Do You Know How Big the Average Series A Funding Round Is?
Boston-based startup Transmit Security is developing password-less identity solutions. Back in June, it raised an eye-watering $543 million in Series...
6 min read
Jeff Erickson June 30, 2022
Compare a startup in its first month against that same startup three years later, after it has closed its Series A funding round. You might think you’re looking at two completely different companies.
The brand new startup is little more than a website and a great idea, while the third-year startup may have a team of 100 people and thousands in monthly revenue. Every business is different, but we know the cash flow of a successful startup changes drastically from day one to day 1,000.
Across the life cycle of an early-stage startup, the financial statements change drastically. But it’s important for founders to prioritize strong financial hygiene from the very beginning.
In this post, we’ll look at some of the best startup tools you can use to achieve great financial hygiene and set the stage for sustainable growth.
The early-stage startup life cycle can be broken down into four main funding stages: pre-seed, seed, Series A, and Series B. As a startup progresses through these stages, it’s increasingly important for the founders to implement financial tools and services that maintain great financial hygiene.
Which tools are most critical, and when do you need them? Let’s dive in and take a closer look.
The pre-seed funding stage generally refers to the early period in which a startup is just getting its operations off the ground.
During the pre-seed stage, founders typically invest money from their own pockets to scale operations – this is also known as bootstrapping.
Although the business is still fairly new and may not have many financial systems in place, it’s important for founders to lay the foundation for financial hygiene by identifying and implementing the best startup tools to fit their operation at its current scale.
In addition to selecting the tools and systems to manage your young company’s finances today, you also need to plan ahead for the additional platforms that will need to be integrated in the near future as you begin to scale.
We’ll look at three types of startup tools you need to implement early in order to track and share your financial metrics accurately as your business begins to grow.
Accounting software packages like Quickbooks, Xero, and Pilot provide a simple and scalable platform to track your monthly cash flow, expenses, payroll, and revenue.
It’s never too early to start bookkeeping. If you’re spending money, you should be tracking it every month at a minimum. A solid accounting system is one of the best startup tools you can invest in.
Lay the groundwork for a strong understanding of your company’s finances early on to prevent unnecessary backtracking and restructuring later in the game when your finances are much more complicated.
Later in the startup’s life cycle, potential investors will need to see all of your accounting statements. If you come out of the gates with a strong financial system, you’ll be able to scale that system up seamlessly as the company grows. This will instill confidence in your future investors and partners.
Consider implementing a financial model as early as the pre-seed funding stage.
Early financial models have typically been executed in Excel or Google Sheets. Today, however, there’s a new breed of financial modeling software on the market that is affordable for even the smallest startups.
Software like Forecastr lets you build a robust financial model with many features you won’t find in a spreadsheet – like the ability to model alternate scenarios, and an intuitive interface you can share with investors and stakeholders.
If you can’t afford the software yet, there are some free spreadsheet templates available that will make your job much easier.
A financial model tells the story of your business in numbers. A well-built model impresses investors, empowers you as a decision-maker, and gives you valuable confidence during the fundraising process.
At this early stage, it’s important for founders to remain constantly aware of how far their current cash will go and the date when they will run out of cash – also known as cash runway. A strong financial model is critical in this regard. It allows founders to make better business decisions within the constraints of their available resources.
A capitalization table (or cap table) shows the equity capitalization of a startup. The capitalization table provides an intricate breakdown of shareholder equity in the company.
For businesses seeking investment, we recommend using an online platform such as Carta, or Ledgy. Online platforms simplify the task of managing your cap table, and give you a clean presentation that’s easy to share.
Purchasing an online platform may not be necessary as early as the bootstrapping phase, but your future investors will expect it. Startups, especially those with more than one cofounder, should be prepared to share a breakdown of ownership with investors as early as the initial conversation.
If you’re not ready to invest in the software yet, use a preformatted spreadsheet template with a clean layout that’s easy for investors to digest.
After the concept stage, a startup moves into the seed stage. At this stage, founders typically begin to approach investors (friends, family, or angel investors) to seek out financial support for the proven business concept.
