I will start by daring to say that the majority of very successful entrepreneurs and founders are neither intuitively finance oriented, nor trained finance professionals. They thrive because of their creativity, passion for a business idea, backed by an intense willpower to invest blood, sweat and tears in making a dream a reality. That said, in most cases they also thrive because they recognize that thinking about funding, cashflow and profitability is critical to making their idea a success. Furthermore, in all circumstances that they don’t bring these skills to the table themselves, they recognize the urgency to find them elsewhere.
Depending on the size and stage of the business, this can mean anything from finding a finance coach or mentor to hiring a part-time or even full-time Chief Financial Officer. Whatever stage your business is at, the message is clear: it is never too early to get guidance on all matters finance from a competent resource that takes your business as seriously as you do. Or as Ben Horowitz, one of the founding partners of Andreesen Horowitz (a globally leading venture capital firm) suggested in a well known blogpost on the topic, in a well run company, the CFO holds the map to ensure the company and it’s founder have visibility on where they are and how to move in the right direction.
After all, many critical decisions are taken early that can influence the economics and cash needs of a new venture. Taking uninformed decisions can, among other issues, lead to unattractive unit economics or unnecessarily high cash requirements early on. This probably sounds very theoretical, so let’s get specific. Here are some of the critical first finance questions an entrepreneur needs to keep in mind:
1) While making product pricing decisions is primarily market-driven, these must also reflect achievable and profitable unit economics. Can you afford to offer a product at the price the market is willing to pay? Will your business model be sustainable with respect to unit economics given market demand and/or the cost to you to provide the related product or service?
2) Have you figured out which key performance indicators (KPIs) are central to your targeted business model, and do you understand the levers to improve on them?
3) Have you thought about your supply chain and how much cash you will need to trap upfront to suppliers before you get cash in the door from customers?
4) What do you need to know about the risks that your customers will pay late (or not pay at all) and how can you manage this risk in your business scaling?
5) Do you understand how much staff and/or marketing activities you can afford before you need access to (additional) external capital? In other words, do you know what your cash “runway” is?
6) Do you understand your options in terms of getting access to capital? Do you understand the mid- and long-term impacts of different funding options on your business as well as your equity therein?
There are a lot of points here we could dig into with some detail but let’s focus briefly on the topic of funding options, which has huge relevance for entrepreneurs that may be low on capital but high on great ideas and passionate follow-through. Sources of potential cash may feel elusive to start-up entrepreneurs, but by many a measure there are many more sources of cash than there are great ideas to finance. It is critical to approach any type of fundraising with this mindset.
Business focus, size, growth potential, social impact potential and many more factors must be evaluated to determine the right focus for fundraising efforts, from venture capital start-up funds, private or public grant programs, high net worth individuals, family offices, or impact investors… or any combination of the same. Furthermore, as a founder and entrepreneur, you need to understand very well the “why” behind your quest for funding: is it purely cash you are after? What about market access or expertise? And have you thought about what you are ready and able to deliver in terms of investor reporting and transparency to an external stakeholder? What must be clear is that the risks and obligations increase exponentially after your first fundraising is completed. But of course so do your opportunities, and that is exactly why fundraising is such a critical milestone in the life of any successful start-up.
Furthermore, there are some further key messages relating to finance priorities to keep in mind:
- Furthermore, there are some further key messages relating to finance priorities to keep in mind:
- Please remember that the earlier to take external equity, the more expensive it is. This means that the less developed your business is, the less it is worth in terms of valuation, and by consequence, the larger the share you must cede to convince someone to provide you investment capital.
- You are the champion of your business’ valuation: it is an expensive mistake to sell yourself short.
- Know your relevant KPIs, including the targets for each and what you are doing to achieve them. Monitor them consistently. Know them well. Know them so well that you can recite them if woken abruptly from a deep sleep!
- Your cash resources must be a top priority from day one: transparency and you need a clear line of sight to your available funds for at least the next 3-6 months (in other words: cash planning!)
- With or without external financing secured, keep cash optimization in mind as you tweak your business model and/or early customer and supplier arrangements (think payment terms!)
- Implement simple processes and tools EARLY to track cash and profits regularly – investors care deeply about this. As the business’ champion, so should you.
- Don’t listen to fancy consultants that may tell you to spend substantial early stage money on tax optimization, BUT don’t pretend taxes won’t apply to you. Depending on your jurisdiction and business model, do ensure you get a minimum amount of advice regarding taxation to avoid unconsciously creating risks or higher than needed tax burdens later as your operations flourish
A lot of this probably feels much more daunting in the face of an economic recession and global pandemic. Particularly the thought of needing to raise capital in challenging times. In such times, it is important to remember that a great business and business model will always find investors. Just consider the example of AirBNB – an American vacation rental online marketplace by own definition. In other words, a business deeply negatively affected by the pandemic. While arguably no longer a start-up
for some time, they completed their initial public offering in early December – smack dab in the middle of COVID-19 pandemic lockdown in much of the northern hemisphere – and raised 3,5 billion USD at a valuation of over 100 billion USD.
In summary, I strongly believe that entrepreneurs who invest early in building a strong financial foundation for their business greatly improve their chances of long term success. It can provide a critical edge over the competition, and boost success in both fundraising and profit optimization.
Written by: Sonja Rossteuscher
Sonja is currently Chief Financial Officer at Tristone Flowtech Group, a global mid-size automotive group with 12 global production plants, 6000 employees and >315 million Euros in annual sales. She has been in executive finance roles for the last 12 years, in various industries and firms, including as interim CFO at M-KOPA, a Kenya based pay-as-you-go solar energy company during it’s start-up phase
