The last article discussed how a B2B software startup could build relationships with potential investors by emphasizing in the same manner it would with prospective customers. Make their jobs easier to win them over.
To continue this theme and topics discussed in Key Tips for a Successful Fundraise and The Science of Financing a Software Startup (Part 1 of 2), this article will address two key questions often asked by investors during a fundraise:
- Why now?
- What will the money be used for?
In order to answer these questions, it is important to think of a business holistically in terms of what has happened, what is currently underway, what could happen going forward. Once you’ve gone through this exercise, then consider creating a plan which shows cash needs separated into 3 categories:
- Working capital
- Proven growth
- Experimental growth
As the world and startup ecosystem shifts away from “growth at all costs” towards lean, capital efficient, sustainable businesses, understanding #1 and #2 are key to scaling success. It enables a business to continue growing predictably and attracting investor interest. Let’s unfold these concepts in more detail.
Working capital relies on optimizing cash movements
Working capital or operational cash flow represents the excess (or deficit) cash available inside the business based on timing differences between when money is sent and received.
B2B SaaS businesses have significant advantage over companies that sell physical goods with inventory and a supply chain — when managed efficiently at scale, the cash is received from customers in advance of paying salaries to talent within the business. In finance jargon, this phenomenon is known as negative working capital – it is generally viewed favorably by investors when the company is growing since the extra cash can be used to fuel more growth and minimize funding needs. This is one of the reasons why private and public investors tend to value B2B software companies at a premium to other types of business models.