Investors will initiate a high-level investigation of the product, the market space, and the economic potential of the opportunity. The more work that founders put into their financial hygiene during the pre-seed stage, the smoother the transition to the seed stage will be.
Founders who have already implemented the foundations of standardized accounting systems, a financial model, and cap table management will still need to optimize their metrics before they present to potential investors, but they won’t find themselves scrambling during the due diligence process to build all of their reports from scratch.
The same tools and metrics we discussed above are still the best startup tools for you to use, although more research and evidence will be required to convince investors that your projections and assumptions are sound and reliable.
Because startups need to keep accurate records of all their financial transactions for tax and legal purposes, solid accounting systems become crucial at this stage. Proper accounting is a must have for sound financial hygiene.
Investors will request to see your accounting records to better understand your cash flow. Poor accounting records will reflect poorly on the competence of your team, and you as a leader.
At this point in the life cycle, founders should consider hiring a bookkeeper or bookkeeping service like Decimal, Countabl, or Fireside Bookkeeping to accurately track day-to-day financial data.
During the seed stage, a robust financial model is non-negotiable. A strong model shows investors the amount of funding you need, when you need it, and how you will spend the money.
Your model also lets investors get a sense of the rate at which your business will be able to scale and when they can expect a return on their investment.
Internally, your startup financial model helps founders communicate growth and potential to investors and stakeholders by calculating your potential revenue growth over the next several years.
If you previously used a spreadsheet to track your financial model, it’s definitely time for you to upgrade to an online platform like Forecastr or a fractional CFO service like Venture First, airCFO, or CFOshare.
You need a great model to tell the story of your startup in a way that attracts real money from investors. Don’t show up to pitch investors with a sloppy spreadsheet.
As you achieve success in fundraising, you must diligently track your equity breakdown. The same services we recommended above are still the best options at the seed stage.
How much cap table information should you disclose to your investors?
There isn’t necessarily a right or wrong answer. As a standard practice, founders should start by providing a high-level summary which allows investors to calculate their ownership position. Provide additional detail as necessary to support your investors’ needs for internal tracking and audit purposes.
Once a business has developed a proven track record of success (an established user base, consistent revenue growth, etc.), the company may choose to seek Series A funding.
Series A funds are often used to expand the user base, create additional product offerings, or scale existing offerings across new markets.
In this round, founders should have a well-developed business plan and a solid financial model that demonstrates the potential for long-term profitable growth.
At this stage, your company’s internal accounting systems should be robust and provide a detailed and accurate picture of your finances.
By now, founders should have professional accounting software and a dedicated bookkeeper. If you don’t already have someone on staff, now’s the time to hire an accountant or outsource to an accounting firm or a factional CFO.
A financial model is a must-have at this stage. Don’t expect to close your Series A funding without one.
Your model shows how investment funds will be used to stimulate growth, and the expected time frame for that growth to occur. If you’re trying to raise your Series A without a great financial model, reach out to Forecastr today.
At this stage, your company will likely have received investment money from various funds, and managing shareholders will become an increasingly complex task.
Your cap table is your single source of truth for this important information, documenting who the investors are, their voting rights, and the number of shares each stakeholder owns.
If voting eventually occurs, your centralized cap table ensures that you are able to include all investors in the process as necessary. The same tools we recommended above are still the best startup tools to use at the Series A stage.
Series B rounds take the business beyond the development stage by expanding market reach using additional investor funds.
Companies that have completed seed and Series A funding rounds have already developed substantial user bases and demonstrated consistent scalable growth.
If you’ve made it this far, you can continue to rely on the tools that have made you successful. You’ve proven that you’re well-prepared, accountable, and capable of delivering on your promises. Now, get ready to succeed on a larger scale.
We’ve covered a lot of information in this post, following the journey of financial hygiene from concept to corporate offices. Here’s a quick recap of the best startup tools we’ve recommended along the way:
Financial Modeling
Accounting Systems
Accounting Services
Fractional CFO Services
Cap Table Management
These tools and metrics will remain relevant throughout the life cycle of your startup. If you prioritize this infrastructure from day one to create great financial hygiene, you’ll set yourself for sustainable growth and successful fundraising.
For more information about Forecastr’s full-service financial modeling software, reach out today for a free demonstration.
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