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Surviving the new normal: what to do if a customer asks for your startup’s financial information?

It was in Redwood City in 2008, and my startup Makara was riding the early cloud wave of virtualization and trying to create so-called “containerized applications”. Early adopters for this technology were the typical early adopters: finance companies, technology companies and occasional retail companies that reinvented themselves.

If your startup does it right, you’ll have a website, brochures, videos, and all sorts of materials that will make your business look bigger than it actually is. We were 15 in a $ 1.25 / m² office above a movie theater. During the week, our neighboring unit had karaoke blasting, making our conference room sound like we were in a bad movie. We made sales calls with my Nokia phone in a small room in the back near the toilets. We tried to present ourselves as if we were not next to the toilets, but in a high-rise building in San Francisco with the rest of the top crust.

Startups these days use similar tricks to present a better reality than there actually is. We carefully select our zoom backgrounds to hide our children̵

7;s toys and unmade beds. The tradition of putting the best foot forward when working with very limited resources is not an empty gesture. It is an important test. If an entrepreneur, in my current role as a venture capitalist, can convince me that he is successful, then I believe that he can convince the next person as well, and it continues until he is actually quite successful. If I want to take a risk on new technology that may not exist next year, I should work with someone who makes things look better than they are. I want to buy this dream.

These memories of the first start and the extreme caution of how we were perceived came back to me recently when a founder I worked with texted me: “Hey, it is normal for a prospect to ask for annual accounts Interestingly, an hour later, a friend who is the vice president of a startup called me and told me that when the bank applied for a mortgage, he asked for a startup’s financial statements. I’ve been asking around and this seems to be happening a lot more than normal lately. My answer to the founder was: “Yes, it’s a bit normal, especially right now, but the way to deal with it is probably not just to send it.”

How do I deal with the request?

To handle a financial request when you receive one:

Request a call to speak about it. Ask about their concerns and try to get a feel for what they really want. Do you want to know if you are around? How can you help them understand this? Who has to make the judgment? What criteria will they use? A certain runway? Is this requirement really optional and they just ask everyone?

Propose alternatives. “We are a private company and generally do not share financial information. Could I let you speak to my investor instead? Are you concerned about our financial sustainability? They know we have over 25 customers, five in the Fortune 500, and expect to close ten more this year – and we will be supported by the same VCs that have supported the large companies X and Y. “

If they insist on finance, compress / edit she to get to the point what they’re looking for. If you’re looking for sales volume, just show it. If you want to know the runway, show Cash vs Burn. Can you compress income and expenses on one line? Do you need it broken out for any reason? It is really normal for financiers to have long discussions about how many details and what information formats they will share.

Ask your investors to help you. They are often masters at explaining your business to their investors, who are usually unfamiliar with the market. Even if you call them to your customer to help them feel a financial person’s enthusiasm for the business and how they would be happy to invest more money when the customer makes their purchase.

Find social evidence. Contact your other customers if you can explain why they thought your product was essential. Point to news articles, analysts, and other companies they may have heard of to explain the wave you’re driving. In our case with Makara, we were able to point to EMC’s purchase of VMware as a trend that shows how our business was on a wave that would continue for a long time.

Explain the usefulness of your product without jargon or technical terminology in a way that sounds plausible to this buyer. The explanation of how we were “just like Heroku but for Java enterprise applications” was lost in our customers’ purchasing departments. But teaching them how the latest Turbotax was delivered on the Internet instead of in a box and how we would help improve these scaling efforts was something they could refer to.

The final result

Unfortunately, only a few startups are in positions like Notion, Preset or Lattice, where they have tens of millions in the bank that they don’t need and can simply submit their balance sheet and profit and loss accounts without worrying about how they could be perceived. Most find themselves in situations where they have cash in the bank for 6 to 18 months, lose money and the source of income (during these times) is somewhat unpredictable, since even stable, long-term satisfied customers can suddenly get out of business.

It should be noted that the sponsor of this purchase wants to use your software at the time of purchase. You don’t need buyers to love you or buy your great vision. You just have to feel that the risk is acceptable. But to get them there if your financial statements don’t look like unicorns, you have to sell more. Realize that you are selling to the purchasing department and they are unlikely to understand your product or market. You don’t sell them to use for yourself, you sell the idea that other companies like you need your product, and therefore you get more customers and get more money and stay in business for a very long time.

Issac Roth is a partner at Shasta Ventures, an early stage investor in companies, consumers and emerging platform companies. He is currently a member of the Board of Beautiful.ai and a Scalyr observer.

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