This afternoon I altered monthly financial statements in a startup I am coaching. It is going through its seed round closing. The founder and I were asked to deliver small changes that an investor wanted to make in the first year's financial forecast. The alterations changed the first year's cash requirements by less than 2 percent.
I wish this were the exception. It is not. Most VCs are former managers who eagerly jump into the forecasts with their do this and do that to the numbers. I find it a psychological necessity to show them what the altered numbers look like. And yet I know that after a month of work to close on a round of financing, the numbers will have changed very little.
Financial numbers should be created by the leaders who have to deliver results with the people, equipment and cash they sign up for. Of course investors are expected to challenge the numbers. But I find most of the challenges to be the same: "Find a way to do the same work with a lot less cash."' That results too often in under-funded startups. Sure, the Internet bubble had companies ruined with too much cash. But solid managers with experience know what they need for engineering staff, what wages will get the outstanding talent. They know what they can deliver, when. That is not for the VCs to decide. Instead, after due diligence, the investors are wise to bet on the leaders and stand aside, watching from the board room.
Micro managing the financial forecasts is a path to hindering a fine company, and it could ruin a startup by underfunding it. How should a CEO avoid this? Here are some suggestion: Get outside veterans to look at your numbers and give you their insight. If you cannot hire them right away, at least they can give you help with people and wages and expenses. That brings credibility to your numbers.
And you can look up public companies' financial statements, compare headcounts by department, sales and expenses per person and alter your numbers. That also brings you credibility.
BOTTOM LINE: Spend time on your financial forecast. Get to know your numbers better than a finance person. Get friends to confirm and advise on the figures. Compare them to public companies. Build your case for credibility. Then you will not have to accept numbers from investors who mean well but don't understand your financial forecast.
FINANCIAL FORECAST MODEL: If you need a simple financial forecast model, go to my website and purchase QuickUp. It is a simple Excel model that many CEOs finds saves them a lot of time and that automatically values the company. QuickUp Financial Forecast and Valuation Model .
Quickups is a great tool -- I'm glad you've provided it.
F
Posted by: Fred schoeneman | Thursday, 14 September 2006 at 05:30 PM