Raising capital is no easy feat for startup founders.
But although it can take as much as 6 months of full-time work to attract investors and close a deal, 95,000 companies are founded annually in Canada, thanks in part to some $60M worth of equity crowdfunding (funding companies in exchange for unlisted shares) and other alternative financing.
Whether you’re seeking funds from venture capitalists, angel investors, standard business loans (including term loans), or research and development grants, one thing every investor or lender will want to see is your financials.
Raising money is unquestionably easier when your business is in good financial shape. But you’ll still need to be properly positioned to ride the process through to a win.
Here are 4 ways to prepare your startup finances for fundraising success.
1. Hire a bookkeeper to keep your books up to date
Clean, correct, up-to-date books are fundamental to the fundraising process. Not only is proper day to day bookkeeping essential for creating an accurate historical picture of your company’s financial performance, it’s the only way to:
- Gain visibility into your runway (cash balance ÷ burn rate)
- Understand how much money you need to raise
- Set realistic financial projections and milestones
Considering how time-consuming raising funding can be, you should consider hiring a bookkeeper to manage your financial records if you haven’t already.
An experienced bookkeeper is a true fundraising asset - especially when it comes to preparing financial reports for potential investors (like income statements, balance sheets, and cash flow statements) and answering account-based questions about business developments.
With cash management particularly important for early-stage companies, it’s worth engaging a bookkeeper to become familiar with your finances before fundraising matters turn urgent.
2. Set up a reliable accounting system that can scale with your business
Prior to kickstarting any fundraising activity, you’d be wise to pair your small business SaaS bookkeeping practices with a reliable accounting system that can:
- Accurately track revenues, expenses, and other financial data
- Make it easier to generate business insights and ensure compliance with government regulations
- Accommodate high growth potential, so you won’t have to switch systems mid-stride
Here are 3 tips for setting up an efficient, scalable startup finance accounting system.
Stop using spreadsheets. Not only are spreadsheets prone to human error, as transaction volumes increase, managing them can quickly get out of hand. Plus, many investors will question the accuracy of financial data that’s been generated using spreadsheets.
Take advantage of accounting software. Software like QuickBooks Online or Xero makes it easy to track data and generate financial reports. It also reduces input errors, saves time over manual data entry, and integrates with other accounting tools that can scale with various business models.
Automate as much as you can. Consider implementing time-saving software and apps like:
- Chargebee or SaaSOptics to manage subscriptions, deferred revenue, billing, and invoicing
- Dext Prepare or Expensify to track, manage, and store expense documents
- Plooto or Rotessa to handle payments and manage cash flow
- Payworks or ADP to calculate payroll deductions, process payroll, and track employee time
Adopting a reliable accounting workflow and good financial hygiene won’t just promote investor confidence in you, your team, and your numbers, it will show you know what you’re doing from a financial, managerial, and operational perspective.
3. Understand which startup finance metrics investors are looking for
Different types of investors prioritize different metrics for understanding business value and health. Most, however, will want to evaluate your top-line growth which, for SaaS companies, usually means examining your:
- Revenue (including MRR and ARR) and Gross Margin
- Year-over-year Revenue Growth and Revenue Churn
- Customer Lifetime Value, Customer Acquisition Cost, and Customer Churn Rate
Since investors are likely to benchmark your KPIs against industry competitors, it’s important to understand your metrics and know where you stand in terms of other companies’ startup finances.
While KPIs are important, however, make sure you focus on the ones that are most relevant to your products or services. Clear, quality data is far more valuable than the volume of information when it comes to the metrics you use.
4. Build your financial projection
Your fundraising timelines and targets will largely depend on your company’s cash position and projected cash flow needs.
By building a financial projection based on realistic, historical drivers or trends you can illustrate your growth and profitability, figure out if and when you need capital, and determine how much you should raise.
A solid financial projection also allows you to:
- Plan more effectively around hiring needs
- Understand your profitability better over the long term
- Provide investors with a medium-term financial forecast
Assembling a business plan based on reasonable growth assumptions makes it easier for prospective investors to decide whether the funding you’ve requested is realistic in terms of meeting your goals.
If you don’t know how to create a financial projection, hiring a controller or part-time controller may be the right move.
A fractional controller, for example, can support your fundraising efforts by:
- Assisting with budgeting, financial projections, and stakeholder reporting
- Tracking key performance metrics and analyzing financials to evaluate profitability
- Ensuring your financials are ready to be viewed by investors (including when a merger or acquisition is in the works)
If startup finances aren’t your strength, Enkel’s fractional controller services are a great way to gain access to the financial leadership your business needs to succeed in its fundraising efforts.Contact us today to learn more!