By Janet DeFrino
Who likes data? Investors! That’s who!
As a former equity analyst, I’m very comfortable with spreadsheets. I can lose myself for long periods of time studying data to see what it tells me. Though I rely on my intuition, I prefer having hard facts to back up my gut instincts.
And guess what?!
Beyond your friends and family and possibly seed rounds, most investors you encounter are the same way. A vast majority of professional investors grew up in finance roles and are accustomed to reviewing detailed models before making investment decisions.
So what does a financial model tell investors?
A well-thought through financial model tells investors how much cash your business could generate, helping them decide how to value your company. More specifically, the model shows how your costs will change with scale and how many and what kind of customers you need to attract to hit your revenue goals.
A significant part of early capital raised is typically allocated to marketing — your model shows investors how you intend to allocate your marketing budget and what kind of return you expect from those dollars. It also helps investors understand how the profitability of each business segment varies and illuminates how much cash your business will require as it scales.
Ultimately, most investors are looking to settle on a fair value to both founders and investors and the more data they have and the more confident they feel in your financial projections, the better they will feel about negotiating a higher pre-money value.
Want to improve your fundraising success?
If you want to improve your “hit rate” and have more meetings with positive outcomes, arm yourself with your data. Come prepared to talk about the key drivers of your business and make sure you have the key performance data either top of mind or at your fingertips.
Many founders don’t have finance backgrounds or aren’t facile with excel, but that doesn’t matter. What matters is that you participate in the creation of your company’s financial projections. You know your company better than anyone and the process of thinking through detailed assumptions will teach you even more.
For example, once you sit down to consider all the costs of introducing that new revenue stream, as well as the cost to grow that revenue, like Amanda, you may decide to nix that idea altogether and allocate your precious capital to more promising efforts.
Like Carla, you should emerge from the exercise with a firm handle on the key growth drivers of your business and how they can be refined to maximize the worth of your company. Most importantly, you will have numbers to back up the valuation you seek.
According to research done by Columbia PhD candidates Dana Kanze and Mark Conley (read study here), investors ask women founders different types of questions than they do men founders. According to the nearly 200 conversations the researchers evaluated, women founders are asked“prevention-oriented” questions whereas men founders are asked “promotion-oriented” questions. In other words, while investors (male AND female, by the way) focus on the upside with men, they worry about the downside with women. So, how to deal with that?
First, Kanze et al’s research shows that 85% of entrepreneurs answer questions in a manner that matches the questions’ orientation – so if you’re getting mostly prevention questions, you need to turn that around and respond with facts and data that show you believe your business will be a home run.
Improve your investor presentations
Have your numbers down cold – and communicate them with the clarity and confidence derived from having an intimate understanding of your company’s financials. You will inspire confidence in your listeners and improve your fundraising success! To learn more, contact us here.