The low-down Hide
Don’t you love the Dragons Den pitchers that come in strong, confident, and impressive and then fold under the first bit of scrutiny?
We love to watch them, but we don’t want to be them.
We know you’ll go into your investor meetings prepped with pitch deck, business plan, balance sheet, and market data. But are you ready for the next level of interrogation your dragons (we mean, investors) are going to level at you?
How consistent is your data?
An investor is interested in 2 things: potential and profitability. If you can’t prove the latter yet, you’ll need to fill the gap and bolster their confidence with the former. Accurate data uses your history to paint a projection of your future.
Investors will expect 24 consecutive months of data to understand your operations and financial circumstances. Inconsistencies in things like profits, gross margins, and revenue growth might be okay if they can be explained (honesty is the best policy). Some instances of going backwards to go forward are acceptable – maybe you paused sales to recalibrate the product.
As well as having the data, you’ll need an awareness of the trends it demonstrates, and the anomalies it throws up.
How realistic are your growth projections?
An experienced investor will see straight through an overly optimistic projection. The assumption input should always be justifiable with key metrics.
Your growth projections should take into account factors that influence revenue like essential staff costs or operational necessities, providing an accurate one- to three-year picture to inform investors’ decisions.
There’s always a conundrum here. ‘Underpromise and overdeliver’ is a fine principle in business. But for founders, under-promising doesn’t exactly strike confidence or excitement in the heart of your investors.
Honesty and transparency are the only ways to go, and non-negotiable in terms of your long term relationship. The key is to strike a balance between the two – to excite without misleading.
You can’t make accurate projections 100% of the time. But if they’re way off, investors will question if they were made in good faith in the first place. And that’s bad news for trust.
What does your cap table look like?
A capitalization or ‘cap’ table is a spreadsheet exercise demonstrating share ownership. It tells your investors who owns what, and under which terms. Who owns what will directly influence the company structure, ROI, and decision-making as the company grows. With all the free templates online, there’s no excuse not to have one.
Even if it’s just you and your cofounder and you each own 50%, this needs to be logged along with how much the shares were worth at the time they were put in your name.
A cap table with lots of names at seed stage (AKA highly diluted shares) can also be a little red flaggy. The more cofounders, shareholding C-suites, friends, family members and advisors totting up the balance sheet, the more potential there is for dispute. Plus, if there’s not much of a percentage left for you, how motivated will you be to drive success?
Is your customer door revolving?
High customer turnover can suggest a few things to potential investors:
- The product or service isn’t viable
- The standard of service isn’t high enough
- The clients aren’t the right fit for the business
Who are your customers? Where are they coming from? What’s their feedback? And are there other groups you should be targeting?
Customers coming in and out (AKA a high churn rate) means you can’t grow. Investors will likely use the Customer Lifetime Value (LTV) metric to project how much profit you can make with your current acquisition and retention models.
Break down your customer segments with a CRM system. You’ll also need to detail how they pay you and how often (AKA revenue by client / revenue mix). The earlier you do this, the more data you can aggregate ready for investor meetings.
Do you know your metrics?
The specific metrics investors base their decisions on vary by industry. Make sure you know yours.
In fintech, investors will want to know about things like your backlog, pipeline, and bill rate. In biotech, they’ll want to know about your operating margin and volume. In edtech they’ll be looking at monthly and daily active users.
In terms of financials, you might know your ad spend or staff salaries to the cent, but do you know how much you’re spending on office energy bills? Are your raw materials likely to increase in cost anytime soon? Are your expenses seasonal?
Investors will always pipe up with at least one question you can’t answer.
It’s painful, but the next best thing to a knowledgeable answer is an, “I don’t know, but I can find out”.
If you can’t answer something with quantitative data, especially in the early stages when you don’t have much of it, don’t be afraid to use qualitative data to back up your predictions for success. Use conversations, connections, testimonials, opinion, and research.