What is investability? (and how it can save your startup)
What is investability? One simple idea that can make or break your growth and can set you on the path to sustainable growth.
Our Canadian Managing Director, Scott Spence, shares his insights into what gives a company an edge when seeking funding, and the factors that make the companies that we lend to stand out.
The startup world is famously dynamic and unpredictable, but there is always one constant: the need to raise money. No matter where they are in their growth cycle, CEO’s all tell me the same thing, they need more money to grow, and they would rather not give up equity unnecessarily to get it. Second or third-time founders are particularly aware of this, having faced the horrors of dilution before. They know how important it is to be both well-capitalised and preserve equity — because a time may come when they really need to sell it. The more seasoned founders also know the value of positioning the company as attractive to investors, and how raising capital becomes much, much easier when you have your proverbial house in order.
What can a startup do to make themselves more attractive to investors?
When it comes to fundraising, specifically debt financing, there are a few things that lenders like to see, and they’re often not what founders think. Startup mythology tells you that it’s all about elevator pitches, great slide decks, buzzwords, missions and visions in monochrome ring binders. Yeah, they are important and a snazzy .pptx will turn heads, but when your foot is already in the door and you’re under the glaring light of a due diligence microscope, it’s what’s under the hood that counts.
This is what separates the best and most “investable” companies from the rest.
I know my perspective is skewed — as lenders, we obviously don’t have the same risk profile as an angel or VC and we aren’t looking for the same things, but I know from talking to them that the following factors definitely add to the attractiveness of a business:
- The accounts, bookkeeping, and financial models are accurate and up to date
- The business is running an accurate and realistic cash flow forecast with clear assumptions
- They actively use all available funding sources like grants and R&D tax credits
- They focus on scaling, using equity and debt to finance depending on the growth stage and/or the project where the funding is required
- Financial modeling and cash flow projections are kept realistic, i.e. we know a hockey stick when we see one and would prefer it if you left Wayne Gretzky out of your spreadsheets.
Why do the “boring” bits matter?
It’s simple, they demonstrate competency, professionalism, and accountability. They show your potential investors that the business is setting up the right processes early. This allows the company to grow sustainably and leaves much less room for (nasty) surprises. It speaks strongly to the character of the founders and adds confidence in how they run the operation.
Early-stage companies, especially ones that haven’t grown further than the founders and a small team, are, by definition, a risky investment. Investors are betting on management delivering what they say they are going to do, often without much of a track record. How can you show that you can be trusted? By running a tight ship and putting scalable processes in place early. A big part of being able to deliver is having the right structure, backend infrastructure & great people in key positions. An idea, a business plan, a prototype, some initial revenue are all great, but is the team in a position to manage scaling quickly and efficiently?
What does an investor want to see?
For Fundsquire, transparency and accuracy top the list of attributes a great company needs to show. More broadly, if you’re looking to raise money, ask yourself the following questions:
- Are my accounts up to date, and books reconciled regularly?
- Can I quickly provide financial reports, including balance sheets, P&L, etc?
- Is my cash flow projection accurate, based on actuals & confirmed pipeline, and is it realistic going forward?
- Additionally, and importantly in 2019, am I on a cloud accounting platform like Xero or Quickbooks?
- The stage of your business and growth often dictates the above. You might be a founder doing basic financial modeling and bookkeeping yourself, have a part-time person helping out, a part-time CFO, or even a full-time CFO or analyst. You might even be blessed with a CPA as a cofounder… whatever it is, setting a solid foundation early and building on that is what matters. Don’t leave getting your financials in order on the back-burner for too long, or this decision might be the one to cost you your growth.
The stage of your business and growth often dictates the above. You might be a founder doing basic financial modeling and bookkeeping yourself, have a part-time person helping out, a part-time CFO, or even a full-time CFO or analyst. You might even be blessed with a CPA as a cofounder… whatever it is, setting a solid foundation early and building on that is what matters. Don’t leave getting your financials in order on the back-burner for too long, or this decision might be the one to cost you your growth.
Why is your cash flow forecast important?
There’s a bit of confusion amongst early-stage startups over what a cash flow forecast should look like. There are two main types that we see all the time. One was prepared in a pitch deck for an Angel or VC, the other one is based on cold hard reality.
The entrepreneur’s intuition is usually correct, VCs and Angel Investors want to see huge growth potential. They like the sound of exponential growth, and a 10–20x on their investment in the next two years sounds about right in a pitch deck.
Enter the hockey stick projection, a pitch deck classic, which looks something like this:
This might get equity investors excited, though most VCs are well versed in Powerpoint magic and will drill planet-size holes into your assumptions 20 seconds into your elevator pitch. As debt financiers, our experience doesn’t allow us to look at your sporting-implement-shaped graphs with any seriousness. Not that hockey-stick growth is impossible, we’re aware of that, but it’s about as probable as winning the IIHF World Championship.
Here’s something we’d much rather see, even if it doesn’t knock our socks off.
It’s true, there is no universal formula for a realistic cash flow forecast. But keep in mind that if you’re a young startup, it’s normal and expected for you to take some time to gear up for that explosive revenue growth. Thinking big is a good mindset to have, but your investors and lenders have probably seen thousands of cash flow projections and might be understandably a bit jaded at the sight of yet another break-neck growth curve.
One principle for a highly investable company
To be taken seriously by both investors and lenders, a company needs to show balance.
The key to a great cash flow forecast is: Have clarity and be realistic about your assumptions. If you’re convinced that your exponential growth is possible, I congratulate you but be prepared to explain and clearly defend your position. Show your current revenue growth, add case studies, firm orders or even correspondence with investors and clients to make it clear why you have that mysterious 2 million popping up in July. The more you know your numbers and can back them up, the more trustworthy and “investable” you’ll become in the eyes of the funding gatekeepers.
Showing ambition tempered with realism and deep knowledge of your business and numbers is key. A great story and a sexy pitch deck might get you a meeting, but being organised, disciplined and realistic will take you all the way there.
If you think you’ve struck this delicate balance between ambition and clarity and know your company is investable, we’re happy to explore the options and advise you on your next steps, be it an R&D tax credit loan or something else. At Fundsquire, our highly skilled team and wide-ranging international network allow us to assist companies in every growth stage in Canada, Australia, and the UK.
