3 Critical Financial Factors New Founders Mustn’t Overlook
From CFO to Marketing Director, Customer Service to Delivery Driver, working at an early-stage startup provides experiences like no other.
As entrepreneurs and founders, we wear many (if not all) hats. As such, while we should be specialists in our respective fields (a field from which our initial entrepreneurial idea originated), we will often have to step in to cover various roles until we can afford to fill such positions.
Particularly when it comes to the financial side of a business, founders can quickly find themselves getting into the weeds.
Therefore, having founded several startups throughout my career (and being invested in numerous others), here are three critical (but often overlooked) takeaways when it comes to managing the financial side of your business.
1) Mitigate Risk — identify your weaknesses but focus on your strengths
Prior to working in the startup world, I didn’t have much of an appreciation for risk management. For instance, while I knew risk management was an important element of business, I didn’t possess the necessary depth of understanding, nor the tools to actively apply its concepts.
At one of my startups (i.e. an online D2C membership platform), I quickly recognized how our biggest strategic risk (i.e. competitive/technology risk) posed a significant threat to our business since our prevailing product platform contained no proprietary technology and subsequent defensibility. As such, our product could have been replicated by competitors if they chose to pursue our business model.
However, once we understood this risk, not only did we look to improve our technology, but we realized (more than ever) the importance of serving and delighting customers better than anyone else, and delivering a best-in-class customer experience.
As a result, even without any proprietary technology or IP, we managed to widen our economic moat on the basis of brand recognition and value, thus capturing additional market share and defending against competitors.
2) Forecasting & Planning — is it necessary?
As startup founders, forecasting and planning (F&P) is something we often place on the back burner. For instance, as a small startup, our heads are often down, with a sole focus on growth, growth, growth; and very much living day-today.
However, I learned this lesson the hard way, once running out of cash due to improper timing of cash flows. As a result, I now have a new-found appreciation for the importance of F&P.
For instance, at a startup, forecasting multiple years out holds little value due to decreased accuracy and the difficulty to predict the future — we don’t know what next quarter will look like, let alone next year. Nevertheless, forecasting and planning on a weekly & monthly basis is HIGHLY beneficial as it ensures we don’t run out of cash to maintain day-to-day operations.
Moreover, by running weekly cash flow forecasts, we can determine whether we’ll have enough cash in the bank to cover weekly expenses, and whether we need to utilize our corporate credit facility (i.e. credit card) to cover near-term liabilities.
Lastly, if we are forced to use our credit card, we can forecast how long it will take to collect enough cash from our accounts receivable to pay it down, thus forecasting our added interest expense and working this into our cash flow projections.
3) Debt vs. Equity — diversify your capital structure
When bootstrapping a startup, the thought of raising capital will undoubtedly cross our minds. However, we often don’t realize what the fundraising process entails, other than what we see as glamorized on TV shows like Shark Tank and Dragon’s Den.
As founders, it’s critical we become confident in our abilities to pitch prospective investors, but more importantly, to hone our ability when defending our best interests in maintaining a controlling equity stake in the business.
For example, before raising equity at my D2C startup, I spent many hours researching possible non-dilutive options, such as grants and debt funding, which ultimately allowed us to delay equity financing.
Moreover, if/when we decide to issue equity, it is critical to ensure we maintain a well-diversified and balanced capital structure, with a mix of financial instruments as outlined in the chart below:
By bootstrapping and opting for non-dilutive funding early-on, this not only helps us to maintain a larger ownership percentage in our business but makes our company even more attractive to investors if/when we decide to pursue equity financing down the road — investors love being the first (or only) cheque in.
For more details on whether VC is the right funding option for your business, check out our recent article.
By having a better grasp of these key financial concepts, we can significantly strengthen our circle of competence when it comes to efficiently and successfully managing our business.
About the Author
Matthew is the founder of Allied Venture Partners, a new AngelList syndicate dedicated to the growth and diversity of Western Canada’s technology ecosystem. To learn more please visit Allied.VC
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