For many people, talking about money can be weird. But, when you’re looking for funding, talking money becomes your every day.
When you’re standing in front of potential investors, you have to be able to explain every last cent of the cash you’re requesting. And while it might seem easy to slap some numbers and figures up on the screen, it’s going to take more than that. The investors in the room want a story, and it’s your job to tell them a good one. Just remember, at the heart of your story are the numbers; It’s always about the numbers.
When you’re presenting your pitch, potential investors are going to listen to every word and take into account every piece of information you give them. You’re going to want to paint a picture of your financial performance to date. Outline what your immediate and long term goals are, and explain how much money you’re earning and spending on a weekly, monthly, and quarterly basis.
As a young business, you’ll need help to tell this story. Working with an accounting solution will help you visualize the big picture of your business and discover the numbers investors want to hear.
This isn’t an overnight thing, but a process that will take time. Taking the time is crucial because the better prepared you are, the more investors will want to support you. Trust us on this one, we were once on the other side of that table.
Before the Pitch
Before you even approach an investor, it’s important to get a few items squared away. Even if potential investors love your pitch, they will want to get a closer look at your books before they make the investment. Here are some items that are absolutely necessary to have figured out before entering the boardroom:
- A method of bookkeeping
- A plan for taxes
- A payment plan for the team
- Historical financial records
If you don’t have all of these things adequately documented, getting funded will be tough. Investors want to see everything, not only because they want to assess their own valuation of the company, but also because they want to make future projections.
Make Sure You Follow GAAP
GAAP, or Generally Accepted Accounting Principles, is a set of accounting rules and practices that businesses in the U.S. must follow. Investors often make reference to GAAP as a way of ensuring an experienced, independent accountant (specifically from a third party) is overseeing the accounting of any businesses they invest in.
As a business, you can follow GAAP principles or go to the added step of becoming GAAP-compliant. GAAP-compliance involves internal audits performed by an accountant who is embedded in a company and knows its day-to-day workings, as well as an external audit by a certified CPA firm. While all businesses should follow GAAP principles, only publicly traded companies are required to go through the hoops to get GAAP-compliant.
Adhering to GAAP (generally accepted accounting principles) is important because it is the foundation of how accountants prepare for investors and bankers to look at the books and get an idea of what’s going on in the business.
Once you’ve done the prep work, landed on an ideal funding goal, and found an investor group that is capable of offering what you’re looking for, it’s time to build your pitch. You will need to outline the ideas fueling your business and highlight specific margins, so investors can evaluate if your business is worth their investment. Give investors as many answers to potential questions during your pitch and try to give them vision into your numbers and goals at least two years out.
After your pitch, there are going to be questions. If you don’t know something, don’t answer it. Instead, promise to send an email or a follow-up call if they’re especially interested in one particular point. It’s important to note that investors will probably ask about your valuation. More specifically, you will be asked how you came up with that number and who you potentially consulted with to land on that number.
Diving Into the Metrics
Every slide you have in a deck is going to be considered and cross-examined. Make sure you’ve got all calculations figured out, so there’s no funky math.
Some of the important metrics you’re going to need to know:
Customer Acquisition Cost (CAC)
Your customer acquisition cost (CAC) is every cost that goes into generating business, including marketing campaigns, team overhead, and time spent to convert new customers.
The CAC equation is simple:
Total amount spent to acquire new customers / # of leads you converted into customers = CAC
The CAC equation can answer important questions like: How many leads do you need to get x-amount of customers? and How will new capital help transform this number?
Lifetime Value (LTV)
How much is each customer worth? LTV helps you figure that out. More specifically, calculating LTV helps you predict how much money you can expect to generate from each customer over the course of doing business with them.
The most straightforward way to calculate your customer lifetime value is by subtracting the cost of acquiring and serving your customer from the revenue earned from that customer.
If you’re a SaaS (Software as a Service) company, however, this is the most common formula for calculating LTV:
(ARPA x Gross Margin Percentage) / Customer Churn Rate = LTV
Your average revenue per account (ARPA) tells you how much revenue you’re generating from each customer every month and your gross margin percentage reflects how much cash you have left over after subtracting the cost of goods sold. Your churn rate determines how many customers end their subscriptions. These metrics matter and will come up in discussions with potential investors.
To be extra prepared, do your homework and get an idea of future projections for your business. Here are some other items investors will ask about:
- Burn rate and cash runway
- Churn rate
- Annual recurring revenue (ARR)
- Total revenue
- R&D expenses
- Break even point
After the Pitch
Say the investors liked what they heard and they are interested in investing. Now, you have entered the “due diligence” period.
During due diligence, a lawyer will issue a checklist (or in some cases, a third-party will ask to audit your books). At this point, it’s up to you to make sure everything is squeaky clean. You’ll need to answer your investor’s questions and ensure your internal rate of return (IRR) meets their standards.
What to expect on the due diligence checklist:
- Lists of liabilities
- Current cap table
- Profit & Loss/Income Statement
- Insurance policies
- Accounting method (cash vs. accrual)
- Chart of accounts
- Balance sheet
- Federal, state, and local income tax returns
- Financial model (projections/forecasts)
Where Your Books Come into Play
If you’re looking for funding, you’re not just starting out, you’re looking to level up. This means you need to level-up your bookkeeping.
When VCs look at your books (which they will), they want to see point-by-point breakdowns of data. They’re going to find the stuff you might have pumped up to look good on paper and they might have their CFO go through everything as well.
How do you make sure everything crucial is properly documented in your books? Work with an accountant or accounting software. They will help make your reports detailed yet concise, and simple yet impressive.
Another reason to farm out your books? When the CEO is the CMO and the CFO all at the same time, it might raise a few red flags that you’re doing too much. Outsourcing shows investors that you understand your strengths and know how to prioritize.
Find the Right Accounting Solution to Help
You’ve reached this pinnacle because you’ve been smart and savvy. If you want to raise funding, don’t skimp on an accounting and bookkeeping solution that can’t give you what you need. Working with an accounting pro will make all of the difference during the prep, pitch, and due diligence phases.
Whatever questions you’ve got, just ask. ScaleFactor has a team that can handle anything and everything. From understanding small business loans to daily bookkeeping or making sure contractors get paid on time, we can help.