Investors have only one thing on their mind when investing and that’s to make sure they make more money than what they started off with. In most cases, when they do invest in companies, it all starts with the financials of the company and the legacy it is built. I say legacy because similar to the legacy you build when you leave this world, the company that you’re raising money for will eventually go through a similar cycle if you’re looking for funds to grow, to expand, to exit. That means that the achievements and the skeletons will eventually come out, so it’s of the utmost importance to ensure that you’re sticking to the book as you build your business.
All too often, I sit with entrepreneurs and founders who have not only struggled to keep up with their financial position and achievements but have also neglected to update their forecasts to keep up with their goals. This process, while tedious, points to a meticulous paranoia of how to keep your company going not only in the short term but also in the medium and long term. Too often, I have seen that this lack of updates signals disinterest by investors who care so deeply about the company’s financial position that if they see a slip in the financial oversight process, they worry that the founder/CEO has spread himself too thin on the operations of the business and hasn’t given the financials the attention it needs. When they see a founder who knows what’s to be done in the immediate term to a precise level of detail, as well as know what their financial position will be in 2 years, they can have an engaging conversation.
Furthermore, the financials need to show the profitability of the business from multiple angles. I recently sat down with a CEO who runs an e-commerce apparel business. While he was able to show me his gross and net margins on his audited statements, he struggled to tell me how much each employee costs and generates, or how much he was spending to acquire each new customer and the likelihood of that customer purchasing a product from his store. The second and third derivatives of these numbers tell a multifaceted story that helps investors parse through the complexities of your business while ensuring the business’ financial sustenance.
The company’s future direction from a financial perspective needs to also tell a series of scenarios that convey to an investor the multiple directions it can potentially go. The first story that has to be solid is that if you raise the funds, where will those funds go, and what the payoff will be. Each nickel and dime need to be accounted for and if they’re not, that could mean that you’re squandering money when you’re not at the stage to do that. Your fiduciary responsibility towards their money should be paramount and if you’re careless with a few dollars here and there, that could backfire on the confidence they have in you as a CEO. The allocations also need to make sense which means that the rationale for each expense should be justified and logical. For example, if you need to hire an additional BD representative, you’ll need to clearly articulate why and why not to the fifty reasons that can be raised. Why don’t you use AI, or why can’t your current rep do that for example. The second scenario should show what the company would do if the financing was incomplete, which means a partial raise. That is a scenario that happens all too often and raises a lot of questions because sometimes a fund isn’t closed. Do you deploy with what you have or do you keep raising money or is there a condition that prevents you from closing a fund prior to raising a certain percentage of funds. In most cases, the story you’re trying to convey is that if you don’t raise the total amount and you can deploy the proceeds, how would those proportions change and what impact would you have from that scenario? Obviously, the complexities would be unearthed if the proportions would not be a straightforward equal proportion, such as an HR expense related to the salaries of you and your team. Those what-if scenarios are sensitive because if you’re not prepared for those questions, you can shoot yourself in the foot.
The final scenario is what if you don’t raise any money. The last answer you want to share is that you’ll close down the business and move on to something else. Any investor listening to that will clearly be scared to hear that you’ll jump ship at the first challenge. Your scenario needs to show that you’re willing to put up your own money not only your time. You’ll also need to show that you’re in it for the long haul because the financials make sense to you. You’ll have to show some path towards revenue and profitability if you’re not already there yet. In most cases, having that money should show them that adding more fuel would accelerate your arrival to that destination as you build more walls to prevent others from reaching there as well.
To summarize, as a founder, entrepreneur, or CEO, you should be the one owning the financials of your company and speaking in the language that constantly makes sense to investors and potential funders. Keep in mind that for larger companies, this role is filled with financial analysts, strategic communications managers, and investor relations associates, so it’s important to know that your role includes multiple new hats that you can’t afford to hire yet. Investors will continue to challenge and push new perspectives and new technological ideas, so it will also be your job to know your operations and proactively weigh the options of these alternatives, and justify why your decision makes the most sense. Financial justifications in most cases present the most logical decisions to investors, but in some cases, they aren’t the end all.
