In the world of startups, we all have so many interests and skills that it’s easy to forget the value of domain expertise. I do know a lot of things about a lot of things, but I’m only an expert in a few, and the biggest of those is finance. And the most effective way I can help startups and entrepreneurs is by sharing what I know about finance.
The following is what I consider the four pillars of early stage success, financially speaking. There are other important factors too, but I’m not an expert in those. I don’t care about product, I don’t care about marketing. That’s not my domain. I don’t claim to be an expert in any of that. In my professional opinion, these are my four most important things with my domain blinders on. If you are a start-up, the four pillars I consider requisite as a finance guy, are as follows:
- Financial Integrity: your financial books, past and current
The way you keep track of your finances from the beginning of your business is crucial to what financial opportunities you’ll have later. It’s vital that you have a consistent, reliable system, that your bookkeeping is up to date, registrations are paid, transactions are reconciled, your balance sheet is clear and understandable, and your categories are standard and transparent.
When you’re ready to raise capital or make financial deals, this is the first place people will look. And if, for example, you have a huge number in a category called “other” or “miscellaneous,” you’ll lose credibility with your peers, your investors, and your employees.
You need your books to be clean, so that if someone asks you a question about them, you can answer it and then move forward to more important topics: like how much money they’re going to invest in you.
- Financial Projections: your forward-looking business model, in numbers
Investors want to know that you are managing your company responsibly, you have a clear mission, and that you know your market.
What is your plan for using future proceeds? When you get a dollar in the front, whether investor or revenue, how are you going to spend it? what are you going to prioritize? do you understand the industry that you think you’re targeting? because you might not be targeting the thing that you think you’re targeting. and do you understand what that target is? how big is it? 100 peple? billion? 100 dollars? million? there’s no such things as a bad answer. 100 people who want to spent 1 million, that’s great. that’s ok. but you also need to show that.
This is what projections are for. And those projections have to be well-researched and realistic. You can’t have a plan to make millions of dollars but only 5 employees. You can’t promise you’ll have 15,000 enterprise-level clients if there are only 6000 in the world.
You need to get clarity, be honest with yourself, and then outline your plans in a clear, concise document. You have to have a plan, and you have to be able to tell the story of that plan – in the language that financial professionals use.
- Core Team: the right people
If location is everything in real estate, the team is everything in start-ups. To paraphrase a common adage, “I would rather have an A-team with a shitty product than a great product and a shitty team.”
So what’s the perfect team? That’s the million dollar question. But there are certain things that a team cannot succeed without.
- You have to have somebody with vision, passion, and conviction. It doesn’t all have to be the same person, but you need people with those qualities.
- You need someone with domain expertise. If you’re a marketing guy and a sales guy and you’re launching a website without a web designer, your company has failed before you launch. Not only are investors going to wonder who’s building your product, but you won’t have anyone who can talk effectively to other web professionals. Someone in your company needs to be a guru in your field, someone who has killed it in your business.
- You need to do gap analysis. You must know your weaknesses, and source resources to make up for them. If you don’t know anything about cancer but you’re passionate about a certain treatment, then you can use your passion to bring the right scientist on board. You don’t have to know everything, as long as you admit what you don’t know and recruit team-members who do. But if you keep your blinders on, whatever you’re ignoring will be the first thing potential investors or collaborators will see. They need to know you’re a rational individual, and that investing in you would be a rational decision.
- Respect the multiplier effect. The ideal team tends to be 3-5 people, with 2 founders, and initially, everyone will share responsibilities. It’s assumed that in the early phase, you’ll all still be moonlighting, so you may only be devoting 10 or 20 hours a week to your new business. But if you have the right team, those people will be highly effective with those 10 or 20 hours. Their efforts will multiply, rather than simply add to, each other’s, and their combined effort will produce more than 200 hours worth of output.
- Find the right chemistry. The most elusive, and maybe most important, quality of the right team is its chemistry. That’s the personality, intelligence, empathy, and problem-solving skills of the individuals, and the little spark that makes them work well together.
- Access to Capital: your business’s lifeblood
It might sound obvious, but having the “right” amount of capital, at the right time, from the right people, and on the right terms is absolutely critical. Even on the most basic level, if you don’t have enough money to pay people, or a strategy to raise that money, sooner or later (and it’s usually sooner), your business will fall apart.
The first step is investing in your business yourself. Whether it’s $10k from your personal savings or 10,000 hours of personal time, you and your team have to be the first to put your faith and your resources into your business. Next you can reach out to friends and family, and then you’ll raise money from strangers.
Once you get to strangers, you’re at a transition point. Up until then, people are investing in your idea primarily because they believe in you. They trust you already, and trust that you’ll make good on their investment.
But strangers don’t know you. They’re not your mom or your uncle or your best friend from college. They’re not interested in helping you grow as a person. They’re interested in the return on their investment. A beer drinking buddy might give you some capital based on your passion and your idea, but a venture capitalist or angel investor is going to want actual information, prepared in a financial language they understand.
This is when you’ll want to seek the council of someone with financial experience. Sounding stupid when talking to a major investor could mean the difference between seeding your company and losing it entirely. Can you talk about why their investment is a rational decision? Can you explain the hurdle for the level of deliverable required, and have you met it? Have you worked for one month, or 18 months, to prove that you’ve figured out how to make your ideal viable, and more importantly, profitable?
What’s your burn rate like? What’s your hiring road map? How much money do you need, and what’s your plan for raising it?
And do you know who to approach for what you need? For example, if you’re only raising a million dollars, you could talk to angel investors or use Gust, Kickstarter, Indiegogo. If you need 3, you want to talk to VCs. If you’re talking about 5 or 10 million, then you’re getting into institutional numbers. At all of these levels there are different expectations for how you present your business, and you need to know which is which.
But if you have the right presentation and you’re talking to the right people, everything can be easy. For example, if you can show a VC that wants to invest with you that they’ll get a 30-40 times return on their investment, that’s all they need to see. Conversation’s over, and your company is vested.
If you can do this yourself, you’re ahead of the game. But if you can’t, it’s more than worth it to find a trusted advisor to help you do it.