You’ve probably heard the phrase, “You don’t know what you don’t know”. As entrepreneurs, we face new challenges every day on the road to starting and building a business. It’s hard to know which processes and metrics are important as you manage a team, finances and overall operations. I’ve worked with well over 100 startups who all worked very hard to achieve their goals. Unfortunately tracking sales and marketing metrics often falls by the wayside in the chaos of driving growth. I very often hear entrepreneurs stating they wished they would have implemented metrics from the outset. Hindsight is 20/20.
Your financial operations and how you run them are critically important today and will become even more important as your business grows. The processes that work as a startup, are not going to meet your future needs. Basic financial operations won’t be enough when you are ready to act on your growth plans and raise capital. While VCs and private equity professionals don’t expect the CEO of an early stage company to be a CFO, they will expect financial data for insight into your company’s past performance, present standing and future plans. It’s important, as early as possible, to capture the right metrics and have them available to share with investors in a way that will make your startup more valuable.
Where to Begin?
First, you need to familiarize yourself with the right terms. Investors will want to hear about your business – but in their own language. The more you know your business and can explain it to them in their language, the more your business is worth. Remember, all financial investments have a dimension of risk management. The absence of information equates to risk and puts the negotiating leverage in their hands. The more information you can communicate to them, the fewer the unknowns, the lower the risk and the higher your valuation.
So, what do you do? Explain your business to them in terms they understand – finance terms. You don’t need credentialing letters on your business card to speak like a CFO. Invest some time and learn the basics. At a minimum, you should be comfortable with these key finance terms:
- Monthly Recurring Revenue (MRR)
- Customer Lifetime Value (CLV)
- Customer Lifetime Value/Customer Acquisition Cost (CAC) Ratio
- Cohort Reports
In my next blog, I will review each of these financial terms and their importance to investors.