Financial Management for Technology Start-Ups

How to Power Growth, Track Performance and Drive Innovation

Alnoor Bhimani

• Publisher: Kogan Page
• Year: 2022
• Print ISBN: 9781398603066
• eBook ISBN: 9781398603073
• Edition: 2
• Topic: Business
• Subtopic: Accounting
• Index: Business

More than a third of start-ups fail due to founders having a poor understanding of financial management. Become financially savvy with this easy to understand guide and learn how to effectively grow your business, communicate with investors and progress to the next level. Start-ups face many challenges but managing the finances does not need to be one. Financial Management for Technology Start-Ups offers a complete financial toolkit on how to use this area of your business to your advantage. This book contains invaluable tools and insights designed specifically for tech start-ups, with a concentrated focus on what is important in financial terms for technology-based and innovation focused entrepreneurial businesses.The fully updated second edition offers greater analysis of financial statements directly from real-world start-ups, charts the success of businesses that went from start-up to scale-up with all new case studies and covers new digital technologies, emerging opportunities in the ecosystem, developing markets and much more. For entrepreneurs and tech innovators, this is a must-have book to help take your idea from concept to company with clear and effective financial insights.

08

Tracking your start-up’s growth

Now you have your investor’s monies, you will need to focus on your costs, revenues, profits and investment returns. In this chapter, we look at a few financial management concepts to use in moving your start-up forward. Both you and your investors will expect the time, resources and money put into your business to yield some return. We will start by considering the all-important return-on-investment metric. Based on that, we will discuss how a basic costing approach can be beneficial, although sometimes we will need to use ‘activity accounting’ to really drive profits. This comes in handy, particularly when investment in technology and a growing product range means that your costs start to mushroom. We will find that it’s essential to know the cost of reaching customers and then working out their lifetime value for your start-up. You will learn here how you can use all this information to gauge your strategy along the way and decide on turning points and pivoting your business. Possibly, there may come a time when you decide to leave your successful start-up behind – what exit strategies are open? Finally, we end the chapter with the ‘Tech Start-up Tracker’, which brings together all that we’ve discussed into a scorecard enabling you to assess your start-up’s performance and progress. This chapter will discuss the following points and concepts:

• Your return on investment concerns you and your investors.
• You need to cost your products and know when you go off track.
• Activity accounting could help you make more money.
• Getting and keeping customers can be costly – what to monitor.
• What to do if you want out.
• Tracking your start-up!

Are your returns what they should be?

All investors seek returns on their investments. In Chapter 5, we looked at how you can use ratios to analyse your start-up’s performance. Once you know what your investors want from you via the term sheet, you can use the return on investment (ROI) measure to assess performance. Angels and venture capitalists pay extreme attention to ROI. It reveals how able you are to deliver a return by showing the income yielded for the amount invested. We can calculate it as follows:

Return on investment = Income / Investment

So, an investor will look at it from this perspective:

As suggested in the previous chapter, we can assume that business angels are looking to make 20–30 per cent return on their portfolio of investments, with many venture capital firms seeking to make no less than 30 per cent. But, what do investors mean when they stipulate, say, a 30 per cent minimal hurdle rate of return? What they’re referring to is the internal rate of return (IRR). This is the rate that discounts the future cash amounts resulting from an investment. It ensures that the sum of the present values of these amounts are equal to the cash paid now to make the investment. The formula looks like this:

In the above, r is the IRR; CF₁ is the Period 1 net cash inflow; CF₂ is the Period 2 net cash inflow; CF₃ is the Period 3 net cash inflow, and so on.

Suppose you’ve secured $1,000,000 in funding. Table 8.1 shows what your investor wants.

Table 8.1 What the investor wants

Skip table

Investment		Return on investment		Return of investment	Cash flow
$1,000,000	×	30% = $300,000	+	– $300,000	$0
$1,300,000	×	30% = $390,000	+	– $390,000	$0
$1,690,000	×	30% = $507,000	+	$1,690,000	$2,197,000

Whilst your venture capital investor expects to earn 30 per cent on average, they do not really want a cash payment at the end of each year. And since there’s no cash to be paid out at the end of Years 1 or 2, they will want the expected 30 per cent on these unpaid cash flows accruing from year to year on a compounded basis. That is, the IRR is 30 per cent because the internal amount continues to gain 30 per cent on the investment made. An investment of $1,000,000 put into your start-up today could be worth $2,197,000 in three years, as shown above. But, we all know things do not always turn out as planned. For a venture capitalist, maybe one out of...

Table of contents

• About the author
• Preface
• List of abbreviations
• Acknowledgements
• 01 Now is the time
• 02 Tech start-ups: why they’re different
• 03 Start-up contribution analysis
• 04 Start-up financial analysis
• 05 Start-up progress analysis
• 06 The importance of being liquid
• 07 What’s it worth to you?
• 08 Tracking your start-up’s growth
• Glossary
• Resources
• Index