Is your business gaining strength and ready for another infusion of cash to either support growth or further your research and development? Are you ready?
There are certain things early angel investors will forgive when investing in a startup. They don’t expect you to have fancy systems. They also don’t expect you to have perfect GAAP financials or detailed financial forecasts. They understand you may have a limited number of staff and cash to work with, so these things are often glazed over in the very beginning, as you are just beginning to prove your idea even works.
Regardless of who you are raising money from, you’ll need to be prepared when the time comes to have a successful experience. The following are the final three financials and practices you will need prior to fundraising. If you missed the first half of this series, you can read more here.
Key Performance Indicators
Many investors want to understand what your Key Performance Indicators (“KPIs”, or “metrics”) are for your business. Many industries have standard metrics which are measured the same way from company to company so that comparability is possible. If, for example, you are looking for funding in a software company, your investors may want to know what your Lifetime Value (LTV) or your CAC (Customer Acquisition Cost) is per customer, as most software companies measure this.
Know what your industries metrics are and have these best practice KPIs calculated and ready to share.
Another important figure to look at is Adjusted EBITDA. Adjusted EBITDA can be defined differently from company to company, and is generally defined in the pitch deck for your investor presentation. Typically, it is EBITDA adjusted for certain non-recurring costs. Companies use Adjusted EBITDA to represent what the potential ongoing cash flow should be for the business, after taking out these non-recurring costs. For example, you may have one-time startup costs that will not continue as you grow your business. If these costs are in your prior or current year financials, you may want to show Adjusted EBITDA on a chart rather than actual EBITDA, as this number may be more comparable over the years when looking at potential profitability. Therefore, keeping track of your non-recurring costs just prior to a fundraising effort is very important.
Whether you use an investment firm to help you in your fundraising efforts or not, you will need a pitch deck. A pitch deck is basically a power point or other presentation format in which you professionally guide the investor through your company and plans for the future.
The pitch deck should include the following:
- A Company overview – what do you do or sell, and how do you do it differently than others (i.e. what will be the draw to your company)?
- A financial forecast
- A marketing plan (what sales channels are you focusing on, what is the size of the market, what methods will you use?)
- A plan for the money being raised in the current funding round (i.e. 10% working capital current, 60% capital spend + 20% working capital = growth, 10% cushion)
- An overview of the management who will execute the plan
- KPIs and other graphs and charts that will help the reader pictorially understand your business, where it’s currently at, and where it’s forecasted to go
Get your “Docs” in a row
One thing that a lot of companies don’t realize, is how important it is to know where your important documents are before you start a due diligence process with a potential investor. Investors will generally ask for your entity legal formation documents including incorporation documents from the state, any previous investor agreements, bylaws and such that govern the entity and its current board or member structure, capitalization tables showing previous investments and the dollars and shares associated with each investment, and of course board minutes. Having these organized and ready to save into a virtual data room will come in handy when you get the long list of “asks” from your investor.
In summary, being prepared in advance can smooth out the process and help you entertain multiple potential investors at the same time, which in turn will provide you with more options from which to choose.