The cliched founder story goes something like this: 24-year-old comes up with a remarkable idea, risk hungry investor funds him over beers, and in 24 months, everyone’s a billionaire. The reality is so far from that, and most people working in and around venture capital, angel investing, and technology realize that there is an insane amount of work, grit, and hardship that happens to get from 0 to success. What’s often overlooked though in the early stages is laying the foundations for success through financial and operational planning and discipline.
Florida Funders had the pleasure of sitting down with Kris Smeage and Will Sprague of Adventum. Adventum offers outsourced management of financial operations to small and mid-sized companies, from fulfilling the traditional responsibilities of a CFO, strategy consulting, and basic accounting and bookkeeping. We’ve seen many companies meet their potential by utilizing Adventum’s cost-effective team of financial experts, becoming more focused operationally and appealing to investors in the process.
In the webinar, Kris and Will gave us some key insights into what investors are looking for in a young company, with a focus on the financials. Watch the webinar below, or read on, to learn more about what needs to happen at the early stages of a company to build the financial and operational processes that will set you up for funding and long-term success.
101: Finance and Operational Roles (2:50)
Some of the Key financial roles you need to understand are:
- CPAs: these are the accountants most people are familiar with. Generally, they’re focused on helping a company prepare their taxes or undergo audits. Many CFOs and financial professionals have either a Tax or Audit Background, but you need more than a CPA to help set your company up for financial success.
- Basic Accountants and Bookkeepers: these are the accounting managers and other lower-level team members that power accounting systems on a daily basis.
- Financial Analysts and Strategic Consultants: virtually all major companies hire outside experts to help solve problems and better understand phenomena that are outside the company’s expertise. However, like financial analysts, smaller companies will often opt out of this expense, due to budgetary constraints and limited attention.
- CFO: At Florida Funders, we find that for growing companies on our platform, this is often the first executive position to be added once funding is secured. Will explained that this is the primary service that Adventum offers, filling the gap in financial leadership at an affordable rate until the company is ready to hire internally for the role.
Many young enterprises skip out on filling these roles and responsibilities, relying on the minimal accounting experience of one of the founders. Unfortunately, this translates to headaches down the road and a murkier picture of how the company is doing financially. Companies run on accurate, timely financial information, which requires precise recording and reporting of relevant financial information. Working with the right experts to drive the recording process and integrate financial data with the operational model can make or break an early-stage startup. Prioritizing finances, the least sensational but most necessary element of business, also reflects leadership maturity. For these reasons, investors want to see financial competence before moving forward with a young firm.
What Investors Want
CEOs of growing companies, like those seeking investment from Florida Funders, tend to play many roles as their business grows. From marketing to accounting, scarce resources often mean wearing multiple hats until there’s sufficient capital to delegate. As a result, CEOs may not be focused on how to translate their strategy and vision to an investment pitch.
Kris and Will covered some key elements of what investors want to see in a potential venture. Additionally, they explain why viewing your company in these terms won’t only help attract investment but will translate to the long-term success of your business.
Sound Financials (9:00)
Sound financials are the cornerstone of any business, and no one knows this better than a seasoned investor. When seeking capital, a company should have its financial ducks in a row, including:
- The Three Major Financial Statements. In showing your historical performance, or projecting your future, you must have an accurate Balance Sheet, Income Statement (also known as a P&L), and Statement of Cash Flows.
- Clear Understanding of Revenue and Accounting. Whatever your accounting system, it should be consistently applied and fully understood by management.
- Clean Categories. Categorize expenses and revenue for easy comparability across periods.
- Fully Reconciled – Reconciling your financial activity, from bank statements to payroll, is essential if you want to be taken seriously and inspire confidence.
Clean financials pay huge dividends, from drawing investment to informing better company decisions. The requirements above can be easily met, either internally or by hiring outside help from a company like Adventum. It’s never too late to get the books sorted out, and the alternative can be a botched deal. We’ve seen many otherwise successful companies fail to secure funding because of poorly managed financial records.
Realistic Financial Plan (17:57)
In addition to sound financials, your projections and financial model should be firmly grounded in reasonable premises, even if they’re not prophetic. As Will explains, “The one fact I know [about a financial model] is that it’s wrong. It’s not going to be exact. What’s important is to be able to substantiate your assumptions, to show that they make sense.”
The Adventum team recommends shorter-term models, either 3 or 5 years. They should have an informed expectation of cash burn, and the capital sought should be consistent with a considered, thorough estimate of what’s needed. In addition to financials, there should be historical and/or target figures for key performance indicators (KPIs). KPIs should be benchmarked and revisited often in order to measure the company against its goals.
Another key consideration that investors want to see is a breakdown of the unit economics of your company. This means showing your profitability on a per-unit basis, as accurately as possible, and how this figure will change at scale. In addition to your profit projections, you need to show how you’ll get customers through the door in the first place, as well as where they’ll come from.
Total Addressable Market: Large and Growing (30:48)
Will explained that investors generally like a larger TAM (Total Addressable Market), especially one that is growing, but that isn’t the whole story. He recommends a bottom-up view, a realistic appraisal of how your business, at this stage and beyond, can gain market share. Ultimately, assessing your TAM shouldn’t just recite the total size of a market you operate in; your investor could easily find this information on her own, and it doesn’t say much about where your company fits into the market. It should reflect the market as you expect it to be, and how much of that market your company can capture.
The Adventum team used a fitting example to illustrate the concept: Uber. Uber saw the massive taxi industry they wanted to enter but did not simply seek to find a seat in that crowded arena. They sought to create a new market to meet the same need, offering a totally different experience and price point. In the process of solving that problem, Uber disrupted the entire transportation sector, from supply logistics to food delivery. It not only avoided a competitive slog with a thousand taxi companies, but it expanded its addressable market beyond the industry.
The Adventum team explained that, though often overlooked, the Go-to-Market Strategy should be fleshed out early and revisited often, both to attract investment and for the company’s own benefit. Choosing between a direct or channel sales strategy, identifying the ideal customer profile, and creating a well-defined marketing plan are all key tenants of a well-developed business model.
The team explained in detail the questions a company should ask in terms of its optimal clientele and how to best deliver their product or service. Importantly, leadership should revisit these assumptions often, weighing them against KPIs to see if they need to pivot.
Strong Management Team (51:10)
Kris mentioned that investors love to see a CEO who previously had a lucrative, secure job in a related field, saw a problem that needed solving, and left the company to fill that need. These leaders show both true belief in their business model and intimate knowledge of the market they operate in. At the end of the day, though, backgrounds matter less than the qualities they suggest.
The Adventum team explained that passionate, capable leadership does a great deal to inspire investors. They want to see leaders with a deep understanding of their market, operational and execution expertise, and importantly, competence in the financial realm. Notably, these qualities don’t have to come from one person. A company should bring on executives and consultants that complement their strengths and offset their weaknesses.
One of the most frustrating things in the world as an investor is seeing a founder so in love with the beauty of his own idea that he ignores the other prerequisites for success. Simply put: you can’t have a successful business without sound financials. It just won’t all add up! But if you’re in love with your own idea, and you’re seeing an inflow and outflow of cash without the experience of a CPA, that’s fantastic, groups like Adventum are there to help you tell a compelling financial story. Learn more at: https://goadventum.com/