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50 Questions: What financial information does a VC want to see?

Forty first in a series of weekly posts by myself and Nicholas Lovell of Gamesbrief which answer the fifty questions you should ask before raising venture capital.  We expect the series to run for a year after which we will collate the posts into a book.  You can find the rationale behind the series here, and the list of questions here.  We welcome your comments on any and every aspect of what we are doing.

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We get a lot of emails from companies who send us business plans or executive summaries which don’t include any financial information. That’s a big mistake. If we can see that the basic financial shape of the business is consistent with our usual investment profile we feel more confident that a deal is possible and are more likely to take a meeting. If there is no financial information then there is usually a nagging feeling that it has been omitted precisely because the entrepreneur knows that it isn’t a good fit with what we would like to see, and it is tempting to assume the worst (remember that we look at a lot of plans and can’t spend too much time on each one). I think some entrepreneurs hope that if they can just get a meeting they will be able to sell their way past the fact that their financials don’t fit and secure an investment. I would say that is the wrong way to approach building a relationship with an investor, is unlikely to work, and will most likely result in a series of frustrating meetings.

We like to feel that the companies which approach us are looking for a trusted partner. The best way to give us that feeling is to show that you understand us and our processes by giving us the information that will help us the most, including summary financials.

Financial information helps us evaluate whether a business fits with our strategy in two ways. Firstly, historical financial information shows the shape of the business much more clearly than any other metric. The most important figures there are revenues, gross profits (unless gross margins are over 90%), total expenses and the revenue growth rate. Secondly, financial projections help us understand how much the business might be worth in the future and whether it will need a further round of funding.

It isn’t necessary to provide much detail though. Initial communications with potential investors should concisely convey the essence of why a business is exciting and likely to be worth a lot of money. The most important aspect of that is the truly addressable market and the company’s position within it and the financials should be limited to what the numbers required to convey the information above and anything else which is important to the company’s story.

So different companies will want to include different line items in their financials, but the example below is a good model to work from.

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From this the investor can see that the business has generated some early revenues, is growing fast and expects to need around about £1m to get to profitability. That helps analyse the fit with his or her fund requirements with regard to stage of investment and investment size.

Note that there is no information about how much cash is in the business. Whilst most VCs would like to know that information for negotiation purposes it isn’t necessary for their deliberations at this stage.

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