The Financial Data That Makes VCs Say Yes
Startups are finding it harder to raise funds. In October 2022, Reuters reported Global venture capital investments fell to a near five-year low in the first three months of 2024. If your startup is seeking investment in these tough times, it's crucial to have a captivating idea and strong financial data to prove its survival.
Investors are constantly on the hunt for startups that have the capacity to transform adversities into opportunities. They seek assurance in a concrete financial plan that supports your innovative business idea. Comprehensive financial insights and metrics, provided by tools like Octopus AI, can be instrumental in offering the validation investors seek before they part with their capital.
We had the opportunity to engage with venture and growth investors from reputed firms globally to understand what they seek in the financial data of startups at the pre-launch stage. Here are some of the key insights from those conversations:
- The sooner you embrace financial analytics to comprehend and demonstrate how the investment will be utilized to achieve your business objectives, the better.
- Financial projections can serve as a predictive indicator of future financial outcomes.
- Ignore the "flavor of the season" metrics and concentrate on what matters the most at your stage: Cash Burn, Runway, and accurate Future Projections.
- Regardless of whether you have $100K or $10M, maintaining lean operations should be your mantra.
- Leverage your financial data to weave an engaging story about your startup irrespective of the economic climate.
Remember, the key to convincing investors lies in your ability to demonstrate a compelling return on their investment.
Can you bring the company to meaningful milestones before the cash runway ends? Prove it!
Astute investors pay attention to lean expenses (meaning no extravagant offices or unnecessary expenditures), cash burn rates across different categories (like R&D and marketing), and the financial literacy of the startups they're considering for investment.
Following are four vital financial metrics that investors seek:
Cash Burn
This metric reflects how swiftly a startup is expending its cash reserves prior to revenue generation.
For instance, it would be a positive signal if you can demonstrate a survival rate of at least 6 -12 months given the current cash burn.
Runway
Cash runway is a measure of how many months a startup can continue to operate before it exhausts its cash, assuming no additional income and consistent spending.
For example, many VCs recommend that a startup should have enough cash to operate for at least 12 to 18 months. This timeframe is considered "golden" as it allows the startup ample time to achieve key milestones, refine the product, and showcase potential value to future investors or customers without the immediate pressure of running out of funds.
Expense
By keeping expenses lean, startups can extend their cash runway, thereby providing more time to refine their product, achieve a product-market fit, and pivot as required without the stress of imminent financial shortfall.
As an example, Eric Ries, who pioneered the lean startup movement, has cautioned startups against escalating their burn rates too hastily, even in times of abundant capital. He emphasizes that the external funding environment can shift rapidly, and startups must be prepared to weather downturns.
What-If Scenarios
These scenarios illustrate that a startup is not only aware of potential risks but also prepared to handle them. It demonstrates foresight in planning for possible market shifts, economic downturns, or other external pressures that could impact the business.
An example here would be Ben Horowitz of Andreessen Horowitz. In his book "The Hard Thing About Hard Things," Horowitz elaborates on the importance of planning for multiple outcomes and being prepared for the worst-case scenarios, not just the best-case ones.
Above all, remember that measuring the success of your business is crucial. Metrics and goals change based on the stage of the product, milestones, type of product, team, and many other factors. But one thing remains constant - metrics are your best allies in understanding your current position and future trajectory.
To learn more about these metrics and how to measure them, delve into our metrics library. We've compiled a selection of crucial financial indicators and created convenient calculators to compute them in real-time!