When developing the financial strategy for your startup or early stage impact business, there are three building blocks to make sure you have a solid understanding of: 1) pro formas, 2) capital structures, and 3) use of proceeds.
Not having a solid financial strategy for your business is one of the top two fails cited as to why an estimated 95% of all startups don’t make it, that of running out of money. Besides this, to get through the fundraising process, not having these building blocks solidly in place, will leave you unprepared to answer the critical questions that will come up in the fundraising process.
Let’s take a closer look at what makes up an MVP financial strategy, starting with pro formas. To have any intelligence surrounding the likelihood of your business having a real go at it, you are going to have to take all the great ideas about your business, typically captured in a set of key strategies in your business plan and translate those into the numeric artistry known as a Pro Forma Financial Model. These projections will involve a great deal of validation of the key assumptions underlying the core strategies of your business including: product and service strategies, go-to-market strategies, and operating strategies. This exercise is hyper-critical to your determining that your idea is even valid enough to pursue. It grounds your ideation and innovation into a financial roadmap backed up by as much research and validation as you can gather, depending on the stage of your business. Beyond convincing yourself to roll up your sleeves and make a real go at it, you will need these comprehensive projections to demonstrate to prospective investors your financial strategy viability. Aside from the pitch deck, it’s the piece in your fundraising materials that will get a great deal of attention in due diligence, oftentimes handed off to professional analysts by investors, to comb through as part of determining how they might value the opportunity.
The other pro forma you will want to develop as part of your financial strategy is a Pro Forma Capitalization Schedule (CapTable) which maps out your capital roadmap based on the anticipated tranches of capital you have forecasted to be needed to take your business from startup (pre-revenue) to early-stage (revenue generating but not cash-flow positive) and into growth (cash-flow positive and scaling). These tranches of capital ideally would come out of your Pro Forma Financial Model exercise.
This takes us into Capital Structures, which includes everything that went into the Pro Forma CapTable in addition to defining the types of capital that you are envisioning to move your business along its path. For example, as a startup, you might choose to issue convertible debt or use a SAFE (Simple Agreement for Future Equity) to bring in early stage capital in advance of your initial equity round of capital. One of the important considerations to tranching your capital is to align the tranches with the key milestones included in your projections. The other factor to have a firm grasp in this regard, is that of “burn”, how long you are projected to be in negative cash flow until reaching breakeven, and what the cumulative burn is projected to be, which is an indication of what it will take to reach full capitalization.
The last building block to establish for your business and for prospective investors is a solid understanding of your Use of Proceeds. This ideally should be extracted straight out of your Pro Forma Financial Model and linked to the tranches of capital you will be seeking so that you know exactly where you will be deploying capital into your business at every stage of the journey. Depending on your stage, Use of Proceeds are typically allocated across functional areas like Business Development, Administration, Sales & Marketing, and should also consider Capital Expenditures (CapEx).
With your Pro Formas developed, Capital Structures clearly defined, and a solid grasp on your Use of Proceeds, you will be an empowered Founder or CEO, particularly when speaking to prospective investors and moving through the due diligence process in a fundraising effort.
Want to get prepared to raise capital successfully?
Download our Free Fundraising Checklist Here: https://thechangeagenthub.net/fundraising-checklist
Once you receive the checklist you’ll be redirected to a video walkthrough so you can use this checklist most effectively. And you’ll also be invited to check out our 9-step fundraising preparation roadmap with detailed information called Impact Incubator Immersion. This program is the exact process all our impact clients have used to raise capital successfully.
