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With Paige Soya

Nailing your financial narrative for your climate startup

Your climate startup’s financial narrative is your opportunity to back up your vision with logic and numbers for interested investors. Here, your job is to show you understand both the drivers of your business’s growth and the factors that may hinder its success, and to communicate these things in a compelling way. The way you present your narrative (i.e. how thoughtful, organized, etc) is also crucial - it helps investors understand how you’re thinking about your business and the kind of founder you are, and plays as important a role in their diligence as the actual numbers themselves.  

Paige Soya is a Managing Partner of K Street Capital. We sat down with her to discuss the value of creating a strong financial model, what your financial narrative needs to cover, and how you can ensure it resonates with the right investors.

What’s included in a financial narrative?

At an early stage, your business’s financial narrative will consist of the financial summary and metrics in your deck, your pro forma, and the supporting materials in your data room. But if your startup has traction, and has had customers for over twelve months, you’ll need to go further by including information on your unit economics, retention metrics, and pipeline.

Some important metrics to highlight: 

  • Revenue, # customers, ARR - and make sure you are calculating ARR correctly!
  • Growth Rate
  • Gross Margins
  • Monthly Burn and Run Rate

Uncovering answers along the way

You might doubt the value of creating a financial model when there’s no guarantee that your predictions will be accurate. But the real benefit of putting pen to paper is that you’ll show up to your meetings with investors far more informed than you would be otherwise. It will mean you’ve clarified the path to scaling your business, and dissected the assumptions behind your growth. You’ll nail down the answers to questions like: if you infuse the business with capital, where’s it going to go? How much growth will it get you? What does your runway look like? 

As your business progresses you can expand this narrative, and build more complex models that will provide more accurate projections. The flipside of this is that you won’t be able to handwave numbers anymore - you might not know what your cost of customer acquisition is at the Seed level, but you’ll absolutely need to know by series A. 

Tips for crafting your financial narrative

1. Get the basics right - formatting and language
For starters, build your model on a common platform.  You could choose to build in Google Sheets or Excel - there’s pros and cons to both - but be aware that a lot of investors will simply export it to Excel. This runs the risk of breaking the formulas and formatting, so always test first to make sure this doesn’t happen. 

Also, make sure that your first sheet tells the investor how the model works, and defines any key terms or acronyms they need to know. This is a good opportunity to walk investors through your model to avoid any confusion.  Confusion is a deal killer.

When you’re early, a basic P&L tied to a cash flow will do, as long as the cost and revenue drivers are clearly tied in.

2. Don’t make it too complex
If your model is overly complex it’ll be difficult for the investor to parse, so keep it simple. Stick to standard formatting and standard equations as much as possible. No matter how good it is, every investor will take your model apart and remake it, exploring hypothetical situations such as your cost of goods changing by 10%. If you make it hard for them to do that, they’ll take longer on diligence, and the longer it takes, the more risk you run of the deal falling apart.

3. Go step by step
Don’t start by throwing your entire data room at investors. If you overwhelm them with information they won’t know where to look first, so they’ll look at everything, and build their own narrative that you can’t control. 

As long as you’re getting in all the critical content, the less words and numbers and documents you need to use, the better. Walk investors through the process step by step, gradually introducing them to increasingly complex information. You can even write a memo that explains how you’ll grow and how that links to your model, so that when they look at your financials, they’ll be predisposed to seeing the narrative you’ve already laid out for them.

4. Get comfortable with transparency
A lot of founders neglect to include cash flow in their financial narrative, but it’s one of the first things investors look for, and if it’s missing they’ll often just build it out themselves.

Remember that investors want to see two sides of your business. First, there’s the promise of how big it can get and how fast it can grow. But on the other side, there’s the risks to the business, the biggest of which is running out of money before you can hit your metrics and raise the next round. 

Founders often struggle with feeling like they’re negotiating from a position of weakness, but if you’re not transparent about how much you’ll need to spend to grow, you either won’t raise any money at all, or you’ll burn it all much too quickly, so you have to get comfortable with transparency. This is an important exercise for founders to go through anyway before setting out to fundraise, as it will inform as to how much capital you need to raise, which informs which investors you should be talking to based on the check sizes they write.

5. Highlighting headcount
Headcount is a significant factor of your business’s cash flow. Really think about the profiles of the people you want to hire, the hiring timelines, and any other associated costs in addition to compensation - and make sure you build in a buffer, because the process will likely take longer and cost more than you initially expect. In outlining these costs, the key is to communicate that certain skills and personnel are missing from your business, and your success is contingent on filling those gaps.

6. Building your pipeline
A built-out pipeline is something investors will want to see at almost all stages, unless you’re a frontier technology company that’s still years away from commercialization. Your pipeline shows what’s backing up the future growth you’re claiming in your model, and is key in helping investors gain comfort with your projected revenue and growth. Your pipeline should be made up of distinct stages, emphasize your win/conversion rates, and clearly connect to your financial projections. It’s OK to make assumptions as long as you know what’s driving them and show your work - for instance, ramping your conversion rate up from 5% to 15% because you’ve hired an excellent new sales person.  

7. On your exit
The standard answer when it comes to how you see your exit is either an IPO, or an M&A buyout. This won’t lose you any points, but it is the standard expected response. Most founders don’t know what their exit will look like at the early stages, but if you can be more thoughtful about it, it certainly helps in raising capital. 

Taking the time to think through your response in terms of your specific business will help get investors comfortable with the likelihood and timing of exit, as well as their ability to influence it and help you find a buyer when the time is right. Who do you see buying your company, when, and why, and at what multiple? Knowing common comparables will show that you’ve thought this part through. At what inflection point are these buyers looking to buy? Maybe you’ll only attract a buyer when you have 100,000 consumer users, or maybe it’s $50M in enterprise revenue, or something else. Will they be buying it for the tech, the IP, or the data? Give examples of similar companies that have achieved the results you’re striving for to show you understand the market you’re in and have thought strategically about the future.

Paige Soya is the founding Managing Partner of K Street Capital. She currently leads the investment team, making early stage investments in innovative tech companies in high-growth regulated markets including climatetech, fintech, cybersecurity, healthtech, and mediatech. Before joining K Street, Paige founded a venture backed fintech company, GoTab, which she exited in 2018. She also worked for over a decade in finance and has been an acting CFO executing financings and M&A transactions to a diverse set of clients ranging from early-stage, venture-backed startups to later stage PE-backed corporations. 

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