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Your startup may be the next innovative product or service to hit the market, but you won't get far if you can't convince venture capitalists (VC) or investors who have the financial legs to succeed.
Displaying comprehensive financial reports for VCs is a critical early-stage process to embed for entrepreneurs seeking funding. Investors want a detailed understanding of your business economic health, growth potential, operational efficiency and more. They need clear, data-driven insights to help them accurately assess the potential threats and rewards associated with their investment.
As CEO of Dale Ventures Group of Companies, I hear a lot field for great ideas that can make a splash in the market. However, I won't make any decisions until I have a chance to look at some financial reports that will either confirm my assumptions or make me think twice.
So what financial information should entrepreneurs share to get me and my VCs on board? I'm going to share a series of reports that your startup should include when you present your business plan.
Income statement
Also known as a profit and loss statementthis report is a comprehensive summary of each critical financial component:
- Income
- Cost of goods sold (COGS)
- Gross profit
- Operating expenses
- Net income
- Earnings per share (EPS)
This document clearly shows your business's ability to manage costs and generate revenue, as well as its financial performance and potential to turn sales into profit. In their research, investors want to see your revenue trends, gross margins and net income to assess your current viability and potential for sustainable growth. VCs use this report to assess business efficiency and operational health.
The numbers in this statement help them understand how well the company is currently managed, how efficiently it allocates resources, and its ability to capitalize on new market opportunities. The income statement is a crucial indicator of whether to invest in a company.
balances
While the income statement is the 30,000-foot view, BALANCE SHEETS help investors see your financial picture at a given time. Here, we are looking for three things:
- Assets: Everything the company owns, such as cash, accounts receivable, and physical assets.
- Obligations: Liabilities, including debts and accounts payable.
- Capital: The remaining owner's interest, which helps to show the net worth of the company.
The financial health of your company comes down to a simple mathematical equation: Assets = Liabilities + Equity. Balance sheets help investors understand a company's liquidity, solvency and financial stability. VCs like myself will review your asset and liability allocation to fully understand your risk exposure and leverage.
or strong balance gives us confidence that your startup has the financial strength to face potential challenges and take advantage of opportunities. A transparent and well-structured balance sheet signals to investors that your company has what it takes to go the distance.
Cash flow statement
This vital financial document tracks the flow of cash in and out of your business over time and covers three main sections: operating, investing and financing activities.
This is where the microscope comes in for potential investors and VCs. Here, we can analyze the sustainability of daily operations. It's a way to gauge your company's ability to generate and manage cash, especially how you allocate capital. This can be through asset investments, debt repayment or financing activities.
A strong one cash flow statement includes details on cash generated or used by major business operations and other financial endeavors. This provides a clear picture of how cash moves through your company, providing deeper insights into liquidity, operational efficiency and ability to meet financial obligations. This statement tells investors how well you manage your money and whether your business is set up to navigate future financial difficulties.
Gross margin
The following two topics are not complete financial documents, but vital metrics for the health of your business.
Gross margin is a critical piece of information that shows the percentage of your revenue that exceeds COGS. This insight tells investors how efficiently you produce and sell your products or services.
Here's another equation for you: Gross Margin = Net Sales – Cost of Goods Sold (COGS). This percentage shows investors that your startup can cover its operating expenses while keeping a good portion of revenue as profit. Investors will look at trends in your gross revenue to gauge your sustainability and scalability.
Burning rate
of norm in which your company uses its cash reserves or capital is critical to investors. Your negative net cash flow per month is a timeline that shows how long your startup can operate normally before you exhaust your available funds. This tells investors how much of a runway you have before additional funding becomes necessary.
A reflection of your financial discipline and strategic planning, a consistent burn rate shows how well their investment would contribute to long-term success.
The numbers tell the real story
These financial reports and metrics are all part of your startup's narrative. To VCs and investors, they tell a comprehensive economic story about your company: where it started, where it stands, and where it's going.
As you seek capital to fuel your ventures, keep these in mind. Transparent and in-depth financial reporting will build trust and credibility with potential investors and provide them with an inside look at your company's true potential. A compelling financial story attracts investors by laying the foundations for long-term partnerships, building towards sustainable growth and success in a competitive market.