Revenue management as startups grow from Seed stage to Series A
Nailing the steps from the moment your startup successfully raises its first VC round to when it’s ready to scale through a Series A, is often where it lives or dies. Literally.
According to techcrunch, there’s a near 60% chance that a startup won’t live long enough to make it to Series A even if they raise an institutional pre-seed or seed round. As the A round is usually considered a growth round, in order to raise one you generally should have understood and validated your product-market fit, and moved to the more mature go-to-market fit stage. That means you have a good understanding of your customer journey, a repeatable playbook that has buy-in across departments and metrics to support your further investability.
Aside from the obvious such as financial management, people and product-building efficiency, your main focus as a founder should be to create healthy and sustainable revenue growth. This is critical for any type of business, but especially for startups considering the high reliance on external capital in the current macroeconomic investment landscape.
Countless startups try to scale their business before getting the basics in place, and it’s really no surprise that it’s often cited as the most frequent reason for startup failure. As a result startups fall short of the growth goals the best Series A investors expect. In my current role as Chief Revenue Officer at Scaleup Finance we’re facing a lot of the same challenges that we must overcome in order to succeed and raise that (statistically) all-important A round, where the startup death risk decreases to just about 15%.
To do so successfully, I’ve outlined three of the most important revenue-related initiatives early stage companies must embrace in order to raise a healthy Series A.
RevOps
Revenue Operations, also popularly coined ‘RevOps’, is one of those startup job titles that came out of nowhere and filled up everyone’s LinkedIn feeds with new business jargon. However, unlike other previously popular titles coming out of Silicon Valley (*ahem*, growth-hacker), RevOps has genuine substance to it, and is unlikely to leave anytime soon.
"Data-backed revenue organisations see a critical advantage with regards to reaching go-to-market fit at speed" - Toni Hohlbein, CEO @ Growblocks.
Investing in RevOps at Seed stage will help you understand your marketing, sales and customer success metrics and how they impact each other. It will not only dramatically improve your understanding of how your revenue is being generated, but also assist you in identifying weak points in your funnels that could prevent you from reaching your business goals. Using RevOps correctly, you should be in a position to centre your entire revenue organisation on the data you receive which in turn gives you the ability to forecast and predict revenue to a high degree of accuracy.
At Scaleup, we use Growblocks as a solution to assist our internal RevOps staff with the data needed to make the best possible decisions for our long-term growth strategy.
Cross-Department Collaboration
As your startup grows and your seed round is secured, it’s important to make sure you put the right building blocks in place in order to scale sustainably. What often happens in a pre-seed/seed stage startup is that each department has a set of goals which are either wholly or partially independent from each other.
For example, as the startup was first established it may have been a goal to build and launch a specific product for a specific type of customer. The time between initiation period and securing your funding round could be anywhere between 18 months to 4 years, meaning the goal you originally set out to achieve may have drastically changed in that period of time. This could result in potentially fatal consequences if your startup's leadership does not identify possible warning signs in time to adjust the course of the ship, and instead continues to work towards the original goal.
Developing a shared strategy approach amongst the company’s leadership will help align goals based on input from all departments enabling you to adjust faster, and based on recent data. The revenue leader has a unique role to play in this space as their customer insights, results and sales forecasts directly impact other key members of the leadership team.
Using the data from the revenue department will enable other key stakeholders in the business to perform their job better; whether that’s product building, budgeting or resource planning. Combining the revenue data with those aspects of the business ensures to the highest degree possible that the business scales in a healthy way.
Revenue Health Management
We've covered the importance of understanding your funnels and using these as a mechanism to drive revenue, forecast sales results and deliver those to other stakeholders in the business. Next step is to gain an in-depth understanding of your customers. This helps you understand the health of your revenue, a critical requirement for a company trying to raise an A round.
You need to be able to see and clearly display how your revenue and customer base develops as the business grows and becomes more complex. Analysing how your existing revenue base reacts to initiatives such as new product launches will help you showcase investability to investors.
