What investors want
CFO Partner, George Robinson, shares his thoughts on the reporting and analysis investors want to see from their portfolio ventures.
The summer days of zero-interest rates and topline growth at all costs are a thing of the past. As the cost of capital goes up, capital allocators are increasingly looking further down the financial statements for indications of a startup's efficiency. “Who will make the best use of my capital?” is one of the main questions driving investment decisions in 2024.
The good news for financially savvy founders is that this pivot gives an opportunity for early-stage ventures to stand out by delivering what investors want to see.
The Fundamentals
Starting with the basics: Investors want an honest appraisal of their investments performance vs forecast. They bought into a combination of a founder's vision and financial opportunity. If the business doesn’t have a firm handle on where they are, or worse, are being unrealistic in their assessments, that does not build trust.
The format of how you report is customisable to your business and investor. As a general rule, share an executive summary, key performance metrics for your business, revenue and cash analysis.
Executive Summary
Much like your weekly team standup, this should be snappy and to the point…
- Performance highlights: Focus on current period and add an outlook for the rest of the year
- Key business wins since the last update: Make sure these are aligned to previously communicated new dev sprints or commercial initiatives
- Risks and potential issues: Which ones are you managing that your VC will want to know about?
Metrics that matter
Clear, Concise, Relevant and Reasoned. Your key metrics give a snapshot of what matters.
This is individual to every business, but as a general theme, in 2023 VCs will want to see KPIs that give greater visibility over operational efficiency.
- What is the payback period on Sales & Marketing’s efforts?
- For a SaaS startup, what is your Net Revenue Retention?
- For an e-commerce business, what is your Average Order Value?
- What’s your Net Burn and how much new revenue is this spend generating (Burn multiple)?
Topline Growth
Market conditions might, but some things never change! For early-stage ventures, sales and revenue growth will always drive board conversations. A good business model with well-defined milestones is the starting point. Combined with key metrics and clearly presented actuals vs. forecast, this gives a clear picture of where your business is, relative to expectations (graphic 2). Graphs are a great way to lead conversations about revenue, so make sure to think about how you can visualise the data you are presenting in an impactful way.
Cash is king
72% of early-stage European ventures have less than 12 months runway (84% in the US). That makes cash runway, burn and future funding strategy pretty damn important! In a market where liquidity is tightening, more so than ever.
Understanding your current and future cash projections clearly gives you need to know information to make informed decisions - and your investors the reassurance they want to see. Make sure you base your cash projections on a timeframe that makes sense for your business. Taking this a step further, you should combine this with scenario planning to assess the impact of potential events on your business.
Three statement report
Backing up all of the above, sharing a well formatted P&L, balance sheet and cash flow statement will not only give your portfolio manager what they need - it gives an investor comfort your own the numbers. In a tight market, optics like this matter. Standing out among portfolio ventures by delivering insightful business reporting enables you to start conversations in a favourable light.
Scaleup Finance is here to help. Our platform relieves the burden of financial management and reporting for startups - so you can be the founder you want to be.
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.
