Startup Series A - The Key Financials To Win Investors Over
As COVID-19 starts to feel like the new normal, many startup founders have been asking if right now is a good time to raise funding. It is a good question. Perhaps we can find the answer in a quote from Albert Einstein: “In the middle of difficulty lies opportunity.” As entrepreneurs, we know every change presents an opportunity.
As I am writing this article, one of my clients raised a Series A two days ago, and a startup founder I have been friends with for years just raised a Series B yesterday. These are positive signs signaling that fundraising is still happening and founders are finding investment.
So when you, startup founders, are preparing for the pitch and getting ready to raise your Series A, here are the 3 key financials that will spark investors’ interest and pique their curiosity to learn more about your startup:
1. Performance in the past - user growth rate
A strong user growth rate is concrete evidence of product market fit—even more so in the current pandemic period. For early stage startups, the sales you’ve made might not paint a complete picture of your growth; instead, your user growth rate shows how much your company has grown and the number of new users that you have gained over time.
Take one of our clients as an example: they are a U.S.-based startup in the financial technology industry, and are in the pre-revenue stage. Comparing their core competencies in different markets, they chose to start in the country that they know the best, Kenya, which also is a country that is experiencing tremendous growth. Their bold bet paid off—once the service hit the market, the organic user growth rate was climbing day by day. They then chose to expand into different countries in Africa and Europe, one country at a time, to acquire even more customers. Their amazing user growth rate got them a lineup of investors waiting to invest and willing to negotiate an amount that is in the best interest of the startup.
Looking at this startup, there are two things worth mentioning: first, the founders decided to start from the market that they knew the best, which also happened to be a market that is experiencing tremendous growth. This strategy sets them apart from their competitors, as evidence by their high user growth rate. Second, they did not stop after gaining initial traction in the first market, but rather they continue to grow and expand into different markets. As the saying goes, being able to choose the right battle is already winning half of the battle. This continuously increasing user growth rate demonstrates to investors that they have found strong product market fit and get them excited about how bright the future can be.
2. The plan to scale – financial forecasts and budgets
Financial forecasts and budgets describe the plan for your company’s future, they are also called pro forma. Investors want to know how you will spend their money to get to the next stage of the business. Financial forecasts and budgets serve this purpose. In this plan, you describe the projects you will tackle to gain market share, raise brand awareness, acquire customers, and eventually get to the break-even point. If you want to learn how to do forecasts and budgets, here is an article I wrote to show you step by step on how to make forecasts and budgets.
Investors know that, realistically, it takes startups an average of three years to break even. When founders are out and raising Series A funding, they are not yet expected to show profits. Of course it would be great to see profits early on, but the most important thing is to show investors that you have a plan to make the company a huge success. Your forecasts and budgets show investors your road map to victory.
3. The key to success – the founder, yourself!
Founders are the captains of the ship—they determine if the ship will sink or sail. Your abilities to direct and execute plans are the keys to success. Investors are more willing to invest in founders who can make this startup journey smooth sailing, or, even better, a huge win. You want to show that you are relentless and resilient, when it comes to the goals that you want to achieve. You want investors to know that no matter what, you won’t give up and you won’t back down until you steer the ship to the final destination.
Takeaways:
In summary, when you are out pitching for Series A funding, investors want to know your company’s past, future and you. They want to know your company’s past performance, what was the user growth rate? They want to see the plan to scale—forecasts and budgets. Finally, they want to know that you are the right founder for this, the founder who is relentless and resilient for achieving success. Now that you have all the secret source, go and show investors that you are ready to make this venture a certain success!
