Before meeting with investors to pitch your company and raise capital, it’s crucial to get your financial house in order. Having clean, accurate, and well-organized financials will make your company more attractive to potential investors and help the due diligence process go smoothly. On the flip side, messy or incomplete financial records can raise red flags, slow down the fundraising process, and even jeopardize your chances of securing investment.
Here is a checklist of key financial housekeeping tasks to complete before kicking off a fundraising round:
- Clean Up Your Bookkeeping
- Create Detailed Financial Projections
- Define and Track Key Metrics
- Organize Contracts and Agreements
- Prepare Supporting Documents
Clean Up Your Bookkeeping
Messy or incomplete financial records are a major red flag for investors when you are looking to raise capital. Inaccurate books can lead to poor business decisions, cash flow issues, and potential problems with the IRS. Getting your bookkeeping in order will give you a clear picture of your financial health, help you make data-driven decisions, and instill confidence in potential investors. Before fundraising, take the time to:
- Organize your financial statements including Balance Sheet, Income Statement, and Cash Flow Statement
- Reconcile all bank and credit card accounts to ensure transactions are recorded properly
- Categorize expenses into the appropriate accounts
- Record all customer invoices and payments
- Separate personal and business expenses into different accounts
- Consider hiring a bookkeeper or accountant to review your books and make any needed corrections
The financials are usually the first requests from investors when you are raising capital so it’s important to have them in order and ready to go.
Create Detailed Financial Projections
Investors will want to see a clear picture of your company’s future revenue and profitability potential when you are raising capital. Solid financial projections demonstrate that you have a good grasp on your business model and growth trajectory. Absent or incomplete projections can cause cash flow disruptions, unclear messages to your team and investors, and eventual problems obtaining credit. Work with your team to:
- Build a bottoms-up financial model with 3-5 year monthly projections
- This means start from scratch as opposed to using your company’s history to build the projection
- Include projected income statements, balance sheets, and cash flow statements
- Document and be prepared to explain all key assumptions
- Model different scenarios (conservative, aggressive, most likely)
- Get input from advisors or investors on refining the model
Realistic, well-thought-out projections will give investors more confidence in your financial acumen and the viability of your business.
Define and Track Key Metrics
Investors look for companies with strong traction and growth momentum. Identifying and consistently tracking the right metrics will help showcase your progress and enable data-driven decision making. Also, failing to define and monitor key metrics can cause you to miss important trends, make poor strategic choices, and struggle to raise capital. To highlight your startup’s performance:
- Identify the 3-5 most important KPIs for your business model and stage
- Implement systems and processes to accurately track these metrics
- Create visually compelling dashboards or charts to display KPI trends
- Know your metrics inside and out and be ready to discuss drivers, trends, and anomalies
- Compare your KPIs to relevant industry benchmarks when possible
Demonstrating a solid grasp of your key metrics and how to move them will show investors you know how to grow your business.
Organize Contracts and Agreements
During due diligence, investors will conduct a thorough review of all your business’s legal agreements. Having these documents well-organized and easily accessible will streamline the process. Incomplete or missing contracts can slow down diligence, uncover potential liabilities, and sour the deal. Gather and organize:
- Customer contracts and MSAs
- Vendor and supplier agreements
- Office and equipment leases
- Employee offer letters, NDAs, and IP agreements
- Past financing documents like SAFEs or convertible notes
- Intellectual property documentation
Keeping clean, organized records of all legal agreements will give investors confidence that you are buttoned up and mitigate any concerns around legal or compliance issues.
Prepare Supporting Documents
In addition to financial statements and projections, investors will request several other documents to evaluate your startup. Having these materials prepared in advance will help you respond quickly. Failing to provide requested documents in a timely manner can stall the process and make investors question your competence and commitment. Key documents to have ready:
- Past 2-3 years of business tax returns
- Year-to-date income statement and balance sheet
- Current accounts receivable and payable aging reports
- Detailed budget vs. actuals reports
- Cap table showing all equity ownership and terms
Being responsive to investor requests and having all the required documentation will demonstrate your professionalism and help build trust.
In summary, preparing your company’s finances in advance of a fundraise is well worth the time and effort. By cleaning up your bookkeeping, creating solid financial projections, tracking key metrics, organizing legal documents, and preparing required supporting materials, you’ll be in great shape to impress potential investors with your financial acumen and make the due diligence process much smoother.
If you need any assistance getting your startup’s financials investor-ready, please don’t hesitate to reach out to our team of startup accounting experts.
