• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to secondary sidebar
  • Skip to footer

Scale FinanceScale Finance Logo, Interim CFO, Part Time CFO Services, Accounting Support, Temporary CFO, Accounting Bookkeeping Services

Interim CFO, Part Time CFO Services, Accounting Support, Temporary CFO, Accounting Bookkeeping Services

Charlotte · Raleigh – Durham · Chapel Hill · Triad · Southern Pines · Coastal Carolina
Closing the GAAP to Scale Your Business
The FINACA Logo
919-230-4667
Scale Finance, LLC, Financing, North Myrtle Beach, SC
  • Home
  • Services
    • CFO & Controller Services
    • Capital Raise Services
    • Business Valuations
    • Mergers & Acquisitions
    • Professional Consultations at No Cost
  • Professionals
    • Partners
    • Charlotte Team
    • Raleigh – Durham – Chapel Hill Team
    • Greensboro-Southern Pines
    • Coastal Carolina Team
  • Client Experience
    • Closed Capital Raise Transactions
    • Closed M&A Transactions
    • Client Endorsements
    • Information Technology
    • Healthcare, Biopharma & Medical Device
    • Services, Energy, Industrial
    • Consumer, Retail, Media
    • Real Estate
    • Private Equity Groups
  • Recent News
  • Knowledge Bank
    • Best Practices in Scaling Companies
    • Entrepreneurial Management Skill- Building
    • Financial Management
    • Mergers & Acquisitions
    • Regulatory Developments
    • Venture Capital
  • Contact Us
    • Charlotte
    • Raleigh – Durham – Chapel Hill
    • Triad – Southern Pines
    • Coastal Carolina
  • Joining Our Firm

VC Due Diligence – Are Your Sales Pipeline & Forecasts Accurate & Honest?


Source: Brian Zimmerman – due diligence, sales forecast

Here are the three very important factors that venture capitalists look for when they perform due diligence on a potential investment’s sales organization:

  • Avery clear understanding of its target market and buyers,
  • A sales process that maps to those things
  • A sales team that can be cloned to replicate the company’s previous success.

It’s rare that we find all of those components in one company, but that’s not the point. The purpose of performing due diligence on an expansion stage company’s sales organization is to confirm the future potential of the business and judge how prepared it is to scale and grow into a great, big company.

Which is why the last thing I’ll discuss in this series is so critically important. After all, venture capitalists aren’t charities. We exist, like any other for profit enterprise, to make a return on our product (which, as OpenView’s Nick Hammerschlag points out, is cash). So, what’s that oh-so-important final component of VC due diligence?

A forecast and pipeline review that shows substantial revenue potential.

Now, that doesn’t mean that the business has to be profitable right now. It means that, if a business is promising significant revenue in future quarters, we want to confirm that their forecast and pipeline information isn’t total garbage.

As VCs, there’s typically a number that we commit to in the quarter we make the investment. That number is usually based on revenue or bookings and can significantly impact the valuation of the deal itself.

For example, let’s say a company’s growth rate has staggered a bit, but they’re promising an uptick in the current quarter. I want to validate that by performing an objective analysis that proves their assertion. That might include evaluating things like:

  • The names of the companies that they expect to close
  • The realistic dollar amount of those deals
  • The date they’re going to close
  • The probability or stage of each deal based on the company’s sales process
  • The definitive next step that will ensure those deals close

From there, I can look at each forecasted sale, examine the best and worst case scenarios that could impact each one, and determine whether the company has a buttoned-up forecasting process, or some framework built on pie-in-the-sky projections. We’ll also break out renewal business versus new business in the forecast due diligence process, allowing us to see where the forecast is more heavily weighted. Ideally, it should be on new business.

As for a broader pipeline review, the more it’s tied to specific details (sales process stages, probabilities, and date-to-close, for example), the more comfortable VCs will feel with its accuracy and viability. If it’s sloppy, inaccurate, or loosely tied to documented data, red flags will inevitably be raised.

