One of my favorite First Round Capital Holiday Videos is the the 2014 release – “It’s All About Burn Rate” set to the tune of Meghan Trainor’s “All About That Bass”. I sometimes find myself humming that tune when I am reviewing an investment opportunity from an entrepreneur who does not fully appreciate the importance of understanding how burn rate and cash runway can impact the success/failure of their venture. When analyzing the financial structure of an investment opportunity, I try to evaluate both the amount of time the funding will last as well as the milestones/traction that the funding will enable the company to achieve. Will the proposed funding result in:
- Achieving cash flow “break-even” which allows the company to have some measure of control over their financial destiny?
- An inflection point of milestones/traction that will position the company to raise another round of funding at more attractive valuation levels?
- Landing in the “dead zone” – not enough traction to attract the next round of funding and without further funding in need of cutting expenses.
If the current raise enables the company to generate enough recurring revenue to operate on a break-even basis, then the company can continue as an operating entity without having to lay-off staff, reduce marketing outlays or frankly shut the doors and cease operation. The company needs to have a clear understanding of their variable versus fixed costs – what expenditures are mandatory to allow the company to survive versus those that can be reduced or even eliminated for a period of time. Growth may be slower than desired, but may at least provide the company the time to pivot their strategy or hold out for a more attractive funding environment.
Traction reached for next round:
For most of the companies in which I am investing, there will be multiple rounds of financing required before the company is in a position to exit. It is critical to understand what are the milestones/traction that the next investor will require and how does the company plan to achieve these milestones within the runway provided by the current raise? On the expense side, does the company have a strong grasp of the resources required to execute on the plan? Do the assumptions for revenue recognition take into account a realistic sales cycle for the product/service being offered?
Unfortunately, many companies end up in this position either because they do not raise sufficient capital or do not have the ability to actually execute on the plan that would position them to be attractive to the next investor. I find this oftentimes with companies that utilize convertible notes and end up within sight of the maturity date without enough demonstrated progress. As an investor, I am usually faced with the decision to extend my note, invest more in the company to provide some life support, or hope that there is at least some asset value to be distributed to note holders in the event of liquidation.
Remember as the music states – “It’s All About Burn Rate”
Posted in Angel Groups, Angel Investing, Convertible Notes, Due Diligence, Early Stage Investing, Financial Models, Golden Seeds, New York Angels, Opinion, Term Sheets, Uncategorized, Venture Capital, Women Investors
Tagged Education, Funding, Investing, Investments, Launch, Money, New York, NYC, Perceptions, Portfolio, Portfolios, Risk, Start Up, Startup, Strategy, Term Sheets, Value, Viewpoint, Women
On the first day of Christmas
a founder sent to me:
A Financial Model error free Continue reading
Posted in Angel Groups, Angel Investing, Financial Models, Golden Seeds, Opinion, Uncategorized
Tagged Angel Investing, Angel Investor, Financial Modeling, Golden Seeds, Happy Holidays, Valuation, Women in Angel Investing
As an angel investor, I see lots of financial models, which range from the very simple to the extremely complex. I am often asked why I insist on seeing the actual model ( yes the excel not the pdf version) as it all based on layers of assumptions. In response, the financial model is nothing more than a quantitative expression of the business model and in fact what is most important to me are the assumptions that underlie the numbers. Continue reading
Posted in Angel Groups, Angel Investing, Financial Models, Golden Seeds, Opinion, Uncategorized, Venture Capital
Tagged Angel Investing, Angel Investor, cash flow, Early Stage Company Valuation, Financial Modeling, Funding, Golden Seeds, revenue models, Startups, Women Angels, Women Investor
Probably one of the things I have found that many of my fellow angel investors enjoy even less than analyzing the financial model of a company they are contemplating investing in (see my last post ) is diving into the Term Sheet. A term sheet is a document that lays out the key terms of a proposed investment. Once those key terms have been negotiated and the term sheet is executed by both parties, it serves as the basis for drafting the other documents which comprise the legal closing documents in a transaction.
At a recent meeting, one of colleagues made the comment that term sheets are like country western songs – you know those soulful ballads that bemoan the difficult breakup, the secrets never shared, the soulmate you trusted who walked away and left behind a pile of debt…… When you make an angel investment you are not only entering into a financial transaction, you are entering into a relationship with the CEO/founders/management team. If you have been investing in this sector for awhile, it is likely you have made at least one investment that did not turn out as planned! Another way to think about the term sheet is a kind of “pre-nup” for angel investing. Clearly if you don’t really believe that a particular investment has the potential to be a good partnership over time, you probably shouldn’t make the investment. Continue reading
Posted in Angel Groups, Angel Investing, Due Diligence, Financial Models, Golden Seeds, Opinion, Term Sheets, Uncategorized, Venture Capital
Tagged Alex Wilmerding, Angel Investing, Deal Economics, Early Stage Company Valuation, Exit Strategy, Follow-on Rounds, Golden Seeds, Term Sheets, Valuation, Women Angels
“I am a serial entrepreneur with a business idea that will generate $100 million in sales in 3 years!!!!” , sound familiar? As an angel investor, I meet many passionate entrepreneurs who present a very optimistic outlook for the future of their business concept. Building financial projection models is a very difficult process for the CEO of an early-stage company and an even more difficult process for the investor to believe in.
So, is there any real value in financial projections? Continue reading
Posted in Angel Groups, Angel Investing, Due Diligence, Financial Models, Opinion, Uncategorized
Tagged Angel Investing, Angel Investor, Early Stage Company Valuation, Exit, Financial Modeling, Golden Seeds, Investment, Investor, Valuation, Women Angels