Startups Live or Die from their Spreadsheets when Raising Capital

ImageThere is a saying in the investment community that the companies which successfully raise capital must tell a compelling story.  Besides the text, such story lives and dies by the numbers in the spreadsheet.  How important are those numbers? Let us first look at the harshest example. During a Wall Street IPO due diligence, an army of experts – financial, economic, and industry – sits in a very large conference room at the investment bank, reviewing the company’s spreadsheets, blown up in a 6 foot by 8 foot screen so that every team member can observe and comment every cell entry. Many participants graduated from the top academic institutions, with doctorate degrees in finance from Harvard to head of the specific industry sector.

Since many VCs analysts have worked previously in investment banking, they also bring with them the same keen analytical eyes to determine the credibility of a startup’s financial projections. I always advise companies that, if anything, they should apply the same precision in their financial statements, both historical and the projections.   Or they will be rejected.  Still I notice numerous business plans coming across my desk with wild numbers that would never pass the smell test of any financial analyst.

One recent set of numbers came from a healthcare startup with highly inflated line items. One line item described a monthly retainer fee of $20k per month for a CPA/Lawyer, practically a quarter of a million dollars a year.  And that expense line cell began day 1 of the operations.  First thought I felt that most startups are ramping up their business.  Paying for a full time lawyer is an expensive proposition.  And given the slow ramp ups of any startup business, that same attorney will be sitting on his hands for at least a year into the operations.  Building up a business is a gradual process; expenses should reflect that as well. Secondly, what even raised an eyebrow on this line item was the fact that the same CPA/Lawyer was the founder’s father.

As an experienced CLO for fast growing startup companies, I had to approve all legal expenses for the company.  In one company, where the company operated in several countries, the average monthly legal bills amounted to no higher than $10k a month. Large companies such as AT&T do pay $25k monthly retainers for law firms in other countries. But how can a startup justify $20k monthly retainer from inception? Obviously there was something wrong with this picture.

There were other line items in the spreadsheet that were so wildly high – software development at $1.5 million – when I was informed that the platform was complete.   I doubted that the founder of this company had any experience in running a company.  Some included monthly travel at $50k a month. On the other side of the spectrum I noted line items that were too low as well.

Now that founder has been frustrated that he has been pursuing a $5 million investment for a couple of years.  And he has decided to reach out to the West Coast.  That approach will not matter – smart money will reject the plan from both sides of the coasts.  What that founder does not acknowledge is that a rejection does not come with consulting advice. And he rather continue to receive rejections instead of revisiting his business plan, or paying someone to evaluate it de novo.  As one of my early blogs clearly state, 10% of something is better than 100% of zero. This founder wishes to keep the 100%.

I keep repeating this theme over and over, when smart money reviews a company’s financials, that spreadsheet is one several thousand he has studied so far in a calendar year. He will know from both experience and due diligence which numbers make sense and which numbers vary from the norm.  Any line item that varies from the norm by 20%-30% will generate questions.

That founder is doing a disservice to the investor, who is seeking a high ROI on his investment. By inflating his expenses, the founder reduces the ROI. The investor will question the founder’s managerial skills.  Rather than controlling his expenses, he is overpaying for many services and practicing nepotism. And if that founder is making such mistakes now, those mistakes will compound into the future.  Any serious investor will walk away.

Another business plan stated that the startup’s projected sales for the RFID hardware within the healthcare industry will jump to over $1 bill. in less than 3 years. This founder sent out his plan to over 80 firms! My first question was – any bites? Negative. A review of the competitive environment showed that their average revenues were less than $100 million per company. The 3-4 companies in the same space did not have sales exceeding $1 bill.  Then I commented that I do not know any startup whose revenues exceeded $1 bill. in 3  years.  One cannot manufacture that many products, hire a management team, or build a corporate infrastructure to support such growth.  And there is always the business school possibility of companies going bankrupt when the sales do not catch to their revenues, with the paramount example of Woolworth bankruptcy – companies can still go bankrupt even if they are growing too rapidly. He was about to hire some IT people, but I recommended that he should hire someone with direct experience in selling in the healthcare industry and another person with operational experience.

Again I will reiterate that a business plan lives and dies by the numbers. Bad numbers are poison that will scare off investors. Spreadsheets have facilitated the means to put together financials.  But I prefer the old school of visiting every projected cost–  from salary to consulting to office supplies—so that they reflect real life situations. And that is what any intelligent investor expects – especially when the startup is putting that investment at risk.


About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP,, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy.; For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
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