At the April forum meeting, the panel of experts provided valuable insights into the importance of financials in presenting a venture to investors. So, what should entrepreneurs be aware of when talking with investors?
What is Important? Projections are important to show progress on milestones. Startups estimate the business model; whereas, established businesses execute the business model. For the startup, assumptions become the core drivers of the business model – that is your story. Financials help focus entrepreneurs to think through their assumptions for the numbers to make sense. Do the math to figure out how many customers it will take to cover costs and earn a profit.
What is your red flag test? Market size, how big is it and how are you going to get there? Inconsistencies in market size and price can show errors in thinking. Capital requirements need to be thoroughly thought out and make sense. Gross margins and profit margins that are not realistic.
What do investors look for in financials? Never say, “Our financial numbers are conservative.” Investors want to know what is realistic. Revenue ramping must make sense in terms of timing. The founder is the best one to make these projections and not the CFO. Cash flow statements mean more to startups versus profit & loss because startups have not proven their business model yet. Financials are an outcome of a well thought out plan, not the other way around. Really understand your market.