Why financials are so important during fundraising?
You may be taking on this venture to solve a problem you are really passionate about, to have an impact or just to test your full potential. Yet, a startup is a business. It has to function as a business. At least if you want it to last and to justify obtaining funding. Businesses are all about the financials. If the financials don’t work, nothing will work.
The financials slide is where you show most of your key financial data in your pitch deck when fundraising. There may be other factors which are more impactful and pivotal to your potential succeeding the big scheme of things.
Factors like the strength of your team, the problem you are solving, and if you can even get your foot in the door with a winning cover slide. However, your financials slide is easily one of the top three most impactful slides when it comes to getting funded, or not.
Here are some of these reasons for this.
Potential Investors Will Spend The Most Time Viewing This Slide
When you are wondering why financials are so important during fundraising, keep in mind the data shows that when you include financials slides in a pitch deck that investors will spend far more time on this slide than any other. While in reality the problem, idea and team may be more influential, and you want to bring in others who share your vision and passion for the mission, this is a financial decision for investors. It is not a charity donation.
They must make wise money decisions to be able to keep investing in startups. Even if not for their own financial gain, to avoid loss and for the legal responsibilities they have to their partners and customers.
More time spent on this slide can be a product of the fact that there is just more information and detail on it than other slides, as well as the fact this is where they are judging whether this a sound financial move.
Keep in mind that in fundraising storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
More Questions & Concerns
With more time spent on this slide and more detail covered, and the importance of the data, the financials slide is going to generate more questions and concerns than other slides in your pitch deck.
Startup fundraising can already be an uphill battle. Make sure you know the answers to the most common questions you’ll get, and avoid bringing up more concerns or objections than you need to.
Like any sales situation today, investors are already looking for any excuse to say no, or to confirm their suspicions that this is a bad move. Don’t fuel those fears. Keep it simple and concise. The last thing you want is for them to have an excuse to put you off until you can go find out an answer and get back to them. You will have lost your momentum.
Shows Your Handle On Your Space
Your financials and financial projections immediately indicate your handle on your market space and business in general. This is a critical factor when understanding why financials are so important during fundraising.
Too much idle cash in the bank for too long, with too little progress and growth may say you don’t know how to invest and multiply money. If you are bankrupt, despite having raised money before, that says you probably can’t profitably invest their money either, even if you are bullish about deploying it.
Projections for unit economics, customer acquisition costs, ROI on marketing, profit margins and market share all show how well you know your industry and business in general. Any existing hard data on these factors will show whether you can really outperform competition or are already lagging and under performing against those you claim you can disrupt and replace.
Make sure your assumptions and projections are benchmarked and based on real research. At least if you want to maintain any credibility.
Shows Your Value In Seconds
A few seconds looking at your financials slides will instantly tell any experienced investor what your company is worth. At least from a conventional business valuation perspective. Between your balance sheet and cash flow, the intrinsic, physical value of your company as is will be revealed.
Your potential may be much greater than this for some investors, but it gives a baseline to work with for calculating risk and returns.
You may want to watch the video below where I cover how to value a startup without revenue.
Shows How Strong Or Desperate You Are
Your financials immediately show your financial health and runway. If you only have a few weeks or months of cash left in the bank before you start missing payroll and supplier invoices they know they can squeeze you. They can demand tougher terms in their favor. Versus a startup that still have 6-12 months of runway and cash in the bank, which means the entrepreneurs have the upper hand in negotiations, and they need to hustle and give you money on lenient terms.
Shows Potential For Returns & Multiples
Your profit margins show investors that if they put in X dollars in investment, and your profit margins are Y%, they should be able to make $Z.
They can also use your growth rate to project a multiple they can expect on exit based on different timelines.
Are You Actually Able To Do What You Say
Are you actually able to execute on your idea and projections? What are you achieving on the financial front to prove it? Users, retention, growth, even without revenues can be significant indicators of your ability to get results.
Hopefully this post provided you with some perspective as you are looking into why financials are so important during fundraising.
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.