When we visited Estonia we heard from a young Mexican working for a company based in Tallinn. He lived in the city but travelled on business across the world. He was able to gather all the information required, enter it into his tax return and submit online in less than one minute.
It would not be easy to replicate Estonia’s digital government on a national scale. But this level of speed and efficiency should be an achievable benchmark for financial information within a business. The conversations I have and the things I see every day tell me that is not how things are today.
7 Lessons about the challenges of financial information
Startups and growing businesses need better financial information. My financial information survey was the first step in a plan to tackle that problem. Nothing in the survey has changed that view. Now I am able to refine it to a small number of specific statements about what needs to change.
Here they are!
1. Revenue forecasting is the hardest thing. Neither past performance nor external market views help much.
2. Cash flows and funding needs are the biggest worry.
3. Founders and entrepreneurs want a system to help make decisions and plans. It should be:
5. Lack of visibility about cash flow is the biggest worry. Lack of skilled resources to focus on finance is also a concern.
6. Your numbers should help you understand your business. Achieving this means to integrating data from multiple sources, not just financial numbers.
7. Founders and entrepreneurs what data to help understand how their business is doing. It should be:
Painting by numbers
Learning from potential customers is an exercise in humility. This survey asked some broad and fundamental questions. As you might expect, this has led to identifying some much sharper questions. Not to any definite answers.
The responses came from a wide range of perspectives. Many different countries, roles in the ecosystem and levels of experience were represented. This means you have taken me further forward than I could possibly have hoped.
A full analysis of the survey responses is available to download in this slide deck.
The Chairman's View
I started out on this project because startups need better financial information. Next step for me is to figure out how best to answer the challenges posed by the generous response to the survey.
The job of “finance” is to make the numbers into a voice the entrepreneur can listen to and learn from. All the admin, accounting and compliance should just happen. Real time, right first time, invisible. Low cost. I know the job to be done and my aim is to find or build the tools to do it.
The many who offered to help will be hearing from me shortly. Thank you in advance for your further assistance.
Click here to download the full survey results and analysis.
I talked in my last post about the value of numbers in running your business. For many entrepreneurs financial information looms largest when they prepare a business plan. I am still looking for as many people as possible to share your opinion on both these challenges –– final reminder I promise.
Some sort of financial forecast is integral to any startup business plan. There is no need to explain to founders why this matters. A good business plan can be the key to unlocking investors' wallets. I meet a lot of entrepreneurs who are focused on this stuff. Yet more often than not, they are a bit sheepish when it comes to the numbers.
In the glory days of amateur rugby the spirit of the game sometimes overcame the urgency for results. At these rare moments, Bill McLaren sometimes used to quote a mythical Irish wit “the situation is desperate but its not serious.” (See origin)
Financial forecasts in startup business plans remind me of this philosophy. A set of financial projections is essential to the whole fund raising process. But in truth they don’t count for much. Investors make decisions based on the team, the market size, the level of innovation/ disruption and maybe the business model.
Financial forecasts - why bother?
There is a good reason that financial projections don’t figure high on this list. In early stage, innovative businesses, the link between forecasts and reality is pretty tenuous. The business has no track record to act as a guide. The risk of failure is overwhelming. Most VCs and angel groups invest in 1-3 out go every 100 business plans. Then expect only 1 in 10 of those to succeed. No-one has the expertise or experience to beat these odds.
Investors talk all the time about being risk takers. And they are but that is not a good paradigm for how the process works. The key factors in any investment decision are all about reducing risk. The best chance of success lies with having a great founding team. A huge market also reduces the risk of failure. And so on.
Nonetheless, preparing a set of financial forecasts is an essential part of the process. You have a choice. Get lost in the process and pray that no-one asks about your numbers. Or use it as an opportunity to think about your business plan and enhance your credibility.