“The most important thing for me to look at in any new investment opportunity is the health of the startup’s revenue” - Magda Lukaszewicz, Principal @ Balderton Capital.
VCs are always searching for companies who have extreme growth potential, and showing an in-depth understanding of your revenue health metrics such as net retention rate (NRR), customer lifetime value (LTV) and customer attrition rate, will help convince them that you’re worth the investment. Topline growth metrics are just as important, but easier to understand and display. Getting ready to raise a Series A indicates that you’re ready to scale your business and that can only be done effectively if your existing revenue base is continuing to grow as you do.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
How should a startup business prepare its budget?
To prepare a budget for your startup, begin by listing all potential expenses you anticipate in starting and operating your business. Next, organise these expenses into categories. After that, estimate your monthly revenue and calculate the total costs required to start and run your business.
What are the key steps to creating an effective budget?
Step 1: Determine and track your income sources.
Step 2: Make a list of your cost. Include both fixed and variable costs.
Step 3: Set achievable financial goals.
Step 4: Develop a plan to meet those goals.
Step 5: Put everything together to build your budget.
Step 6: Regularly review and revise your forecast to ensure it remains effective.
What does capital budgeting entail for a startup?
Capital budgeting for a startup involves allocating a set amount of funds for specific purposes, such as purchasing new equipment or expanding business operations. This process is crucial as it supports making strategic investments that are expected to yield long-term benefits for the startup.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
How can a startup forecast its cash flow?
To forecast cash flow for a startup, follow these steps:
Step 1: Create a sales forecast by estimating the revenue your products or services will generate over the forecast period.
Step 2: Develop a profit and loss forecast to understand your expected expenses and income.
Step 3: Prepare your cash flow forecast, which involves calculating expected cash inflows and outflows. This can often be done for longer-term by using assumptions around payment terms to forecast a Balance Sheet, and using the movements in Balance Sheet and Net Profit/Loss to calculate the cashflow.
Step 4: Consider ways of improving cash flow by improving your invoicing methods, considering short-term borrowing, and negotiate better payment terms to manage cash flow effectively.
What is the most accurate method to forecast cash flow?
The most accurate method for forecasting cash flow in the short-term is the direct method, which utilises actual cash flow data. In contrast, the indirect method is better suited for longer term forecasting using projected balance sheet movements and income statements to estimate future cash flows.
How is cash flow calculated?
Cash flow is calculated by deducting cash outflows from cash inflows over a specific period. This calculation alongside forecasts of future cash flow helps determine if there is sufficient money available to sustain business.
How do you project cash flow over three years?
To project cash flow over a three-year period, undertake the following steps:
Step 1: Collect historical financial data.
Step 2: Identify all expected cash inflows, which could include revenue, investment, grant income, etc.
Step 3: Estimate all anticipated cash outflows including expenses, suppliers that need to be paid, investments into assets, debt repayments, etc.
Step 4: Calculate the net cash flow by subtracting outflows from inflows.
Step 5: Consider your cash reserves and explore financing options if needed.
Step 6: Regularly review and adjust your projections to ensure accuracy and relevance.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
When should a startup consider hiring a CFO?
A startup should think about hiring a Chief Financial Officer (CFO) when it begins to experience rapid growth, finds it challenging to manage finances, or needs to navigate complex investment scenarios. A seasoned financial professional can provide the necessary expertise to handle these challenges effectively.
What are the indicators that my business might need CFO support?
You might need to hire a CFO or consider outsourcing this role if you notice any of the following signs: a decrease in gross profit margins despite increasing revenue, uncontrolled business growth, lack of cash reserves despite having a financially successful year, or a halt in business growth.
Does my startup really need a full-time CFO?
Recruiting a full-time CFO is an expensive hire. Given budget constraints and the need to prove the viability of your business idea, founders will often need to prioritise investing into building and commercialising their product. That's where CFO services for startups are a cost-effective solution for founders looking to take their financial management to the next level.
