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Three Questions We Ask About Historical Financials

HistoricalsIn the course of our due diligence work here at MicroVentures, we see a lot of financials, and we know that individual components of a company’s historical financials cannot be evaluated in isolation. You have to look beyond the raw numbers if you’re going to gather any insights. To that end, here are three questions we like to ask when first examining a startup’s historical financials. As an investor, they may help you as you evaluate potential investment opportunities. As a founder, they may help you decide how to approach your own historical financials or how to present them to prospective investors.

  • How is cash holding up relative to the burn rate? Cash on hand is a good figure to know, but it’s the ratio of cash to burn rate, or operating loss, that suggests what shape the startup is in. A little money can go a long way for a company that has their operating expenses under tight control. Likewise, a pile of cash can disappear quickly, especially when the burn rate is not consistent from month to month. Depending on the stage of the startup, consistent monthly burn is usually an indication of founder discipline as it relates to investing in mission-critical product features or sales and marketing tools. Debt and its maturity date can also affect burn rate/cash on hand. Remember, cash is king.
  • What are the customer acquisition dynamics? This question looks at a lot of variables – customer acquisition cost (CAC), CAC payback period, and customer churn. How much does it cost to acquire a customer, and how long does it take for that investment to pay off? How much revenue can a startup generate from a single customer and how does that compare to CAC? In most cases, the payback period should be less than a year, but high customer churn can call even the best CAC numbers into question. High customer churn often leads to overspending on sales and marketing to attract new customers while neglecting important product-related investments.
  • How is monthly revenue growing? The historical monthly revenue growth figure shows how well a lot of different elements of the business are coming together – or not. Revenue growth can be a reflection of the sales pipeline, marketing and customer acquisition strategies, sales execution capabilities, business model and pricing strategy, customer retention rates, and, ultimately, the addressable market’s response to the startup’s product or service. The most promising startups exhibit exponential revenue growth – and sustain that growth over months or even years.

These are just a few of key metrics we look at first when evaluating a startup’s historical financials. Different metrics are important to different businesses – for example, a media company has to keep a close eye on monthly impressions, while a SaaS company is going to be more focused on monthly recurring revenue. Just bear in mind that one financial metric rarely tells the full story. If it did, due diligence would take only minutes instead of weeks.