may scale over time.
It demonstrates the management team or founders have held internal discussions regarding planning and strategy to build an expectation of revenues and expenses for at least the next few months. Investors often ask about high level projections so including these in a presentation for companies of any size can help increase investor comfort with a management team.
Supports the start of building an internal culture of goal setting and strategy. Developing a financial forecast can become the foundation for setting strategic and financial goals for the company.
📝 What To Include?
Companies in the pre-revenue stage often ask how much financial detail should be provided as part of an investor presentation. Venture capital investors understand most financial forecasts for a new company are at best an educated guess, but the following level of information is often helpful for investors:
Detail of revenue earned to date, even if it’s just consulting or pilot revenue. Convincing a third party to pay money for a product or service is a meaningful step forward for any company so let investors know about these successes.
At least six months of actual expenses as this detail provides an idea of the monthly burn rate for the company. Venture investors often ask about burn rate, which is a financial metric all companies should have available. If there are significant start-up costs or volatility in the monthly number, provide a bit of detail in the presentation to help investors understand the fluctuations.
A minimum of twelve months of forecasted revenue and expenses on a monthly basis and then a few years of annual projections. The reason is most capital raises provide a company with at least twelve months of funding so the forecast lets investors know the management team has a roadmap for the new money.
At the inception of a company most teams are focused on building the initial product and having customer conversations. Often the idea of a capital raise involves a presentation detailing the company’s progress and concepts but tends to be less focused on the financial picture. Providing a few basic financial metrics can help increase investor confidence along with beginning the development of additional internal tools for managing the business as it grows.
What We Are Reading and Watching: UFO’s and Corporate Fraud
🛸 Over the past five years UFO’s have started visiting Idaho more than California. Maybe its due to record population growth in Idaho.
🧪 Finished watching The Dropout on Hulu which details the rise and fall of Theranos. Highly recommend it for any investor or founder on how to avoid a fraudulent situation. A few of the many lessons we noted:
If the majority of the board is comprised of political or industry celebrities, be careful as rarely do these people have enough time to stay active in the management of a company. Start-up boards should include at least a few members who are able to spend time with the company outside of the board meeting cadence.
Founders with no management experience can be a powerful catalyst for a company but the board should help with hiring experienced executives to begin crafting the structure around corporate strategy and reporting.
When multiple people raise concerns, listen to them. Especially those working inside the company. We have seen this multiple times in companies big and small.
As much as we want a technology or concept to work, sometimes it just is not ready.
Thank you to all our new readers as our newsletter family continues to grow. If you know someone who might be interested in our discussions, let them know about us as we always enjoy having more smart readers join us every few weeks.
Wishing everyone a great weekend.
- The Caymont Team.