So you’ve taken the plunge, launched your startup, gained traction, and now you’re looking for external funding. You might not be a CFO or an MBA, but that won’t matter - investors will want to see financials, and you’ll have to do your best to deliver.
What kind of financials, specifically?
You can parcel out investor financials into 3 different stages, all of which will require a different set of metrics, and a different style of presentation:
● The Pitch
● Due Diligence
● Monthly/Quarterly Reports
Here we’ll focus on exactly what financial information you should include in your pitch.
The Purpose Of Your Pitch Deck
Your Pitch Deck has just one goal. It helps you prove that you’re worth the investor’s attention.
At this stage you’re not expecting to get funded immediately, but you are asking for something arguably even more expensive than cash - a potential investor’s time.
This should start to give you some idea of what to do and what you should avoid at all costs (a 200-slide presentation with in-depth financial analysis prepared is the wrong way to make a pitch deck).
Most great pitch decks answer a number of key questions:
● What’s the problem?
● How do we solve it?
● What does the market look like?
● Why now?
● Who are the people behind this project?
● What do we expect from financials?
● What we ask you to do next?
Your section on financials will take up only 1 or 2 slides, but it is crucial to get it right - it demonstrates that you’ve done your homework and understand the type of data investors look for when making decisions.
How To Talk Financials - When You Have Them and When You Don’t
The best thing you can do to convince investors is to demonstrate traction. In other words, do you have paying customers?
If you have traction, use it to create a foundation for your growth goals and projections. If you don’t, you’ll have to rely on some key assumptions when creating your financials (and be ready to communicate those assumptions to investors). In a pinch, you’ll have to rely on industry benchmarks.
Let’s use a SaaS model to illustrate what this looks like.
You’ll need to have data or make assumptions about the following metrics (we’ll use some sample metrics below):
● Average revenue per customer ($99)
● Monthly customer growth: (15%)
● Monthly churn rate: (10%)
● Average customer lifetime: (24 months)
Once you have the above metrics in place, you’ll be able to project and prove the financial viability of your business.
Using the above assumptions, we can see what a sample projection would look like:
How exactly do you arrive at this?
Luckily, you don’t have to have years in finance or accounting to draft these projections. There are plenty of free resources for easy-to-use, out-of-the-box financial modeling.
Keep things simple and straightforward in your deck - a graph or a chart will be your closest ally.
At the same time, be prepared to discuss your underlying assumptions or numbers in more depth, while thinking of your slide as a conversation starter.
The Ratio (Or, Just How Liquid Are You?)
While you probably won’t include this explicitly in your deck, you should come prepared to talk about another important metric pertaining to your business - liquidity.
Smart investors carry a set of frameworks in their back pockets (or more likely their heads) known as Liquidity Metrics, or Ratios. You can think of them as a set of formulas that help an investor answer the question “Are they going to run out of money?”
While you’ll find many variations on these ratios, let’s have a quick look at one of the most common, the Current Ratio. You can derive it using two metrics from your Balance Sheet:
Current Ratio = Current Assets / Current Liabilities
Current Assets = $10,000
Current Liabilities = $5,000
Current Ratio = $10,000 / $5,000
Current Ratio = 2.0
You will want to aim for 2.0 as the benchmark number for this ratio. Traditionally that's the minimum investors will seek. While a ratio between 1.0 and 2.0 stil indicates a good margin, anything below 1.0 signals that your business may have some issues with cash flow.
Additional Data In Pitching
Always remember the main function of numbers in your pitch - they're meant to prove the story you're telling about your market and your startup. In other words - data is evidence. It doesn't tell a story entirely on its own, and needs to be interpreted.
To that end, there's data other than your immediate business financials that you can consider when pitching.
This may include things like:
● Your total addressable market
● What the competition is doing
● Development or product costs
● Timelines to market
● Parallel or supporting technology
● Financial standing of your customers
Above all, make sure to shop your pitch and take in feedback. If you hear the same questions again and again, perhaps it's time to add a slide or an explanation to your deck.
Keep track of how people respond to your pitch, ask questions yourself, and keep iterating - if your startup has a great idea behind it, you will find the right support eventually.