Ultimately, a forecast and pipeline review during the due diligence process is about fact-based, objective validation. We don’t want to know what you hope to close in the next quarter. We want to know what will close. And we want to see supporting information, processes, and history that prove your claims.

The bottom line — and the underlying point of this series — is that venture capital deals can be made even if a potential portfolio company has done none of the things I’ve discussed in this, and previous, posts. But those deals are the exception, not the rule. The more that you can legitimately and explicitly present valid revenue potential to a VC, the better your chances are of signing a term sheet that can propel your business forward.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides professional 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 in Charlotte, NC, the Triangle, the Triad, Southern Pines, and Wilmington with a team of more than 30 professionals serving more than 100 companies throughout the region.

Primary Sidebar

Knowledge Bank

How to Handle a Bank’s Rejection of Your Loan Request

Accessing University IP – Negotiating Financial & Other Terms

Why VCs Sometimes Push Companies to Burn Cash Too Fast

7 Steps for New Business Owners

Basic Benefits of Starting a Business in North Carolina

Finance & Accounting 101 for New Small Company Owners

Accounting Fraud – Common Causes and How to Stop It

Why 80% of Court Judgments Go Uncollected

7 Steps for Early Stage Fundraising from a VC

Foreign Exchange Management Under Volatile Conditions

Lessons Learned from the EIDL / PPP Trenches

Cash Management Plan – 2020 Economic Crisis

Is Your CFO Any Good? 4 Point Checklist

What Happens When Deals Die

How to Handle a Bank’s Rejection of Your Loan Request

Susceptibility to Accounting Fraud for Medical Businesses

Bankruptcy Relief for Small Companies Coming Soon

New Rules for Overtime Pay take Effect January 2020

The 5 Worst Things You Can Say to a Venture Capitalist

Incentive Stock Options Versus Nonqualified Stock Options

Explore the Knowledge Bank…

Secondary Sidebar

Recent News

SF Client Impact Financial Systems (IFS) Acquired by iPipeline

Scale Finance Assists TrueLearn with Investment by LLR Partners

Scale Finance Assists Textum Weaving with Investment by Quad-C

Scale Finance Closes Debt Financing for Horizon Eye Care

Scale Finance Closes Acquisition of Horsepower Site Services by MCG Civil

Scale Finance Closes Growth Financing for Celerity

Scale Finance Advises on Acquisition of Reliant Transport

Scale Finance Closes $20 Million ABL Financing for TRA

SF Client TruPoint Partners Acquired by Ncontracts

Scale Finance Advises on Debt Financing for Alpha Waste Industries, Inc.

Scale Finance Closes $7M Senior Debt for Travel Resorts of America

Scale Finance Closes Acquisition of Raleigh Metal Recycling by Elite Waste Services

Scale Finance Advises on Debt Financing for Pediatric Advanced Therapy

Scale Finance Closes Growth Equity Investment for Better Car People LLC

Scale Finance Closes Sale of Cayden Security to SCE Group

SF Client EarthKind Secures Growth Investment

Scale Finance Advises AMTdirect on Strategic Growth Investment

More News…

Footer

Ask the CFO

Need a quick answer to a finance/accounting question?

Sending

Media

Scale Finance Managing Director Dave Gilroy interviewed on WSIC Radio (local Fox affiliate)

/wp-content/uploads/2014/02/David-Gilroy-Interview-Local-Biz-Now-2-7-14.mp3

Entrepreneurial Tips

  • Funding Tips from Scale Finance
  • CIE Life Sciences Panel Discussion
  • Why Use Fractional CFO Services

FINACA is a nationwide network of independent finance and accounting consulting firms focused on delivering exceptional client service.

FINACA is a nationwide network of independent finance and accounting consulting firms focused on delivering exceptional client service.

Sign Up—Finance Bulletin

Monthly insights into corporate finance for entrepreneurial companies

Sending

Return to top of page

Copyright © 2008–2021 Scale Finance, LLC
Securities and offering services through Charles Towne Securities, LLC. Members FINRA and SIPC.