Monday, May 27, 2024

These Are the Financial Reports and Metrics VCs Need to See

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Your startup might be the next groundbreaking product or service to hit the market, but you won’t get far if you can’t convince venture capitalists (VCs) or investors that it has the financial legs to succeed.

Showing comprehensive financial reports to VCs is a critical early-stage process to nail down for entrepreneurs seeking funding. Investors want a detailed understanding of your business’s economic health, growth potential, operational efficiency and more. They need clear, data-driven insights to help them accurately assess the potential threats and rewards associated with their investment.

As CEO of Dale Ventures Groups of Companies, I hear many pitches for great ideas that could make a splash in the marketplace. Still, I won’t make any decisions until I have a chance to look at several financial reports that will either confirm my assumptions or make me think twice.

So, what financial information do entrepreneurs need to share to get me and my fellow VCs on board? I’ll share a handful of reports your startup should include when presenting your business plan.

Related: 99% of Investor Pitches End in Failure. Here’s How to Make Sure You’re Part of the 1% That Succeed.

Income statement

Also known as a profit and loss statement, this report is a comprehensive overview of every critical financial component:

  • Revenue
  • Cost of goods sold (COGS)
  • Gross profit
  • Operating expenses
  • Net income
  • Earnings per share (EPS)

This document clearly shows your business’s ability to manage costs and generate revenue, as well as its financial performance and potential to turn sales into profit. In their research, investors want to see your revenue trends, gross margins and net income to assess your current viability and potential for sustainable growth. VCs use this report to gauge business efficiency and operational health.

The numbers in this statement help them understand how well the company is currently managed, how efficiently it allocates resources, and its ability to capitalize on new market opportunities. The income statement is a crucial indicator of whether to invest in a company.

Balance sheets

While the income statement is the 30,000-foot view, balance sheets help investors see your financial picture at a particular time. Here, we’re looking for three things:

  1. Assets: Everything the company owns, like cash, accounts receivable and physical possessions.
  2. Liabilities: Obligations, including debts and accounts payable.
  3. Equity: The owner’s residual interest, which helps indicate the company’s net worth.

Your company’s financial health conveniently boils down to a simple math equation: Assets = Liabilities + Equity. Balance sheets help investors understand a company’s liquidity, solvency and financial stability. VCs like myself will scrutinize your allocation of assets and liabilities to fully understand risk exposure and financial leverage.

A strong balance sheet gives us confidence that your startup has the financial strength to weather potential challenges and capitalize on opportunities. A transparent, well-structured balance sheet signals to investors that your company has what it takes to go the distance.

Cash flow statement

This vital financial document tracks the cash flow in and out of your business over time and covers three main sections: operating, investing and financing activities.

This is where the microscope comes out for potential investors and VCs. Here, we can analyze the sustainability of day-to-day operations. It’s a way to assess your company’s ability to generate and manage cash, specifically how you allocate capital. This can be through asset investments, debt repayments or financing activities.

A strong cash flow statement includes details on the cash generated from or used by core business operations and other financial endeavors. This offers a clear picture of how cash moves through your company, providing deeper insights into liquidity, operational efficiency and ability to meet financial obligations. This statement tells investors how well you manage your money and if your business is set up to navigate financial difficulties in the future.

Gross margin

The following two topics aren’t full financial documents but metrics vital to your business’s health.

Gross margin is a critical piece of information that shows the percentage of your revenue exceeding the COGS. This insightful information tells investors how efficiently you produce and sell your products or services.

Here’s another equation for you: Gross Margin = Net Sales – Cost of Goods Sold (COGS). This percentage tells investors that your startup can cover its operating expenses while keeping a good portion of revenue as profit. Investors will look at trends in your gross revenue to evaluate your sustainability and scalability.

Burn rate

The rate at which your company uses up its cash reserves or capital is critical to investors. Your net negative cash flow per month is a timeline that indicates how long your startup can function normally before you deplete your available funds. This shows investors how much of a runway you have before additional funding becomes necessary.

A reflection of your financial discipline and strategic planning, a sustainable burn rate shows VCs how well their investment would contribute to long-term success.

The numbers tell the real story

These financial reports and metrics are all pieces of your startup’s narrative. To VCs and investors, they tell a comprehensive economic story about your company: where it started, where it stands and where it’s going.

As you seek capital to fuel your ventures, keep these in mind. Transparent, insightful financial reporting will establish trust and credibility with potential investors and offer them an inside look at your company’s true potential. A compelling financial narrative attracts investors by establishing the foundation for long-term partnerships, building toward sustainable growth and success in a competitive marketplace.



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