Eight Tips from Greg Ho, President of Spring Mountain Capital, Former CFO of McKinsey, and SheWorx Mentor.
Greg Ho, President of Spring Mountain Capital and former CFO of McKinsey is a veteran when it comes to evaluating financials and investing in startups. “One of the biggest mistakes,” he says, is “many entrepreneurs use aspirations not facts when making their financial projections.” While it’s tempting to inflate your numbers or to “fake it ’til you make it,” Greg recommends taking a step back to thoroughly understand your numbers. At our recent SheWorx breakfast, Greg provided the SheWorx community insights into his investing practices and what he looks for in the deals he is presented.
- Avoid single-layered financials. This means that when an investor clicks on a cell in your financials, there should be formulas embedded that allow the investor to understand your thought process and how you arrived at the number. This shows the investor that you’re detail-oriented and you have thought deeply about your financial projections.
- Make sure everyone on the team thoroughly understands your financials down to a T. Anticipate the questions you’ll receive from investors and make sure everyone on your team agrees and understands the answers to those financial questions. There should be no disagreements when you are standing in front of an investor.
- Don’t build your numbers when you can’t. In other words, don’t kill yourself building aspirational financials that will ultimately undermine your credibility. If you project a number, investors will monitor to see if you actually hit those goals. If you do build financials, be specific about how you’re going to get there — use facts and not aspirations. If you say you’re going to capture 5% of the market, explain the steps that you need to take in order to capture that market. What’s your pipeline? What’s your success ratio?
- If your numbers are not attractive enough for VCs, you should find a non-financial angel (someone who is investing in your mission or your team), or you need to re-think your business. Greg invests in companies that he has an affinity towards. For instance, even though food & beverage investments have notoriously bad margins, Greg backed a Paris bar and restaurant because he is a big foodie, and he appreciated the vision and dedication of the business owners. Broadway shows are also historically bad investments, but he recently backed a play called Allegiance because he believes it is important for Americans to learn more about the history of Japanese Internment. Find the investor whose passions resonates with your vision.
- Theologically, there are nine choirs of angels; similarly, entrepreneurially, there are different kinds of angels. It is critical to find the angel who is the best fit for you and your company. When deciding whether you want to take money from an angel you should consider if you like the person with whom you’re entering into this long term agreement. Not all angels are looking for the same things. People will back you not just because you have a sound business plan. Many will back you just because they like you or because the investment will make them feel good.
- Value is relative. Your company may be valued at 2x or 5x depending on who you’re approaching. If you appreciate this, then you should go to people who are less focused on the present value of your company and are instead valuing it higher because they want to see your idea come into existence for some other mental purpose. These are the investors for whom there are higher financial rewards to get to the valuation you want. Go and find the factors that will give you the highest valuation, then start backwards. For instance, a transportation company was able to get an $8MM valuation, a valuation that no other firm was willing to offer to the company, because the particular sponsor had a very strategic purpose for wanting the company in their portfolio. Consider putting together You different sets of presentations for different types of investors.
- Think of the minimum you want to achieve financially in 3–5 years, then work back to the present. “Where do I MINIMALLY want to be from a financial viewpoint? How much money do I want out of this business by the time I’m done?” For example, you might set the following minimum: “If I’m bought out after three rounds, I want to leave with $5M ” So from there, hypothesize the sale price and how much of the company you need to own — do this projection accounting for dilution for at least three rounds of investment. This is important because most founders focus on what they can do to make their company more valuable rather than thinking backwards about how much they eventually want to get out of it. Once you’ve set this goal, you should work to outperform the expected growth model.
- Probabilistically, you will need to raise more money than you think. Set yourself up for that. Build a buffer into your financial model to protect yourself from running out of money because cash is the lifeblood of every business.