One of my favorite reality shows is “Bar Rescue,” where the lead character brutally tells bar owners and their employees what they have been doing wrong. Many bars faced eroding sales nearing bankruptcy. The host has no hesitation in pointing out all of the errors. He points out to the owners to shape up or close up. Somehow or another I find that startup companies can learn from such show. One such startup company, the subject of this blog, has for 2 years attempted to raise $10 million. Since it is in the biotech world, that dollar amount did not seem unusual. What was unusual it that it had no prior investments and human clinical trials needed to be administered. Now the “Bar Rescue” metaphor relates to the startup’s spreadsheets. The team had only prepared its spreadsheets in quarters, not monthly. When I inquired as to the existence of any monthly numbers, I encountered silence and, in one instance, I was told by a senior officer that it was not relevant. And just like the Bar Rescue host, I pointed out to them the facts of life.
Why monthly? By detailing your costs month-to-month, you begin to identify all possible expenses from labor to equipment to magazine subscriptions. No one can foresee every potential expense, but one can analyze or do the due diligence on what those approximate costs should be. When I showed some of these quarterly numbers from the biotech startup to an experienced biotech investor, he commented on the high costs of some of the clinical trials. When I myself investigated those same figures, I discovered that he was right. Apparently, rather than breaking down the figures, the senior executive simply gave pie in the sky numbers to be on the “safe side”. Yet that might have been the problem for this startup, everyone who looked at those numbers thought that the costs were too high for the risks. The biotech startup did not realize that investors prefer to view detailed figures during their due diligence.
So I began to prepare a monthly model for this company by looking at every potential cost. When the final result came in, the capital required dropped to half, $5 million. In other words, had these numbers prepared appropriately, the company could have been funded sooner.
Another advantage to monthly numbers is the flexibility it offers. Some investors might hand out lesser capital. In they offer a third, you need to tell then what can be accomplished with that round of capital. With a monthly, one can provide a quick answer. And I cannot think of any other way of building a financial model with that flexibility unless the model is monthly based.
Note that I am not suggesting that the executive summaries or pitchdecks show the monthly figures. The advantage of a spreadsheet is that one can consolidate monthly numbers into quarters or yearly. And the yearly numbers is what is normally shown to potential investors. The monthly, however, offers the initial foundation to a decent spreadsheet that can attract investors.