As discussed in the recent article about establishing a holistic investor reporting philosophy, it's crucial for a seed-stage company to do so as soon as possible. But once the business has actually acquired backers and secured its first round of financing, that reporting framework will see its first real-world tests. And as any experienced businessperson knows, plans have a peculiar habit of changing considerably once they are put to use.
If your first seed funding round was successful, there's no time to rest on your laurels - you have a company to build. So how can you hit the ground running?
Know what investors want
According to data compiled by TechCrunch's CrunchBase service, the average size of a seed round in the first half of 2016 was around $1.14 million, while the median amount rose to $625,000. While the data points to a trend of steadily growing seed round values, the startup funding environment continues to shift to a focus on leaner firms and faster returns. As CrunchBase put it, "seed is increasingly looking like the new Series A." In other words, today's investors tend to prefer a quick injection of cash followed by measurable growth. That puts the burden of proof on startup executives to demonstrate financial success quickly and accurately.
Assuming your company's investors fall into this trend, great financial reports become imperative to success. That means your funders should always have a complete picture of three key metrics:
Where their money is going.
How your business is performing.
When your cash will run out.
The details behind these three ingredients will likely vary for any given company, but the best way to demonstrate them to financiers tends to remain constant: show, don't tell.
1. Where is the money going?
If you are fresh off a successful first seed round, chances are your company isn't exactly looking like one just yet. As startup investor Philipp Moehring wrote in a Medium post, some of the most legendary (or infamous) startups of old were able to secure initial funding with little more than an idea. But the ecosystem has changed in just the last 10 years, and today's new firms must be able to prove they can deliver on their goals from day one.
The key to spending seed money wisely and within shareholder expectations is to generate easy-to-understand financial reports at every step of the way. Investors deserve a clear picture of how their money is being used from the moment the check is cashed, which requires some or all of the following:
Standard reports - Income statement, balance sheet and statement of cash flow.
Budget breakdown - Comparison of income and expenses with previous expectations.
Variances between current period and prior period.
Product line margins - Showing revenue and cost of goods sold for each product.
Seed-stage companies can grow to new heights if they can deliver on their initial strategy.
2. How is the business performing?
With staff hired and offices leased, investors will next want to see how your business is doing compared to industry averages.
If your business adheres to a standard retail model, investors want to see more sales, growing revenue and less debt.
Companies focused on software or app development need to focus on growing their active user base while reducing the cost of acquiring those users.
Software-as-a-service providers need to show an array of these data, with other important metrics like recurring revenue churn, new users per channel and lifetime value.
3. When will the money run out?
If this all seems incredibly complex already, take another deep breath. As explained in a guide to startup fundraising from Y Combinator, seed-stage firms have to quickly adapt to a cyclical view of growth. With an initial cash infusion secured, it's not long before the company must start working on another funding round. And since "seed is the new Series A," a young company may find itself seemingly stuck in a loop - pitching the idea, building the product, reporting success and doing it all over again.
Seed-stage companies that can effectively monitor their cash flow through these cycles will gain enormous advantages both internally and externally. With an easy way to quickly understand how cash is being spent, the CFO or core finance team can determine the runway that's remaining. Using this information, executives can then make more reliable projections for investors, who should take these proactive measures as a promising sign.
Providing investors, as well as internal staff, with answers to all three of these questions takes serious financial legwork. Consero's finance solution for seed-stage companies provides the framework that makes this task not only possible, but effective. Consero provides the people and processes necessary for gathering relevant financial data and crunching the numbers. Then it puts executives in the driver's seat, with easy-to-understand visuals and timely metrics. All of this combined allows fast-growing companies to make better business decisions and keep their investors informed (and impressed).
To learn more about how businesses create and execute a winning growth strategy, get in touch with Consero.
By Bill Klein