Part of Y Soft Ventures’ value to our funded portfolio companies is offering mentoring to the founders and their leadership team. Once such area of mentoring is financial guidance.
It is not unusual for entrepreneurs to not spend much time learning about the financial aspects of operating a company, especially in the early days. After all, many of them tend to be more technically oriented, are focused on creating their product or prioritize developing business – and there is only 24 hours in a day. Most do not consider financials deeply until they are looking to raise money.
I often get to work with entrepreneurs even outside of Y Soft Ventures’ portfolio as a consultant or a lector thanks to my cooperation with organizations such as JIC – South Moravian Innovation Centre or Impact Hub.
Y Soft genuinely wants young companies to succeed and learn from our experiences, our mistakes. Such assistance was not available to Y Soft when it started nearly 19 years ago. Many of these companies are not after venture capital, but even in their case, it is difficult to underestimate the importance of managing your finance properly.
Here’s a few ways we assist in the area of financial advice.
Before Investment – “more fiction is written in Excel than in Word”
Most founders have a plan, in their head or on paper. But a quote that I heard recently sums up a typical founder’s plan: more fiction is written in Excel than in Word. Entrepreneurs tend to overestimate the speed of generating revenue and underestimate the costs necessary to operate their ventures. This applies especially to founders looking for an investment, who want to show the full potential of their business. Therefore, we need to talk about what is possible in the real world.
Usually we work together to create a financial plan that is realistic, reasonable and makes sense to both the founders and us as the potential investor. At the end of the process, the founders must understand how the individual aspects of their business fit together, how they influence each other and what the “physical laws” in the business world are. We ultimately want founders to be comfortable working toward the milestones laid out in the plan – in other words, they must see that they have ambitious but achievable goals ahead of them.
During this time, the founders’ financial literacy gets better, their planning skills improve and, all the while, we are getting to know each other – which is a crucial part of the due diligence process. Sometimes we end up not investing in the start-up, but at least the founders get some value from working with us.
After the Investment – “seeing the big picture”
When everything falls into place and Y Soft Ventures decides to support the start-up with funding, we help set up the practices and processes necessary for effective financial planning and reporting. While some founders might see it as a burden, at least at first, it is an important step to take. By doing so, they start gathering the data needed to make informed business decisions, have their financial resources fully under control and can truly think about where and how to allocate these resources. (That’s better than just wondering where all the money went!) To put it simply, we want the founders to have a full picture of their business and to be able to run it smartly.
The founders we work with are smart people, so it doesn’t take them long to understand the concepts. It is realizing that it is a good use of their time to develop their finance management that sometimes takes some convincing.
Besides, we need the data as well. Not only we have to report to our investors, including Y Soft, we also keep tabs on the start-ups so that we can spot potential anomalies in their financial health as soon as possible and help their management address them. That’s why we ask them for monthly data – which might be seen as somewhat unusual. Typically, the venture capitalists involved in a company sit in on quarterly board meetings to hear updates, provide opinions and resolve issues at hand. We believe that we can provide the best value by deep mentoring and to do so, we want to be in touch as much as possible (which obviously involves much more that the financial reporting!). We feel we really do have a vested interest in the invested start-ups and want them to be as best positioned to succeed as possible.
Over the investment horizon – “learning to think forward”
We continue improving the financial processes and practices so that their quality develops with the growth of the business. It is not just about meeting all the legal requirements, it is about having the information the founders need to manage their business.
There might be quite a lot of work involved, but it is worth it. In these early days the business is changing very rapidly – and as it grows, it becomes more and more complex and new challenges and issues arise. Usually it is not finance management that is the root cause, but you can spot the cause by analyzing the finances.
Another thing I point out to the founders is that, should they need additional investment or when preparing to be acquired, having all this financial work done puts them in a much better negotiating position. They will know their own business better – plus the investor or acquirer will definitely want to see the numbers. Our goal is the maximize the start-ups exit value – something that benefits both the start-up and us, and having strong financial foundations is an absolute must.
This work concerns all the start-ups we invest in, but each of them eventually brings various ad hoc topics we work together on – managing working capital, financing opportunities, financial risk management, tax considerations, adjusting pricing or the details of the business model etc. It is start-ups, so you never know what will happen the next day!
Although mentoring these founders is part of my role at Y Soft Ventures, I learn many new things along the way too. Every business and every founder is different, each represents unique challenges. It is truly inspiring and educating to work with such exceptional people. And I am not going to lie – it is a great joy to see the founders and their businesses to grow and mature along the way!