A version of this article was originally published on TechCrunch.
For companies in the midst of startup fundraising, news of rising interest rates, Russia’s invasion of Ukraine, market volatility, and falling valuations are painting a daunting picture. Understandably, founders are eager to understand how current public market conditions may impact startup fundraising in the private markets. The good news is, in the context of history, periods of market correction are common––and great companies are still poised to thrive.
In more favorable market conditions, using your performance data to articulate a clear story about your company’s potential is best practice. But in the current volatile markets, using data to tell your story becomes the imperative. Whether looking to raise equity or debt, investors will pay even closer attention to a company’s performance and projections in order to manage their own investment risk. As a former venture capitalist, I tell all founders that confidence in their data will have major implications on their company’s valuation and deal terms when startup fundraising.
Unfortunately many companies lack an efficient way to gather, synthesize, and interpret data into real-time insights, resulting in the default reliance on static, Excel-based samplings that may not capture the full picture of your company’s potential. With all this friction, it can be challenging for entrepreneurs to even know where to begin and setup your data room. For founders and startup teams looking to become more data-driven in their approach to startup fundraising, the following steps are a good place to start.
Start with Revenue Cohort Analysis
A cohort analysis looks at different groups of customers, whether that be users over certain periods of time or segmented by region or size, and allows investors to see how they individually perform. Investors love to see into the future because they know that the value of a business is the present value of its future cash flows. By decomposing the drivers of revenue growth via cohort analysis, you can raise investors’ confidence in your cash flow projections, resulting in a higher valuation or more favorable loan terms.
Sample revenue cohort analysis, May 2019 to March 2022
Take the above graph as an example. The cohort analysis shows that newer groups of customers are larger and more retentive than ever before. This indicates to investors that there is a trend toward higher customer lifetime value, which ultimately instills confidence in your company’s future growth.
Companies that can tie the same cohort performance to improving sales and marketing efficiency will help demonstrate that the business’ growth is not just a function of increased spending on customer acquisition and retention. In other words, this is a company that is compounding value and thus even more valuable to investors and will increase your chances for startup fundraising.
Sample LTV/CAC, July 2019 to January 2022
If your Cohort Performance is not your Strength
While it is always best to raise capital for an efficiently growing business, many company financings are completed without the above cohort behavior. In this case, it’s about showing investors how stable and therefore safe your business is. If your business is profitable, it is about showing why your earnings before interest, taxes, depreciation, and amortization (known as EBITDA), will remain stable due to a diversified set of suppliers and customers.
Sample customer concentration analysis, July 2016 to May 2020
Another useful metric specifically for lenders, is showing the longevity of your revenue due to recurring purchasing behavior. Even in the event that you stop investing in sales and marketing, this is a way to drive this stability home in a powerful manner. This kind of analysis is called a “Runoff Analysis” and can prove to investors how safe the return from the investment is even in a meaningful downside scenario.
Leverage Balance Sheet Assets Regardless of Performance
As mentioned earlier, cohort analysis or revenue driven metrics might not be possible for many companies to use during startup fundraising.
If your cohort-based customer lifetime value to customer acquisition cost (LTV/CAC) curves show a value of <1.0 at the 12 month mark, an equally viable financing path involves using valuable assets on the balance sheet. These can be borrowed against or sold (called factoring) generally without regard for how the business is performing –– which can also be a useful lever to buy more runway and prove enhanced business metrics ahead of an equity raise. Another bonus? This helps companies avoid unnecessary dilution.
To rely on the path of leveraging balance sheet assets, companies must have two data assets. The first is a clean balance sheet that accurately articulates the assets and liabilities of the company; the second is backup material (often contracts) which prove the ownership and obligations listed in the balance sheet. It is critical that these source documents and the balance sheet tightly reconcile. In fact, failing to reconcile this carefully is one of the most common reasons why a company fails a diligence process post term sheet.
Sample non-cash assets, February 2021 to November 2021
Ultimately, companies that are both aware of the avenues that will tell their story most effectively and have invested in the ability to tap into those resources are poised for success in early funding rounds during startup fundraising.
Invest in Forecasting
Forecasting is essential for developing and subsequently demonstrating your company’s outlook and strategy for success. Yet, one of the most common (and significant) barriers to data-driven fundraising is the inability to effectively forecast. Companies that fail to forecast using a defensible methodology are missing the critical assets needed to pitch their story in a data-driven way.
The advantage of investing in stronger forecasting is simple: because a company’s value is the present value of its future cash flows, the more confident a company can be in its future cash flows, the more credit it gets for them. To articulate cash flows in “present value format,” they are discounted––or in other words, divided by a number that quantifies uncertainty. If cash flows are discounted at 3% vs. 25%, there ends up being very different present value numbers.
In today’s dynamic between investors and companies, investors tend to hold all of the cards because they have the human resources to invest in quantitative and qualitative forecasting. To level the playing field, companies should invest in the tools that will allow them to understand their company’s outlook from the same vantage point as investors. Simultaneously, companies that spend the time providing the insights and analysis most relevant to investors are also signaling a level of savviness that can set the stage for a more efficient fundraising process.
The End Result? A Data-Driven Pitch
In a down or uncertain market, investors will seek to de-risk their decisions based on hard evidence of success. The result is an additional layer of scrutiny in pitch meetings around performance and financial projections, and an overall lengthier due diligence process during the startup fundraising process. Coupled with reports of burnout among VCs, the obstacles for companies looking to fundraise through traditional channels are building. Good storytelling about your company, backed by strong data and robust financial models is always a powerful tool in startup fundraising, and in the current environment it can make or break a company’s successful outcome.
Interested in learning more about Hum Capital’s data-driven approach to helping private companies find the right capital for their business? Fill out this form to connect with our investment team!