3 ways your business plan numbers are different
The way to tackle this is not to think about getting the forecast right. It will be wrong - get over it. These numbers are different for three main reasons:
The Chairman's view
The key to business plans is not precision. It is storytelling. A good financial forecast is driven by the business plan. The revenue numbers reflect the market opportunity and the sales model. For example, enterprise SaaS leads will take a lot longer to turn into revenue than SMB free trials.
Cost calculations are the same. Once you explain your business model, the structure of the cost base should be clear. Your audience will know where their money is going to be spent.
More important, investors want to see how that translates into growth. Its like filling up a car. Easy to do but hopeless if you don’t know where to find the accelerator pedal.
A lot of entrepreneurs take professional advice when producing a business plan. Nothing wrong with that. Remember you are not selecting for technical skills. These are important but easy enough to find. You pick a designer than can make your story come to life in pictures, fonts and colours. Select an advisor that can paint your business by numbers.
I have spent quite a bit of time over the last few weeks writing a business plan. Its a bit of a retro experience for me. These days I spend much more time reviewing and advising rather than doing.
Apart from a long overdue return to real work, this has been a reminder of some key challenges. The business plan I am working on is for a funding pitch. Why else would you bother?
This is reality for most entrepreneurs. At some point you have to do one.
Framing your sales pitch
In preparing for battle, I have always found that plans are useless but planning is indispensable.
Regulars will know this is one of my favourite quotes. The meaning is clear when you are fund raising. The purpose of both planning and plan is to support a sales pitch. Selling shares in your company to investors. (Please never “giving equity away”.)
Because its a pitch, your business plan is much more than a technical description of how you aim to grow your company. This is about presentation and storytelling. And its about a clear message. Not a range of scenarios for debate and discussion.
Most often the value from planning is helping evaluate options before making a decision. In an investment pitch, that value is thinking through the best story to tell your audience.
How happy is the ending?
Your first dilemma is aggression v realism in the numbers.
People and narrative sell the business but investors buy the numbers. As a struggling entrepreneur, fighting for your first few sales, can you really see $100 million revenue in 3 or even 5 years?
Yet that is what investors want to hear. The easy option is to offer exponential growth. Creating the forecast is remarkably easy. With no track record, your projections can be anything you like.
Then the dilemma hits you. Will anyone believe it? How do you convince investors that the dream is doable?
How credible are the characters?
That brings you to the next dilemma. For the numbers to be believable, there are at least three other articles of faith. Team, market and product.
In each case, you need to sell investors a combination of proven reality and potential.
What are the limits of the genre?
At the risk of extending the literary metaphor, your business plan sits in a well understood genre of fiction. Investors have a set of expectations and plenty of experience looking at this stuff. And this is the true dilemma at the heart of everything.
Raising startup investment is a game with well established rules. They vary a bit between individual Angels, syndicates like those which operate here in Scotland, VCs and other market players. But the rules exist and they can be hard for entrepreneurs to learn.
Once you uncover the rule book, the temptation is to play it to the letter. And you will not be short of well meaning advisors who recommend just this approach.
Yet it won’t work.
The hardest rule to abide by is simple - surprise me. Every investor wants to see something unique. A passion or a solution or a hook of some kind that makes your business stand out.
Stray too far from the playing field (sorry drifted into a different metaphor) and people will think you are crazy. Stick within the white lines without deviation and the same audience sees you as boring.
The Chairman's View
There is the ultimate unanswerable question. How do you stand out from the crowd? Emphasise the unique genius of your business proposition while playing to the prejudices and preferences of your target investors.
No answers to this one.
But one big piece of advice. Make sure this is where you focus when developing your business plan.
Do the basics and use your thinking time to wrestle with the last dilemma.
Competitive pitching drives a whole lot of bullshit.
Its become one of the centrepieces of every startup ecosystem. If you want to build a reputation, grab some PR, grow your network, win cash prizes and generally just fit in, you need to pitch to win.
Founders are groomed by a whole coterie of experts and supporters. How to hone your message? How to pitch your startup? Get yourself investment ready? Business is framed as a race and only the fastest and strongest are winners.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.