For decades, it was good to be a technology start-up. Growth was spectacular, investor money was readily available, and even the pandemic couldn’t slow growth – tech firms outperformed the overall market because they kept the world connected.
But as FTX’s collapse continues to reverberate across Congress, markets, and court rooms; Alphabet, Twilio, Amazon, and other top tech firms lay off huge percentages of their staff; and investors turn a more critical eye toward tech start-ups, companies can’t rely on investors to provide the same historically accessible money with long profitability or acquisition runways. Start-ups must go back to traditional business fundamentals to prove that they take investor money as seriously as the investors themselves.
What’s going on in the investor market?
From social media and phones to streaming and cryptocurrency, there hasn’t often been a better place for investor money than in tech start-ups. Some of those start-ups have turned into household behemoths – and in 2021, the market caps for companies like Amazon, Microsoft, and Facebook were each larger than most of the world’s countries’ respective GDPs.
However, as tech struggles become daily stories, investors have become more selective. Alphabet missed its revenue and profit projections in Q4 2022, and recently laid off 12,000 staff. Facebook has been notoriously struggling to find new ways to grow for several years, and Salesforce’s layoff of 8,000 staff comes as the company has not provided a forward-looking revenue projection for the first time in its history.
It’s not just the behemoths. The Associated Press reported in January that the annual CES conference brought the traditional 3,000 start-ups and corresponding investors. But while past years highlighted pie-in-the-sky ideas and companies, this year’s conference was much more about showcasing deliverables, profits, and other business fundamentals traditionally valued by investors.
Investor Tien Wong, who founded the world’s largest monthly pitch event CONNECTpreneur, told us that the entire investment community is changing. “There is still plenty of investment capital sloshing around, [but] investors are scrutinizing investments more. They are doing deeper diligence on risk factors and investment considerations.”
Some of this is the natural economic return from the high point of the pandemic years, as we’ve seen with the recent Zoom layoffs. Some of it is related to forward-looking concerns about inflation and a potential recession. And some of it is investor caution as companies like FTX, WeWork, and Uber failed to turn into expected investor payoffs.
Know your financials – and how to present them
Just as with anything else, the best companies work with what they have instead of the resources they wish were available. Start-ups should build their case to investors around three traditional business metrics:
- Financial forecasts with periodic metrics of success to prove forecasting legitimacy. This can often be achieved with a 24-month forecast broken up into four quarters for the first year and two six-month windows for the second year. This traditional approach to forecasting will give investors confidence that you take their money seriously and that they can hold you accountable.
- Use top industry metrics to show the validity of the forecasts. For example, Deloitte’s 2023 tech outlook found opportunities in health care and climate-related tech in response to regulations. Showing a deep understanding of the wider industry you’re targeting will give you greater credibility than competitors who are reliant on generic claims like “technology is the future” or “the potential market size is X.”
- Compare actual performance to past projections. Anyone can claim they are going to hit a targeted revenue threshold in 2023 or that milestones will be met. Investors want to know how your past performance compared to past projections, what technology improvement milestones were met, and if you were able to expand to new markets or expand your staff as promised. Being able to prove past promises against actual performance will increase your credibility and, therefore, your place in the marketplace for investors.
Wong said that “there’s no magic” to communicating financial information to investors. He looks for “cash and liquidity resources, burn rate, and gross margin,” and said start-ups “should produce monthly balance sheets and income statements” for both internal and external use.
Okay, so you have the financials – now what?
One of the things that hasn’t changed in the tech world is the need to get ahead of the competition any (ethical) way that you can. Once you have the fundamentals in place and your story ready, it’s time to accelerate your growth by telling everyone about it.
This is the one area FTX got right. The company’s fundamentals were lacking, which is why it failed. But along the way, it got some of the best media coverage the world has ever seen. And that coverage gave investors, regulators, celebrities, and other target audiences confidence that FTX was the real deal.
Your exposure and initial growth may not be as explosive as FTX, but nor will you likely implode. Instead, by using strong financials, you’ll create the narrative that you’re a game-changing company which:
- Attracts new investors because of your financial strength.
- Hits metrics that matter to investors and other stakeholders.
- Understands the competitive advantage your company has compared to the industry, as well as the risks and rewards investors can expect by trusting you with their money.
- Has competent, profit-oriented management and advisor teams which will lead the company to success and investors to greater returns.
Using webinars, white papers, social media, earned media, and the other tools of surround-sound marketing and branding, your disciplined approach to business growth will create a trusted path of success that will show investors today and tomorrow that you’re the company of their future.
This piece was originally published by Dustin Siggins and Cheryl Heusser, CPA, CFE at TabbFORUM.