Since March nearly everyone in the world has experienced change in their lives beyond our average experience. Some of the changes have been stressful and devastating; some have been positive. Most people with whom I have spoken have found times of joy in spending more time with their loved ones, having the time to cook, play games and just talk.
However, the negative impact on so many businesses seems almost unbelievable. Eight months ago no one would have predicted that restaurants, retail stores and gyms would have to completely shut down.
What has not changed are the core fundamentals of business. In order to survive, a business must have a product or service that solves a problem and can financially make a profit. From what I have seen, many businesses that will not survive until the end of 2020 were not sustainable prior to the pandemic because they did not understand which products or services were making money and which products were losers.
The core metrics and accountability required to run a profitable business were overshadowed by the exuberance of the economy and the unrealistic valuations private equity and venture capital firms were paying for investments. These valuations stemmed from the limited supply of investment-worthy companies and the requirement for investors to invest in order to stay in business.
The firms being capitalized had the Seven Essential Tools® – and knew how to use them to attract investors.
Check out my Seven Essential Tools Road Map®, which shows the steps to preparing to pitch to investors. Along with the Seven Essential Tools® details, you can position your company for growth or simply gain a better understanding of where your company stands financially.
Investors are focused more than ever on the core attributes of a business when evaluating it for investment. The good news is that the information they want to know is the same information that is critical for you to run your business successfully.
If you are a founder or a C-suite executive of a fast-paced, growing entrepreneurial company, are you confident you have the Seven Essential Tools® you need to pitch to investors?
We have learned many definitions
related to essential in 2020. The interpretation of essential has been heavily
debated, including discussions over golf courses, liquor stores, restaurants,
and bars. As communities open up, these debates are getting more interesting as
the discussions center around who is allowed to be open.
My favorite debate about “essential”
is the one where the attorneys representing Elizabeth Holmes, the Founder and
CEO of Theranos, appealed to the court that they should be considered essential
and allowed to meet at the office to work.
Pre-COVID, one meaning of “essential” described
having the right infrastructure in place if a company wanted to raise capital. The
right infrastructure is critical to generate the data about your business during
the due diligence process with potential investors.
Here are a few examples of why this is
Revenue projections will be a key
component of what the investor will look at when evaluating the business. The
revenue in the projected income statement for the prior year probably
represents an increase in the revenue over the current year. The investors will
ask questions like: “How long does it take you to close a deal from the time
you speak to a customer to close?” “How many deals do you have in the pipeline
now?” “What is your customer churn rate?” “How do you charge customers – as
SaaS, by transaction?” etc.
These questions will be asked during
the initial discussion as well as during the presentation. Whatever answer you
give, if the due diligence moves forward, must match the data in the general
ledger, CRM (Customer Relationship Manager data base) and other systems.
I have known a C Suite executive
falsely stating things like they have never lost a customer or they close a
deal in 30 days. But when we drilled down on the historical data his statements
are not supported by facts.
I have also experienced a C Suite
Executive who stated that the projections were high because “that is what we
need to close this deal.” False information may get the attention of a
potential investor but it will not keep their attention when they drill down to
the “essential” infrastructure and claims are not backed up by facts.
Burn rate – potential investors will
ask what your burn rate is, i.e. what is the amount of cash the company
requires each month. Burn rate is based on the cash leaving the checking
account – not the pretax income. These are two different calculations and often
commingled into one number for companies. If the C Suite executive states the
monthly burn rate is $10k because that is the best guess he has during an
investor presentation, but the historical cash spend is $15k per month, the
investor will lose trust and the company seeking investment will lose
credibility. Best guess does not get the job done.
buyers are looking for infrastructure that can help them identify, track,
measure and report on a broad range of externalities. Being able to demonstrate
actions taken to date, along with a path forward that helps buyers envision how
the company can help address or mitigate global challenges and serve societal
needs, can help them think more expansively about opportunities for creating
In their article, the E&Y authors
are directing their advice to Private Equity Firms to emphasize the importance of
creating value for portfolio companies the PE may want to sell. The quote above
supports my assertion that adequate infrastructure is essential for
companies seeking investment.
