Congratulations! The business that you’ve been working so hard to get off the ground finally received its first round of funding. You’ve successfully navigated the initial investor meetings, survived the due diligence process, and the money is actually in the bank. What we’re going to talk about today are the three questions that your investors want to know every time you get together with them.
Q: How Are You Spending Their Investment?
Present Regular Financial Statements
The first question they are asking is, “Listen, we just gave you $100,000; what are you doing with all that money?” That’s really an introduction to financial statements. So the financial statements are what you’re going to want to present to your investors on at least a monthly or quarterly basis, so they have an indication of how you’re spending the money that they have invested in your business.
The only way that you actually got the business or got this financing in the first place is because you presented them with a plan that seemed reasonable, that was believable, and one that they saw that they could get a return on that investment. So, what you want to be able to do now is show them how you’re spending that money against the plan that you presented with them in order to get that financing in the first place.
Be Prepared to Explain Disparity in Earning/Spending
Profit and loss, compared to a budget; you’ll want to be able to explain the differences between the two. Because quite frankly, I think we all know that plans are plans, and real life actually comes up, and sometimes can throw you a curveball.
If you said that you were going to generate $100,000 in revenue in any given month, but you only generated $50,000, that’s a pretty decent sized variance; you’ll want to explain why that happened. If your plan indicated that you were going to spend only $25,000 in marketing, yet you spent $50,000 in marketing, that’s 100% more than what you said. You’ll want to have some sort of indication as to why that actually happened. So, these are all things that will actually impact some of the other questions that your investors going to ask later on.
Q. How is the Business Performing?
Utilize KPIs: Key Performance Indicators
The second question your investors can ask is how the business is performing. This is an introduction to key performance indicators and other non-financial metrics that are going to affect the growth of your business. Typically, these are established at the time of the financing; so you have the basis for which to compare your actual performance.
For software companies, these KPIs would be lifetime value of a customer, customer acquisition cost, or monthly recurring revenue. For other types of businesses, it might be a number of customers or average order size or cost per lead; whatever the key metric is, it’s usually rather unique to your specific business.
Agree on a Metric to Measure Success
Being able to report what has actually happened, relative to the plan you established with your investors at the time of that financing, is going to be critical in how the business actually continues to grow.
Q. When Will You Run Out Of Funding?
The third question your investors are going to ask is: when are you going to run out of money? Depending on the type of investor that you’re working with, some of them will expect that you will need to raise additional money. Some might say that this is the only money that you’re ever going to receive, and that that gives you another indication of how closely that you need to track this cash.
Understand Your Cash Burn Rate
Understanding your burn rate is critical in being able to provide this answer to your investors. Burn rate is, quite simply, the amount of cash that you actually end up using each month. For example, if you plan on only burning $10,000 in any given month, that’s great. However, if one month you end up spending $20,000, you just actually lost one month of runway – that would indicate when you would be running out of money.
Clearly Communicate Your Financial Situation
Having this piece of information, and being able to communicate with that with your investors, is going to give you a much better line of communication. You will make sure that you are on the same team, and they will be able to not be surprised when you go and ask for more.
Giving your investors an update on when you’re actually going to run out cash will do you a lot of favors in the end, because the last thing that they like is to be surprised. Nobody wants to be given zero days’ notice that they need more money to make the payroll for next week.
It’s better to raise money when you don’t need it, so understanding your cash flow and cash burn and being able to manage that on a monthly basis is gonna be absolutely critical to your survival as a business.
About Jason Pulsifer
Jason Pulsifer is head of the Boston sales office for Consero, a business-finance consulting company. He has been working closely with entrepreneurs for more than 20 years. Often working as a “finance department of one,” he has been responsible for every aspect of a company’s financial process, from daily bookkeeping through presenting financials to the board of directors. His background includes experience in commercial lending, management consulting and technology startups. Prior to his current role, Jason was Founder of Starting11 (a successful financial automation company) which he sold to Consero in fall 2015.