Navigating Capital Planning: the ‘Basics’ for Startups

13.12.23
GD1 Thought Leadership

Startup financial planning - stay on top of it at all times!

 

GD1 and AWS took a room full of people from the NZ tech ecosystem through a ‘Capital Strategy & Financial Planning Masterclass’ presented by GD1 Co-Managing Partner John Kells.  This is a synopsis of the masterclass. John has a background in finance, entrepreneurship, and has backed global VCs who have invested in some of the world’s most well-known success stories, including Docusign, Bill.com and HubSpot (with Scale Venture Partners); Fitbit and Peloton (with True Ventures); Klarna, Stripe, Pipedrive (with Atomico); and others. 


“Financial planning is a pivotal step in bringing your company’s strategy and future visions to life, and is a critical tool for managing risk,” believes John. The event was all about simplifying the core essence of financial planning and understanding its strategic importance. As with most core aspects of startups and scale ups, tackling high level challenges with a short and long term mindset is critical. John said at the end of his presentation that “The very best entrepreneurs never panic when things don’t go as expected, and neither should they (or their investors)...” Sound capital strategy and financial planning upfront with  periodic reviews over time is one of the foundations of achieving this peace of mind. 


For portfolio companies (and others) who may have missed out, here’s a short round-up of what was shared, including some handy checklists and pointers that will help you keep the financial health of your startup on track…

What is financial planning?

At its core, financial planning is about shaping your company's financial destiny. It's the process of creating a detailed action plan or blueprint that governs the efficient allocation and distribution of your company's capital resources, and about ensuring that you’re raising capital at the right time to fuel your growth. 

Given the inherent uncertainties around building a tech business from scratch, leaders focus more over the next year, and then extrapolate that to address longer-range planning needs. 

Your planning should include:

    • A profit and loss statement

    • A cash flow statement

    • A balance sheet

    • A sales forecast

    • A personnel plan

    • Business ratios

TLDR: It's all about keeping a vigilant ete on metrics like cash flow, burn rate and runway.

Why is financial planning important?

Financial planning is the lifeblood of startups for several reasons:

    • Funding needs and sources: It helps identify your company's funding requirements

      and optimal sources of capital which will fuel your growth.

    • Strategic alignment: Financial planning helps to align different functions across your

      startup with your overarching strategic goals, ensuring that every part of the

      company communicates and prioritises what's really important.

    • Survival strategy: Navigating through the volatile tech landscape and macro
      environment, effective financial planning is crucial for survival and can help you
      weather unexpected challenges.

Critically, it also allows you to answer pivotal questions like whether you have enough capital to manage risks efficiently, where you can allocate resources, how reliable your revenue streams are, as well as growth drivers. In today’s environment, there is renewed focus on the financial viability of startups and, with the fundraising environment being a challenging one, vigilance around cash efficiency and runway could set you up to thrive long-term. 

Before you kick things off…

Before diving headfirst  into spreadsheets, getting laser-focused on your goals and constraints is key. Your business priorities and company needs should inform your strategy, rather than just the numbers. Identifying your unique strategic opportunities and clearly understanding your available resources early on is crucial; as is cutting through market noise and gathering insights directly from existing customers and your team to make informed decisions.

Financial modelling - the backbone of financial planning

Financial modelling is the backbone of financial planning but requires an experienced individual who understands the distinctions between a Profit and Loss (P&L), a Statement of Cash Flows, and a Balance Sheet, as well as how these different things are interconnected. 

It's essential to establish parameters in your financial model based on underlying assumptions, enabling you to make adjustments when your assumptions change. 

Keep these considerations in mind as you work on your model:

    • Research or historical data can provide sensible assumptions, allowing for reasonably

       accurate near term cost estimates. 

    • Think hard about each parameter and try to understand what shapes its behaviour.

    • Use this process as an opportunity to see where operations can be streamlined.

    • Use both coarse-grained and fine-grained planning approaches. (For the next 12

       months, use a more ’fine-grained’ or detailed approach; but for the two years

       beyond that, use a more ‘coarse-grained’ approach.)

Critically, we would suggest building a plan with sufficient runway to weather the current macro-environment.

Scenario planning - accounting for the ‘what ifs’

Tech startups thrive on adaptability, and scenario planning is a vital tool for preparing for a variety of different futures. Scenario planning ensures that you're ready to pivot when necessary, whether it's a year of solid growth or heading through a challenging cash-strapped period.

“Somewhere between prophecy and ignorance there’s a sensible spreadsheet…” 

John recommended planning for the following three scenarios, as outlined by this handy SaaStr graph by Jason Lemkin, where C refers to ‘confidence’:

Devising a simple way to represent your ‘base’, ‘best’ and ‘worst’ scenarios is key to using (or modelling) your data in a way that makes sense to your stakeholders. 

Once you have finalised your scenario planning, keep in mind that “Just because you modelled something, doesn’t mean it’s correct - continuous review is critical (monthly, more formally on a  quarterly or annual basis),” says John. 

Keep an eye on cash, burn and runway and maintain flexibility as you adjust your plan and spending accordingly.

The importance of benchmarking

Benchmarking is an external perspective that will help you gauge your startup's performance against industry standards and data. It's a valuable way for identifying areas of improvement and staying competitive.

John highlighted areas of strength that would be of interest to future investors; as well as some ‘red flags’ to be aware of. In the case of SaaS companies, this could include focusing on financial metrics like ARR growth, churn, net dollar retention, CAC payback, LTV/CAC, Gross Margin %. 

Capital raising

For many tech startups, capital raising is a critical step in their growth journey. Financial planning is key to making informed decisions around whether to raise capital, when to raise capital, how much to raise and what you’ll use the money for.

Potential investors will look at your capital efficiency and resource requirements in relation to your ARR (again, just focusing on the SaaS side). Ideally, your financial model will give a pretty clear picture.

Capital strategy and financial planning is not just a financial exercise but an ongoing strategic imperative for tech startups. In a landscape as dynamic as the tech industry, the best entrepreneurs are those who embrace uncertainties and use financial planning as a tool to navigate ever-evolving challenges and opportunities with confidence. 

A huge shoutout to Amazon Web Services (AWS) for sponsoring the event and to Jonathan Barak for collaborating with us on this event and the Q&A 🎤✨

Written bY
John Kells

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