When it comes to raising money for your startup, you’ll need a lot more than just a compelling pitch deck and a great idea. (Although, admittedly, both will help.)
Investors also want to see that you’ve built a solid financial foundation and are savvy enough to truly understand how your business operates. After all, they’ll want to have full confidence in your ability to succeed and, therefore, make them money.
It doesn’t matter if you’re preparing for your first funding round or looking to attract additional investors for an existing venture. Getting your finances in order can make a real difference in securing the capital you need to take it to the next level.
With that in mind, here are five financial tips every founder should know before asking others to invest in their business. Hopefully, it will help you with your endeavours.
1. Get Your Financial House in Order
Before speaking with investors, it is important to take a close look at your financial records. Having well-organised accounts will show that you take your business seriously and, perhaps more importantly, understand where your money is coming from and where it’s going.
When deciding whether to entrust you with their money, investors often ask for a range of documents, such as:
- Profit and loss statements
- Balance sheets
- Cash flow statements
- Tax records
- Details of existing loans and liabilities
When doing this, these records must separate your personal finances from your business finances. If you don’t, mixed expenses can create confusion and, therefore, make it harder for investors to assess your company’s financial position.
While preparing for a funding pitch, some founders experience short-term cash flow challenges. If you need temporary financing to cover essential expenses, options such as bad credit loans from EBP Money may be worth considering. They provide affordable repayments that could well suit your financial needs and circumstances.
2. Build More Cash Runway Before You Start Fundraising
“Cash runway” is a term you might not be familiar with. But it refers to how long your business can continue operating before you get to a point where you need additional funding to survive.
If you’re almost out of money, investors may feel pressure to move quickly or worry about the business’s ability to survive if negotiations take longer than expected. That is why, wherever possible, you should begin your fundraising efforts while you still have several months of operating cash available. Doing this will give you more flexibility and allow you to speak with multiple investors instead of accepting the first offer that comes along.
If your runway is a bit on the short side, you may be able to extend it by:
- Reducing unnecessary expenses
- Delaying non-essential purchases
- Improving invoice collection
- Reviewing recurring subscriptions
- Renegotiating supplier agreements
Even making nominal savings across the board can buy you valuable time during a fundraising campaign.
3. Understand How Existing Debt Looks to Investors
Many founders assume that debt is an automatic negative. But that isn’t always the case.
In fact, a legitimate tactic for many businesses is to use finance to purchase equipment. Expand their operations. Or smooth out their seasonal cash flow. For this reason, investors will generally want to understand why the debt exists and whether it can be managed comfortably.
For this reason, before starting your fundraising efforts, make a point of reviewing every loan you have and then ask yourself:
- Why was this debt taken on?
- What are the repayment terms?
- Is the borrowing still serving its purpose?
- Could expensive debt be reduced before speaking with investors?
These could well be questions you are asked by investors. So, being able to answer them will demonstrate that you’re actively managing your business finances, rather than simply reacting to problems.
4. Know the Numbers Investors Will Ask About
One thing you can certainly reason for is that investors will want to know all about your numbers. You don’t necessarily need to memorise every financial report. However, you should be aware of the key figures that investors will most likely want to discuss with you.
These commonly include:
Revenue Growth: Shows whether your business is generating increasing sales over time.
Gross Margin: Indicates the amount of profit remaining after deducting direct production or service costs.
Customer Acquisition Cost (CAC): Measures how much it costs for your business to acquire each new customer.
Customer Lifetime Value (LTV): Estimates the revenue a typical customer will generate for your business over their entire relationship with your organisation.
Burn Rate: Shows how quickly your business spends cash each month.
Monthly Recurring Revenue (MRR): For subscription-based businesses, recurring revenue offers insight into the future income and levels of customer retention they can expect.
The more you understand these figures, the more you will be able to answer investor questions with confidence and explain how your business is performing to them.
5. Avoid the Financial Mistakes That Can Slow Down a Funding Round
Unfortunately, even the most promising businesses can lose investor interest if avoidable financial issues arise during the course of their due diligence.
Some of the most common mistakes that turn them away include:
- Waiting until cash reserves are almost exhausted before fundraising
- Producing unrealistic financial forecasts
- Mixing business and personal spending
- Not understanding your own financial reports
- Carrying unnecessary high-interest debt
- Asking for more capital than the business actually needs
- Failing to explain how investment funds will be spent
Before undertaking any fundraising efforts, it is worth taking the time to address these issues. If you are able to eradicate them, or at the very least minimise them, it will go a long way towards ensuring your fundraising pitch is received more favourably.
