NextView
This post was originally written by InsightSquared, a NextView portfolio company. The original can be found here. This post explores some of the critical data that seed-stage startups should consider using as they seek future rounds of funding from VCs.
For early-stage startups founders and CEOs, funding is an omnipresent, top-of-mind issue. Some of the questions centered around this issue include:
- “How should we spend the money we currently have?”
- “Do we have enough money to do the things we need? To help us grow?”
- “How long can this money realistically last us?”
- “Where can I get more money?”
While all the questions are critical – after all, the number one job of a CEO is to make sure his company doesn’t run out of money – it’s that last one that we find most interesting, especially coming from such a venture capital-rich community like Boston. Startup CEOs are always out working on fundraising, meeting with VCs and other investors to convince them that their company is a hot property worth investing in.
Of course, convincing others to pour millions of dollars into your business and vision isn’t exactly child’s play. Just because you believe strongly in your company doesn’t mean that others – particularly those with deep pockets and sharp investment instincts – will. It’s on you, the CEO or founder, to prove that you deserve that next round of funding.
So, how can you definitively prove to VCs and investors that you should get a round of funding?
1. Demonstrate Proven and Consistent Success Using Historical Data
What’s more effective – telling potential investors about your up-and-to-the-right growth over the past year, while sprinkling in a couple of anecdotes about specific big deals? Or showing them that same growth, presented in a visual format and backed up by data?
That’s what we thought.
Many CEOs and startup founders automatically default to talking about bookings in trying to communicate the extent of their company’s sales success and growth. However, especially at early-stage startups, financial information doesn’t always match sales reports, for a variety of reasons. Which is why a Revenue Analytics report is more convincing for potential investors.
Revenue is generated only after all the work has been done, and the cash is in hand. Potential investors want to see a healthy Compound Annual Growth Rate (CAGR) – a high one suggests that they will see a healthy and speedy return on their investment. A revenue report like the one above – with generally consistent up-and-to-the-right growth in revenue month-over-month will boost any investor’s confidence in your company.
2. Ensure That Your Financial Situation Is Healthy
Nothing scares a potential investor more than sinking money into an endeavor that is going to quickly burn up that money. At the same time, investors also understand that early-stage startups will inevitably spend more money than they bring in – such startups aren’t expected to be profitable (yet). What investors want to see is a responsible spending of said cash, with decreases balanced out by the occasional influx via sales.
If a startup is purging cash at an irresponsible and unsustainable rate, they will be hard-pressed to convince investors to give them more cash to spend in this manner. On the other hand, a company with a cash-flow history similar to this example above will be much more trusted. This company spends evenly and responsibly each month, without any significant decreases. Additionally, they even have a few months – like January – where a lot of cash is coming in.
The fact that the company has seen its cash-flow decrease by almost $900,000 over the past year isn’t worrying at all – remember, very few early-stage startups are profitable. What investors want to see is a sustainable pattern of cash-spend, with opportunities for cash influxes through successful sales as well.
3. Prove That You Have Growth Potential for the Future
Investors want to be a part of a growing venture – jumping into a stagnant company that has already hit its peak is not worth their time, and certainly not their dollars. Some of the best evidence to show that your company has many more opportunities to target is to…showcase your opportunity growth!
Sales can’t sell unless the pipeline is consistently filled with viable opportunities. For early-stage startups, one of the most critical aspects is to grow this sales pipeline consistently. As the company gets bigger, as the brand gets more recognized, and as the marketing team fills out, there should be more opportunities.
The Pipeline History example above will set any investor’s heart aflutter. Each month – and certainly each quarter – sees the pipeline grow, compared to the previous time period. This company is clearly doing something right in terms of finding the right markets to sell to. This should gird the investor’s belief that they can continue growing this pipeline – and subsequently, sales – going forward, especially with additional resources in the form of funding.
Getting more funding is not easy. Convincing others of your vision and belief in your company’s success can be tough. Instead of fighting these battles with only your words and rhetoric, try using these 3 Finance and Sales reports. Let them do the talking for you, and you should start to see funding offers come in.
Gareth Goth is the content marketing manager at InsightSquared, where he writes frequently about sales and marketing management and analytics. You can follow him on Twitter here. InsightSquared also offers a free guide for executives on managing cash flow.