The Startup CFO - Chapter 6

• Stage of the company

• Competition with other funding sources

• Experience of Entrepreneurial team

• VC’s natural entry point

• Numbers

• Current economic climate

• Berkus Methos

• Rule of Thrids

• Valuation of the deal based on a simple formula, Valuation = Sound idea (USD 1 million) + Prototype (USD 1 million) + Management team (USD 1-2 million) + Board quality (USD 1 million) + Sales (USD 1 million)

• Rule of thumb based on individual experience

+ Simple and reflects a resonable start-up valuation

- Definition of items slightly unclear and will lead to discussion with the entrepreneur

• Most business angels rely on this heuristic

• The rationale behind the Rule of Thirds is: 1/3 of the investment goes to the founders, 1/3 to the capital provider and 1/3 to the management

• Differentiation between founders and management

+ Simple and quick

- Differentiation between founders and management not always entirely clear

• Build a relationsship based on mutual trust

• Reach a level of understanding that ensures that each party will be adquately rewarded for future success

• Draft a contract that optimizes value not just valuation

• Take into account the venture capatalists value-add, such as mentoring, strategic advice, network resources and political capital and do not only focus on the money

1. Do your homework on your backers: Conduct research to decide on your preferred investor type and inform yourself about the investors

2. Create an investor wish list: Carefully choose your preferred investors and do not approach too many at the same time

3. Prove the validity of your business idea: Provide investors with a detailed business plan before your pitch

4. Clean up your financials: Prove your financial history by providing investors all relevant financial statements

5. Line up your team: Convince investors by composing a skilled, capable and experienced team for your start-up

Carefully think about your preferred investors and consequently develop a list identifying your ideal investors

• Approach a maximum of 6 investors at the same time

• Approaching too many investors at the same time hinders you to cater your pitch to the individual concerns and key criteria of each individual investor

• Make sure that you have carefully thought through your business idea in a consistent business plan

• Test your business idea on a small scale to prove its viability

• Be prepared to answer critical questions with regards to your business model

• Provide investors with all relevant financial statements showing that you can responsibly manage your cash and pay your debts

• Make sure you get credit records from credit reporting agencies and check whether they are correct

• Make sure you can provide a short summary on your financials within 2-3 minutes

Provide proof for those characteristics to convince investors:

• Skilled

• Experienced

• Knwoledgeable

—>Do not underestimate the importance of careful liquidity planning and a diligent budgeting process

• Not including a liquidity buffer in your budget

• Losing strategic flexibility

• Mismatching finance and expense structures

• Underestimating the role of Business Angels

• Putting to much hobe in investors “Maybe”

If you do not include a liquidity buffer in your budget, you run a high risk of running out of money, eventually causing your business to fail

Managing your liquidity:

1. Manage your required upfront payments: Manage your financials in a way that provide you with some leeway for upfront payments

2. Intensify your relationship with your local banker: Ensure that you have a strong relationship with your local banker likely to provide you with short-term credity in case of liquidity issues

The lack of strategic flexibility makes it difficult to adapt to changing conditions (internal and external) that require your business to adapt to prevent liquidation

Retaining your strategic flexibility:

1. Make use of resources, but do not necessarily own them: You do not always need to own all resources you use. By using resources that you do not own you keep strategic flexibility

2. Do not wait too long searching for investor contacts: Failing to get in contact with investors early hinder your strategic flexibility. Thus, make sure you contact investors early, so that you can react to required changes

A mismatch between your finance and expense structure can cause your business to fail. You need to adapt your expense structure to your available resources.

Allign your finace and expense structure

1. Check your external benchmarks: If your do not meet your targets you should be alarmed. Only invest cash for specific reasons

2. Watch your reserves: Ensure that you have at least 6 month worth of cash on hand

Underestimating the role of business angels and approaching VCs too early can cause problems because VCs don’t let you develop your company like business angels do.

Managing your business angel network:

1. Match your start-up with your preferred investor type: Participate in Angel groups and buils your network in irder to define the Angel type that best fits your business

2. Carefully develop your Angel contract: Ensure that the selected investor is able to provide you with your required capital and don’t be too generous with your first contract

Investing too much hope in receiving funds from investors that do not commit to their investments causes unnecessary efforts and lengthens the financing rounds

Getting started with your investors:

1. Read between the lines: Investors are unlikely to reject an investment decision by saying “no”. They tend to keep their decisions open for a long time.

2. Focus your effort on a few investors likely to invest: Investors are likely to require additional very detailed information from you before making their investment decision. Make sure you focus your efforts in your preffered investor.