source not only lends more credibility to you and your business, but also reduces the amount of time you have to spend finding estimates of market size. If you're in a completely new market, you'll have no option other than creating your own market size estimate. One of the common mistakes early‐stage companies make is in overestimating the size of the market opportunity so that it becomes ignored in any presentation. You have a clever product that “every homeowner” will want (for example), but that doesn't play well with investors and they'll want more sophisticated thinking on your market opportunity.
Instead, figure out the size of the total addressable market (TAM). You can arrive at this number in a couple of different ways. A top‐down approach focuses on readily available macro indicators. For example, if your business is chasing an opportunity in the real estate space, it's easy to find macro numbers on the size of the US real estate segment you are in and you can provide some color on how fast it is growing and what percent of that segment you feel is addressable for your business.
The other approach, bottom‐up, uses individual metrics to arrive at a number if you were able to sell your solution to every single possible client. Continuing the real estate example, if your clients are commercial real estate tenants, you could use data that show there are 500,000 commercial tenants in the US (for the easy math) in your market and the average service price of your product is $5,000 a year, the total addressable market is $2.5 billion. From there you would (probably) refine that number to something more reasonable, like reducing the TAM by region or some other factor.
The CFO plays a major role in driving alignment among the leadership team in creating a realistic answer to the size of market opportunity. If this is not well thought‐out, if it's wildly optimistic, if there is no data supporting your assumptions, you could lose investor confidence.
Chapter 6 Financial Plan
The pitch deck should have two types of financials: current financials and projections.
Current financial statements should include at least the current year‐to‐date (YTD) income statement with detail at least showing:
Revenue makeup. Often you will want to break out revenue into “types,” for example, breaking out subscription/recurring revenue from transactional and service revenue or breaking out hardware revenue from subscription revenue.
Gross margin. Each industry will have gross margin benchmarks that are useful regardless of the stage of the company.
Costs. Knowing the costs of the following is very useful:Research and DevelopmentSales and MarketingGeneral and AdministrativeInvestors like to benchmark these measures, although these will be very different depending on the type and stage of the business.
Operating margin/earnings before interest, taxes, and depreciation (EBITDA). This is another metric that can vary widely depending on the industry, stage, and growth rate. Sophisticated investors will be able to easily decipher this metric and account for industry, stage, and growth rates, so include it even if the number looks bad to you.
Balance sheet and cash flow. These can be included if there is an appendix or highlights like cash balance, cash burn, and runway on the financial slide. In addition, there are a handful of other possible reasons to have more of the balance sheet in the deck:material capital expenditures,large working capital variability or requirements, especially around product inventory,commercial debt,significant leases or other off‐balance sheet liabilities.
Financial projections are more important for later‐stage companies than early‐stage startups but you need to have some projections. This will help the investor understand your thoughts on the unit economics, margins, and needed investments. This is also one of the best ways a CFO can be a good partner with the CEO. Your role can range from sitting down and crunching through the model with the CEO, to creating the model yourself and iterating after getting input from the CEO on the key drivers and assumptions that make up the forecast.
For an early‐stage company the financial projections can provide the investor a picture on how you see the company's finances evolving as the company matures. Specifically, you'll want to consider the gross margin, show what the operating margin can become as the company matures, and provide a rough idea of time to profitability with total cash burned. Even though most investors realize that the projections will quickly become dated as you have yet to figure out all of the key unit economics and product‐market fit, it's your thinking about the projections that is critical to receiving financing. Another good idea is to use “mental math” to quickly sanity check the story that the financials are telling you. Does this gross margin improvement make sense? How much of the increase in revenue is falling down to profit and does that make sense? Does the employee base assumption make sense, given the client count increase?
The projections for later‐stage companies will need to be much more defensible as there is now some history. For later‐stage companies, your projections play a much greater role in valuation, which determines nearly everything in the financing moving forward. Your discussion around the projections should include something on key initiatives to improve growth rates and margins. For example, a major initiative could be that customer retention will improve by 5% each year and the discussion should include WHY this is possible and the economic impact of that improvement. Having realistic and defensible projections will require the CFO to deeply understand the business and be a great partner to the other teams like Sales, Service, and Marketing.
Chapter 7 Unit Economics and KPIs
At any stage of growth, it's important to identify the unit economics and key performance indicators (KPIs) and have a clear understanding of the story they tell about the business. Each business and industry could have a different set, but some of the common KPIs that cross industries include the following.
Customer acquisition cost (CAC). For venture‐backed companies looking to grow a business, this is one of the most important metrics, for both B2C and B2B companies. Your CAC will evolve and change over time (either higher or lower as you get past early adopters) so the earlier you start measuring it, the better off you'll be. Even though your CAC will evolve, investors will want to understand how fast the payback period will be against a CAC.
Customer lifetime value (LTV). Lifetime value is an important companion metric to CAC and will include other common metrics like gross margin, average product price, customer growth dynamics, and customer retention rates. There's no one‐size‐fits‐all LTV approach since it includes other measures, but it can be helpful to include it in financial projections and be able to substantiate how and why you came up with the metric.
Customer retention rates. You will have a few rates that each tie to the key customer segments you're targeting. Things to consider are customer size, region, or product set, or other segments that tell a different customer retention story. Net Retention Rate (sometimes called Net Revenue Rate), or NRR, is the customer retention rate, taking into account revenue net of upgrades, downgrades, termination, and cross‐sells. Gross Retention Rate (GRR) only includes downgrades and terminations. Both metrics are useful to track, and many later stage investors (and possible acquirers) will spend a lot of time on these metrics.
Average price. This can include average new vs. existing customer pricing, and you might consider segmenting by region, product, or other key factors specific to your business.
Assorted segment analysis. As alluded to above, investors often want to understand metrics by segment and even if they don't explicitly ask for segmented data, the best investor presentations will give them that information.
Chapter 8 Investor Ecosystem Research
During the scaling process it is useful for the CFO to understand the dynamics of the venture capital ecosystem and develop relationships with firms that are a good fit for the company. Some things to research or think about before you go too far down the path