There’s no doubt that being conversant with the basic financials of your business is critical to successfully raising money. After all, VCs are financial managers, responsible for delivering returns to their LPs (Limited Partners) and when you strip away the media glitz and glow of VC-dom you find people who need to manage by the numbers, just like an investment bank or other fiduciary party.
Paul Singh‘s article on Medium, The 4 Numbers You Need Handy if You Ever Want to Raise Money is a good start. Here’s his list with my comments:
- Revenue (or Monthly Recurring Revenue if you have that) – more important than absolute revenue is revenue growth. It’s growth that investors are looking for. Week to week is ideal, month to month is acceptable.
- Churn – this refers to “stickiness” or “turnover” of your customer base. This number is much easier to track in a subscription business. For an early stage company not selling by subscription I think it’s a tough number to deliver – you don’t have enough data. Look for industry comparable data.
- CAC (cost of customer acquisition) – this is the number I look at the most closely. The key to any business is the profitability of its customers. So a rough measure is gross margin: revenue – costs of goods sold (COGS). Early stage investor are less interested profitability than CAC. Beyond knowing your costs, be prepared to discuss how you will drive down CAC with scale and leverage, such as use of channel partners.
- LTV (lifetime value) – the lifetime value of a customer can be tough to determine in a non-subscription business, but that just means you will just have to work harder to find comparables in your industry you can use to ballpark this number
So what’s missing from this list? Burn rate! Cash is king in startups and you have to have a tight grip on your cash burn and projections of cash flow. For B2B companies you should know your sales cycle: how long does it take from the first sales call to cashing the check? You also need to have a good understanding of your sales funnel: what percent of leads convert to sales calls and what percent of sales calls convert to sales.
So that’s seven numbers you need to have at the tip of your tongue. Any more than seven is going to require resorting to notes, which is not unreasonable.
More important than knowing the numbers is fluency with the assumptions behind the numbers. See my post What’s the most important part of your financial projections? You are going to need those assumptions once you get to the trickiest part of dealing with VCs: how big can you get? Very generally speaking they are looking for hockey stick growth, which translates into building a $100 million company in about 5 years. If you can’t convince them of at least that you are probably not a VC-fundable company, as only about two out a thousand companies can meet that hurdle rate.
As in all meetings, with VCs in particular, follow the Boy Scouts motto “Be prepared.”
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