You may say to yourself, I will build
the infrastructure when I am ready to pitch to investors – we are not ready
right now. If you have the ability to influence decisions about company spend,
it is your fiduciary responsibility to insist the company has the right
infrastructure. Not only will it position the company to prepare for the future,
it will guide the entire management team in making the right decisions day to
Let’s dive into your essential infrastructure concerns – click here to set up a 30-minute free consultation to discuss your unique situation.
Countless Americans seem to have an insatiable desire for immediate gratification. This drive for gratification has led to an increase in “on-demand” start-ups, such as Uber, one that is frequently in the news these days. These start-ups address needs such as transportation, food, entertainment and beauty treatments. The short-term euphoria derived from the instant gratification meets a perceived (or even real) need, resulting in billions of dollars being available to fund these companies. Investors have bet the companies will build enough revenue and momentum to go public. With an opportunity to exit through an Initial Public Offering (IPO), they can get a great return on the investment. The IPO market has allowed some unprofitable, high-growth companies to pass through the gates and create hope for others – including Amazon and FitBit.
Prathan Chorruangsak / Shutterstock.com
History often repeats itself – there were many “on-demand” start-ups during the dot.com boom in the 1990s that were unsuccessful, including Webvan, known as poster child of the dot-com “excess” bubble, according to techcrunch.com. My belief is that the initial euphoria of immediate gratification is then seized by the control freak in us who wants to choose our product. For example, when the apple from the grocery delivery shows up with a bruise or we cannot communicate with the office manicurist, the urgency for immediate gratification dies and we drive to the grocery store to pick our own perfect apple or to the spa to get the manicurist of our choosing.
The success of Uber has given the on-demand space an extra surge of enthusiasm and creativity. Many riders frequently use Uber because they appreciate the experience and the price. On the one hand, this is a great business outcome; the fact remains, the company eventually has to make money. Uber continues to struggle with growing regulatory issues that will eat into revenue, create higher operating costs and, ultimately result in higher rates. I recently landed in the New Orleans airport and requested an Uber car at the airport. An immediate and distinctive pop up on my phone alerted me that all Uber rides were $75 from the New Orleans airport due to city ordinances. This is compared to a $15 cab ride to my client’s office. I cancelled my Uber request and went to the cabstand.
The message to entrepreneurs and business owners is that we can learn from history, and basic business fundamentals are clear – you have to make money selling the product. Investors expect a return on investment, and at some point will be unwilling to continue to fund a losing proposition. Keep your books and records current to ensure all your products are making money or, by default, you could be making the decision to fund a loss leader.
Sunday began the week with the Holiday of Love – St. Valentine’s Day. How do love and emotions influence our decisions about business and investing?
Many people have used the services or read about a Unicorn or a Unicorn “wanna be” without even knowing it. Fortune.com defines a Unicorn as a once mythical, now reality, start-up business valued at more than $1 billion and includes Uber ($62.5 billion), Airbnb ($25.5 billion) and Snapchat ($12 billion)*.
Jacksonville-based Fanatics is a local Unicorn valued in excess of $3 billion that is putting Jacksonville on the start-up map according to a First Coast News report (http://fcnews.tv/1om5Exd)
Speed to market for a unique new idea is critical for start-ups. The exuberance of growing a company fast can generate more endorphins than the Boston marathon, while the adrenaline rush can lead an enthusiastic business owner to burn through huge amounts of cash in an attempt to gain market share. This cash burn must show traction – is the cash you are investing to gain market share paying off? Are the dogs eating the dog food or, in other words, are you acquiring as much of your target market as you project or need to justify continuing to increase the value of the Company and command the incredible valuations such as in the previous examples?
The basic principles of running a business, i.e. the eventual need to generate enough revenue to create a profit remain a core value of building a business. For example, if the cost of production plus acquiring market share is more than what you are selling the item for, that’s a no-win situation down the road. Using metrics and projections, founders and owners must continue to evaluate building enterprise value in order to provide a return on the investment to shareholders.
My experience serving as the Principal of a Private Equity Firm and as a CFO of small and large entities provides a depth of experience that can help with the analysis your business needs to understand if you are on the right track for building enterprise value. Please contact me to discuss your unique situation.
* http://fortune.com/unicorns/. Note these are estimates of the companies’ enterprise value based on the latest rounds of private financings. These companies are private and it is difficult to find the exact valuation.