The preparation required to raise capital is one of the hardest things a founder can do and it will consume a significant amount of your time. Given what we are experiencing with COVID-19, it is even more challenging. Interestingly, today “the biggest change lies in not the money itself, but the appetite for uncertainty. Most investors are going to be more cautious currently, which will require some form of uncertainty premium as a part of the terms. One way to ensure that you can raise money confidently in this time is to get intimately familiar with cash flow on a day-to-day, week-to-week basis.”
What does an organization need to do to be ready to raise capital?
Understand early on what potential investors and acquirers will be reviewing during a due diligence process. Have your files well organized (e.g. keep track of all your contracts with your customers, vendors, and partners, sales pipeline and forecasts, and financials.) Ensure your revenue and expenses are been tracked properly – this is especially true with all the new revenue recognition requirements. Get guidance from experts who understand the process. Consider hiring someone on a fractional basis to help guide the way. A good example is hiring a firm to perform a Quality of Earnings review prior to kicking off the process. You don’t want any surprises.
Your track record is going to be essential when talking to potential investors. You need to keep spotless records from the very beginning so you can demonstrate your ability to deliver predictable results. This is true not only for traditional financial measures but for also for pipeline development goals, sales targets, and employee recruitment and retention objectives to name a few. The better you can bolster your case of how you have performed against your forecast historically, helps you give more credibility to that forecast that you are showing investors on how you are planning to move forward and grow.
What will investors expect at each stage of growth (e.g. start-up, start-up +, or scale-up)?
A good measure here might be the duration of your customer relationships If you’ve had customers for at least a few years, you need to show at least the gross margin, or unit economics, for that early cohort of customers It is an early guide for determining your company’s potential.
But if your company is under three-years-old, and you don’t have the same track record, you might need to focus on the profitability of each contract and perhaps show how that has evolved over time.
The longer you’ve been in business, the more that EBITDA matters. Until you hit that stage, you won’t be valued on EBITDA, you will be valued on revenue growth. Keep your customers – they will directly impact your scalability.
Can you demonstrate that your numbers are reliable?
Tripp McLeod, Managing Director at CBIZ CMF, talked about a recent example where an organization was not recognizing revenue according to GAAP. The way that the company had misinterpreted the revenue recognition guidance resulted in their showing inaccurate revenue figures to potential investors. When the investor performed a Quality of Earnings review and this was discovered the mistake halted the process. Even the most basic mistake in numbers can cause a delay in the process. It is essential that your numbers are reliable and that you are using a best-in-class financial software and fractional resources to report on the health of your startup.
Fractional resources to help ensure your SaaS accounting is reliable and accurate might cost you money, however to an investor, having a professional perform finance and accounting and/or legal consultations, puts you in a much better light and some of the costs can be taken out of adjusted EBITDA because they are transaction related.
Are you ready for a graceful exit?
A graceful exit is a planned exit and is much more than the financial reward. You and your people become a really big factor as well. In this regard, some keys to consider include:
- Who wants to be employed by the buyer, with what role, and for how long?
- What impact does your and your team’s employment have on the purchase price?
- Is your acquirer a financial or strategic buyer? This impacts timing, price, and personnel. For example, a strategic buyer takes longer and there are more things to work out because there might be a lot of redundancy in personnel, system, processes, and reporting structures.
There’s a lot you can do as a founder to attract investors. Set yourself up for the success you deserve. Watch our recorded panel to learn more from Mark Hodges, Founding Partner at Acresis LLC, and Tripp McLeod, Managing Director at CBIZ CMF.
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About Chris Grady
Chris Grady is AcctTwo's Managing Director. He is passionate about helping SaaS organizations achieve success by transforming Finance & Accounting into a growth enabler & change agent. Be it a cloud-based software solution, or outsourcing performed by AcctTwo's Managed Accounting Services team, Chris is dedicated to our customers' organizational longevity and their full realization of growth & vision. You can schedule a meeting with Chris by clicking here.