What Investors Look for in an Early-Stage Startup’s Finances, According to WeWork's Global Head of Business Planning for Real Estate
Getting a grip on your startup’s finances can be intimidating, especially if your background is far from accounting-oriented. But as a founder, you need to understand the state of your money—where it’s coming from, where it’s going, and what shape it needs to be in to get investors to give you more of it. WeWork Labs spoke with Jon MacIntyre, global head of business planning for real estate, development and construction at WeWork, to find out what potential investors are looking for in your financials, and get a few wise words of advice.
You need a cash flow statement
“Cash is king,” MacIntyre says, and this statement shows how much of it is coming into and leaving your company. Revenue is inflow; expenses (like payroll) are outflow. It’s typically divided into two or three sections: Your incoming money, your outgoing money, and your financing and equity. Don’t forget to include liabilities that you haven’t paid for yet—you need to know if you have enough money in the bank to cover them. It’s important to be detailed in all sections, but the financing/equity section is one area startup founders are often too lax with, MacIntyre says—you have to track every dollar that comes in, including any money you’ve personally put into the business, as well as friends and family. This is critical because when it’s time to approach investors, they’ll want to see exactly who’s put money into the company and how much, MacIntyre says.
Your numbers tell a story, and the story has to make sense
Consider this scenario: If you’re pre-revenue and “I’m giving you $10,000 as an investor, but your expenses over the next six months are $15,000,” MacIntyre says, “why are you only asking me for $10,000?” Those types of gaps in logic are important to avoid, and you can do that by creating pitch materials that address any and all questions investors might have, including why you’re asking for the amount you’re asking for and whether you plan to raise again and when. “If you’re going to come back to me in a year for more money, tell me why,” MacIntyre says.
Investors want to see where you’ve been and where you’re going
Historical financial information and financial projections are non-negotiable, even if you’re pre-revenue. “Investors want to know what you’ve done so far,” MacIntyre says, even if you’ve only been around for three to six months. For slightly older companies (think two years) that are still pre-revenue, “they’ll want to know what you’ve been doing and what you’ve been spending money on,” MacIntyre says. And if you’ve been around even longer, say five years, and your revenue has been unsteady or declined, they want to know that, too. (And if that’s the case, be prepared to explain why.) Looking into the future, for early-stage companies, investors want to know where you expect to be financially at least one year from now and how you’re going to put their money to use to grow the business. Be specific when you explain what their money will go towards. “That’s where people mess up,” MacIntyre says, “not knowing what they’re asking for and why.”
Don’t be afraid to spend money to get your money in order
“If you don’t have someone who understands your numbers, you can’t meet with the smartest investors out there,” MacIntyre says. If you’re not that person (and it’s important to be honest with yourself about whether you really have the financial chops to fill that role), MacIntyre recommends finding someone who can be, even if your budget is very limited. And there are a few compelling reasons why. First and foremost, you’re unlikely to get funding if your finances are a mess. Second, if you wait too long to fix things, it becomes a big drain on your time and resources later on. And third, getting someone to help with numbers doesn’t have to mean hiring a cofounder or a CFO. “You can leverage local accounting firms and CPAs,” MacIntyre says, noting that it’s crucial that you find someone with an accounting background, not just general finance. Plus, prioritizing your finances can look good to investors, MacIntyre says. “If you mention to an investor that you want to spend $50,000 being reviewed by an accountant and tracking the financials, that can speak well of you.”
For more money information, check out our post on the do's and don'ts of basic startup finances.
This post is based on content from a WeWork Labs programming session.