Source: Ricky Pelletier, OpenView Partners
Often when I speak with a company that is looking for a new round of capital, one of the immediate follow-up items is the preliminary data request. At this point, I’m assuming we’ve walked through a solid pitch deck that at least gives some high-level on the financials and helps answer these three questions:
- What is the pain point you solve?
- How do you solve that pain in a differentiated way?
- Who do you solve it for?
The preliminary data request that follows the investor presentation is usually more financially oriented and allows the investor to take a deeper dive into the economics of the business. Time and time again, I always ask for the same three pieces of data, regardless of the business. In order to maximize efficiency of the capital raise process, answer questions before they’re asked, and present the clearest picture of your business, I believe a CEO who is raising capital should have the following three documents readily available:
This seems like a no-brainer and I’m sure most CEOs will have a solid P&L handy. What really sets a strong P&L apart from the rest of the pack (in this sense, strong refers to the presentation of the data, not the data itself) is how much detail is provided and how that detail is organized in the spreadsheet. Here are some ideas:
- Investors like to see trends over time, so provide them with a periodic P&L over a period of months (or quarters) looking back and forward. I usually like to see 24 months of trailing data and 24 months of forward data. This does not mean you need to send the entire financial model your CFO has built (not yet, at least), but rather the output from that model for future years.
- Don’t just run a report from your ERP system. Take the time to massage the data into a cleaner format so the financials present how you want them to present. This may involve consolidating rows/columns and/or relabeling the various accounts to have them make more sense to an ‘outsider.’
- Include a bookings line in the top of your report. This is especially important with SaaS businesses where there may be annual subscriptions that are recognized over the life of the subscription. Given that revenue recognition policy, revenue may not necessarily jump that much period to period and understanding bookings momentum over time may provide a better indicator of growth.
- Provide additional revenue detail. Investors want to know how the various components of revenue are being generated (SaaS license fee, perpetual license, hardware sales, professional services, etc.), so show that breakdown right in your P&L.
- Organize your operating expenses by department (Engineering, Sales, Marketing, G&A, etc.). Each should be fully-loaded and include all costs associated with the individual departments. For investors, understanding what you spent on Sales & Marketing is far more important than knowing your travel or rent expenses.
- If there are certain elements of your business that you focus on tracking (KPIs, headcount, customers, CaC ratio), include those towards the bottom of your P&L as it is helpful to understand how those are trending over time.
2) Revenue by Customer by Month Since Inception
This tends to be one of the more difficult items to pull and quite frankly, it is the most important (especially for SaaS businesses). In my eyes, it should go back to the start of the business and track every customer’s progression through time. It should list all customers to date (both current and former) along the left and should have months across the top (starting with the company’s inception month and moving right to current day). The data itself should be the monthly recognized revenue or billings per customer and should not include any one-time or professional services revenue.
While it may seem like a daunting task to pull this together, it is always easier to start doing this sooner rather than later. Assuming the business is growing, there will always be more data to enter in the future and it will be easier to update as new customers sign up rather than after the fact. This can be an incredibly difficult spreadsheet to pull together at the last minute when an investor is asking for it, so it is best to have it ready to go.
Additionally, while it is a helpful tool for investors, CEOs can use the same data set to help them better understand and manage their business. Here are some of the key pieces of intel that can be derived from the data:
- Churn: This will help you understand the true churn of your business on a customer-by-customer basis. It will give you a good understanding of how many customers you are losing, average customer life, lost dollar value, etc.
- Customer behavior patterns: By running various cohort analysis, you can understand how your customers trend over time. What happens to a customer after a quarter or a year — how has their monthly revenue changed? If you get really fancy and add additional detail about the customer (vertical, size, etc.), you can run some great customer segmentation analysis to better understand how specific groups perform over time.
- Customer Concentration: Pretty simple, but how is your customer concentration changing over time?
- ASP Trending: How is your Average Selling Price (ASP) changing over time? If ASP is moving one way or another, what is driving that change and how can you prevent (if decreasing) or encourage (if increasing) that behavior?
3) Capitalization Table
The cap table is an incredibly important piece of data that investors will want to see early on. Investors want to know how much preferred stock is currently in the business, how much management owns, and the availability of the option pool, among others.
Many cap tables I see are fairly complex models that look like they’ve been put together by over-thinking CFOs and/or lawyers. While there may be a place for this, I don’t think that sending the complex version is helpful to anyone — neither the investors nor the company, alike. I would recommend taking the time to construct a more basic summary cap table to share with investors during the preliminary data request stage. Here are some suggestions on what to present:
- Break the cap table down by share class first. If you have a business that has only one class of stock (common), break it down by founders, management (being sure to call out specific roles of particular significance if needed), other investors, and options (both allocated and available for allocation). For a business with multiple classes of stock, it is a bit more complex than that, but the same premise exists for the preferred series. Try to consolidate investors into a single grouping when you can, but still make sure to call out significant shareholders (>5-10% of total shares outstanding or so).
- Include both the number of shares per investor and the percentage of total shares outstanding owned.
- Break down the option pool into two individual lines: 1) Options that have been allocated to specific individuals, and 2) Available options yet to be allocated. This will help the investor understand how much room is in the option pool and what adjustments (if any) will need to be made to make sure that the management has the proper incentives in place.
- Outside of the cap table (towards the top or bottom of the spreadsheet), call out a quick description for each of the preferred series. I would include the price per share, date of issue, and any additional features it may have (participating, convertible, kickout, liquidation preference, etc.) — anything that could help the investor better understand how that security works without having to dig into the legal docs.
At the end of the day, the usual preliminary data request consists of three fairly simple pieces of info that you are probably already tracking — this blog post is more to be used as a guide to help understand the presentation of the data that is most helpful in analyzing your business in an efficient manner.
Every business is very different, so some or none of the above may apply to your business. The reason I have called out the data above is that it has proven to be the most helpful in getting me up to speed on the types of businesses that OpenView invests in. I’m sure other investors will have a very different viewpoint.
The goal here is not to have you recreate the wheel (I know you have enough on your plate), so if you are raising now and don’t have this info pulled together in this manner, that’s fine. I’d still love to take a look. That said, if you are not yet raising and starting to think about it, this may be a helpful guide as you begin to pull your material together as I really do think it helps focus the investor’s eye on the components of your business that you care about most, and will ultimately increase efficiency in the process.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.