Securing a new line of funding is an exciting milestone for any entrepreneur, especially during those formative months or years of a young venture. Having an investor put their faith into your business can be a huge morale booster for an entrepreneur.
Still, failure is a reality for many startups and small and medium-size businesses (SMBs) that manage to secure funding, even after improved financial support from banks, venture capitalists, private equity firms and alternative lending platforms. As many as 50 percent of businesses close shop within five years after launch.
Much of that failure has to do with the myriad challenges businesses face during the post-funding phase. Many entrepreneurs often struggle to reconcile the hype around pre-funding or pre-launch stages with the realities of running a successful business.
Consequently, there's a need for entrepreneurs to realize the importance of the post-funding phase, including the hurdles they face, and to put in place mechanisms so their business doesn't become just another failed venture. Here are three places to begin that journey.
1. Establish a reporting framework for your investors.
While getting funded allows a business the ability to scale faster, it also comes with significant trade-offs, including sharing equity and the reins of power with your investors. This means keeping them updated on the goings-on within the company on a regular basis.
Reporting generally depends on the investors you've brought in. Many venture capitalists and private equity firms, for instance, typically require quarterly reports detailing different operational elements of the business. Others, like investment banks, may not require reports as regularly, while others may require these reports at shorter intervals, especially if they've taken an active managerial role within the company.
Irrespective of the investor, it's always critical that important documents, including your income statements, balance sheets, cap tables and cash flow statements, are available for audit at a moment's notice. To this end, it's a good idea to use an accounting or project management system that will let you print reports on demand.
2. Maintain meticulous books.
Every company, even those not actively seeking investors, must keep accurate books to account for expenses and assets. For businesses seeking investors, however, maintaining accurate, up-to-date financials is even more important, because they provide critical information about the business's health.
Good bookkeeping practices don't just apply to the prefunding phase. Because there's a good chance you'll need another round of funding down the line and since your current investors will need insight into your financial standing anyway, you need to keep your books spotless.
Good bookkeeping also helps you manage your corporate credit score, something that many investors and lending institutions love to look at. Your corporate/business credit score, which you can get for free every 12 months, is often used as a measure of how your business uses capital. Your credit score is affected by everything, including late or missed payments, tax payments and your business's credit history.
In keeping with good bookkeeping practices, always ensure you only have a single set of accounting books. Operating multiple books of accounting is a popular practice by many businesses that can obscure an investor's view into the business, leading to more questions, trust issues and eventual pullout by the investor.
You run the risk of operating multiple books of accounting if you operate multiple accounting software applications in your business, your tax preparer is running their own books for your company concurrently, or you're looking to be GAAP (Generally Accepted Accounting Principles)-compliant, which requires a second set of accounting books. Try to minimize these factors to help ensure your bookkeeping process is transparent for investors.
3. Prioritize items on your expense list.
When the first batch of investor funds hit your bank account, the first impulse is to splurge. From the latest tech to fancy office furniture, many of these initial, unnecessary costs can plunge your business into a financial hole and, by extension, land you in hot water with investors.
Even though your expense list will depend on the growth stage of your company, it is vital that you direct funds toward value addition for core functions of your business. One of those core functions usually surrounds hiring, a process that should feature prominently on your expense list. If hiring wasn't done concurrently with your pitching campaigns, those first few days or months after funding should be spent attracting the best talent, especially around the areas of finance/accounting, legal, customer service and branding.
However you spend your new infusion of capital, make sure each expense is in line with your business's goals and objectives. Raising money is only a portion of the work you need to for your new venture; the real work begins during the post-funding phase. Your investors will be looking to you for growth and, eventually, a return on their investment.