Startup founders are by their very nature perceptive, passionate and optimistic. That’s why we love to work with them. But all too often we see them stumble when it comes times to making a persuasive case for debt financing. While they may have succeeded in obtaining venture capital backing, often they don’t realise the same pitch won’t be as effective to a bank.
To get the most out of your pitch, you need to understand who you are pitching to and what the potential financial partner is seeking.
How to make your best case to a bank versus a VC
Banks and venture capital firms (VCs) are both in the business of providing capital to startups, but they size up the risks differently based on their business priorities.
Banks tend to focus on the company’s financial capabilities and will want to understand how the KPIs stack up so they have confidence that your company can reach break-even or profitability over time. They’ll want evidence of the ability to create sufficient enterprise value (‘EV’) in order to attract external capital or ensure that the existing inside investors have seen enough growth to continue to support the business.
Banks typically leverage the due diligence that the venture investors have completed on the team and technology promise, so while important for the lender to understand, startups can skip the technical deep dive. But do emphasise the team’s expertise and experience, your target market and how you differ from competitors.
Banks tend to offer financing to a wider range of companies, and even competitors in the same sector, which give them a broad view of your sector. Many VCs, in contrast, focus on a sweet spot in a sector or stage, and seldom back competitors.
VCs will analyse your plan looking for how quickly you can scale revenues to reach a point at which an exit is possible. They focus on the track record of the startup team and how the underlying technology differs from competitors. As banks do, they assess the size of target market and company’s ability to gain traction. In this case, they are looking at the potential for a good valuation at exit.
Put your best financial foot forward
Be detailed and be transparent. And be open to different ideas: For example, if profitability is far off then a loan may be more suitable than an overdraft. If revenues are increasing, a line of credit may be suitable if to cover working-capital needs.
Digging down to the details, here’s the financial information that will help you persuade a bank to fund an early-stage, pre-profit company:
- A revenue growth plan, including forecasted costs
- Key metrics and milestones with timescales
- The amount and type of loan or credit facility sought and plan for the funds
- A schedule for raising the next equity round, type of targeted investors and a plan to reach profitability
- The source of repayment for the loan or credit facility
- This would include a schedule for raising the next equity round, type of targeted investors and a plan to reach profitability
How to present the financials
The more detailed the financial information, the quicker and easier it is for banks to assess how they can help you find the best options for your business. The frequency with which companies submit just a basic annual profit and loss statement to banks with no cash flow or balance sheet forecast is surprising.
Provide clear, relevant and comprehensive financial information. Not only will this make for a smoother process, it provides the lender additional evidence that you have good financial controls in place and run a well-managed company.
Key information includes:
- Financial Forecast (12-24 months) including monthly profit & loss, balance sheet and cash flow
- Key relevant metrics for your business including customer acquisition costs, customer lifetime value
- Recent management accounts
- Aged trade debtors and trade payable ledger
- Latest annual audited accounts
- Corporate structure chart (showing subsidiaries and overseas entities)
- “Cap Table’ showing investors and percentage shareholding per class of share
Is venture debt right for you?
When you enter periods of rapid growth, venture debt, which Silicon Valley Bank specialises in, may be a good funding option and allow you to extend your cash runway – at a much lower cost than equity.
Instead of focusing on historical cash flow or working capital assets as the source of repayment, venture debt emphasises the borrower’s ability to raise additional capital to fund growth and repay the debt. Additionally, it helps founders avoid further dilution.
Presenting clear, relevant financial projections to your bank will put you in a much better position to raise debt finance as you grow your startup.
This article originally featured in UKTN.