Getting your finances ready for the investor pitch

As part of Globacap’s Get the Money event series, we hosted a panel moderated by Jasmina Henniova, Investment Manager at 3TS Capital, to discuss how early stage start-ups should best prepare before meeting investors.  

Globacap’s CEO Myles Milston, joined by Eamonn Cary, MD Techstars, Martin Carruthers, Growth Finance Manager Grant Thornton and Christian Ahlert, CEO MiniBar Labs, discusses how early stage start-ups should best prepare before meeting investors. They shared their top suggestions to get you and your company ready to engage with investors, ensuring the journey is successful and efficient.

How real are your financial projections? 

Most early stage start-ups have little reliable historical data and revenue can be very unpredictable. “I have seen some companies build complex financial models that are clearly just a work of fiction” says Eamonn. Founders must understand the things that they can control, like evidence of structured, vigorous thinking around expenditure, as well as potential pipeline, potential market and possibility of sales. If there is sufficient evidence of this, investors are more likely to accept a narrative around revenue and growth predictions.

Valuations – more an art than a science?

A hurdle to overcome – Christian identifies the difficulty that early stage founders can face when coming up with is deemed to be a reasonable valuation, companies need to be flexible and reasonable to  make sure that investors can get comfortable with that figure..

The Grant Thornton Growth Finance team have three components they look at when valuing early stage companies: potential revenues; comparison with other industry examples (there is a rich amount of data available from those that have crowdfunded); and the range of equity stake that would be suitable as an investor. 

Myles agrees that it is virtually impossible for early stage companies to provide revenue predictions and believes that a company should be able to answer a number of “sanity check” questions: 

  • What is the product?
  • What is the market? How big is the market?
  • Who are your competitors?
  • What is your market share?
  • How do you get that market share?

The picture will never be completely  accurate for an early stage company but this process can provide clarity, By keeping costs in check and being honest about what can realistically be earned in terms of revenue, and knowing what the addressable market size is for your company or product can help lead to a more sensible valuation. 

Valuation for early stage companies can also be viewed as a function of how much a company is looking to raise. Techstars often use the following benchmarks: 

  • $500,000 raise equates to valuation of around $2-$3m 
  • $1m raise equates to valuation of around $5m 

Although there are many platforms and tools to help build company valuations, most are not appropriate for early stage start-ups. If a company has no cashflow means those tools simply won’t work. Once you have come up with a valuation, shop it around to relevant people you trust to get a ‘sensibility check’.  If you are at a complete loss for any comparable data then reach out to Martin and Grant Thornton’s Growth Finance Team for more detailed advice. 

Have valuations been affected by Covid-19? 

You see a reduction in valuations as a result of all crises, earnings take a hit and investors become more cautious. The Covid-19 pandemic has been exceptional for early stage companies because they are usually invested in by individuals, rather than institutions. Myles believes that many of these individuals are worried about job retention, meaning they are less inclined to invest.

According to Eamonn, there is significantly less available capital in the Angel Investor ecosystem, but, the belt tightening is not all bad. Historically, some early stage companies have raised too much money before they are ready. The current situation has led to investors looking for an extension in runway, longer due diligence periods and in some cases an additional funding round for further working capital – companies have had to be more sensible about expenditure. 

How to navigate due diligence

The earlier the stage your company is, the less documentation and historical data you will have. Instead, Angel and Seed round investors will look for a combination of proof of spend and proactivity. Key areas will be: 

  • Articles of Association 
  • Monthly cashflow statements (showing expenses, salaries, employee structures etc)
  • Proactive production development (R&D tax claims etc)

More detail is required for Series A funding and beyond – expect very complex due diligence, varying demands and an exhaustive process.  Myles highlights that during Globacap’s most recent funding round, due diligence consisted of hundreds of tech, compliance and legal questions as well as documents defining company process and supply as well as assumptions around the revenue process.

A due diligence process can often require either a dedicated in house individual to collate all the information or an outside advisory team. 

Keeping potential investors engaged is key

Any start-up looking for investment “will have to kiss a lot of frogs” according to Eamonn. It usually takes a couple of meetings to get to know an investor, then let them talk about their terms of investment and become knowledgeable about their investment journey. Think about your own fundraising journey, and once you start getting commitments start communicating weekly – look to close the deal in 4-6 weeks and always give a deadline once term sheets are handed over. 

Tracking the communication and document process of your fundraise is crucial but often time consuming and inefficient. Globacap’s leading fundraising platform is both cost and time efficient and the perfect tool to enable start-ups and early stage companies to raise money quickly and effectively. For more information, click here.