Investors’ insights: How to demonstrate positive unit economics and risk mitigation

Earlier this year, Payhawk held an event for the Bulgarian Startup Ecosystem at its head office in Sofia, Bulgaria. At the gathering, investors and other key members of the Bulgarian startup community spoke about VC funding for scaling businesses and what investors are looking for.

During the event, we took the opportunity to run some Q&As for growing businesses and scale-ups. We covered topics including how companies can demonstrate a good understanding of key metrics, how to manage investor relationships, implement the right systems to support profitability, and more.

Thank you to the following experts for taking part: Mehmet Atici - Early Bird Digital East, Daniel Tomov - Eleven Ventures, Yusuf Özdalga - QED Investors, Momchil Vassilev - Endeavour, Voria Fattahi - Sprints, Arsham Memarzadeh - Lightspeed Venture Partners, and Dobromir Ivanov - BESCO.

How do VCs expect companies to demonstrate an in-depth understanding of their company's financials and key metrics?

A clear roadmap for growth is crucial for any company. Investors want to know where you're going and how long it'll take you to get there.

When asked how companies should show an understanding of metrics and financials, Daniel Tomov of Eleven Ventures mentioned that businesses should keep their investors engaged through monthly and quarterly investment reports.

These reports let founders inform their investors about major business KPIs and challenges, including any highlights, lowlights, and significant obstacles the company may face.

Meanwhile, Yusuf Özdalga of QED Investors explained:

“We expect founders to have a strong grasp of their unit economics, show how the product makes money, and demonstrate customer acquisition and direct marketing costs. We realise that the answers may change over time, but we expect the founder to be able to share reasonable assumptions about the future (backed up by data and market insight).”

How can businesses stand out when seeking VC investment?

Although VC investment has declined as we head into recession, investors will keep believing in exceptional teams and support them. So, whether you're seeking VC funding for expansion or new product development, there are steps you can take to help your business become ready for outside investment.

Many promising startups operate in competitive markets. And to attract VC funding in these environments, Mehmet Atici of Early Bird Digital East stated that founders must emphasise the fundamentals of their business models and demonstrate that they can adapt to the current market reality without significantly compromising their ability, ultimate vision, and growth prospects.

Consider, for example, the recent Silicon Valley Bank (SVB) collapse and the many startup tech businesses that were nearly catastrophically affected. This scenario is, unfortunately, part of the current reality right now. And founders must show they can navigate their companies through these choppy waters with proactive risk-mitigation strategies, including diversified funding sources and cash management policies. At Payhawk, our spend management solution includes corporate credit cards for qualifying businesses in both the US and the UK.

The ability to weather the recession and come out strong on the other end is a major competitive advantage in any market. To accomplish this, Mehmet Atici explained that founders should emphasise unit economics and cash burn profiles, make their business plans by assuming worse conditions about future financing prospects, and always keep a healthy cash runway.

In response to the same question, Momchil Vassilev at Endeavour said businesses should focus on delivering value to customers in difficult times:

"Keeping a pulse on your clients' needs takes tenacity, perseverance, and humility. And this is the best way for a business to stand out in difficult and challenging economic times."

What data should a company report to its investors?

According to Mehmet Atici, VCs prefer companies that emphasise funnel and usage metrics to highlight growth; solely focussing on Profit and Loss (P&L) and Annual Recovering Revenue (ARR) reports aren't sufficient.

Businesses should also convert customer feedback into measurable and actionable numbers for upsell and/or acquisition. Topline focus alone isn't enough.

"Sales and wider team incentivisation systems become quite core to your targets depending on the stage," Mehmet Atici explained.

"Metrics such as customer and revenue churn, net revenue retention, customer acquisition cost, customer lifetime value, and burn multiples are among standard insights into the company's growth health."

Voria Fattahi of Sprints adds that businesses should expect to provide a succinct written summary of financial and operating performance for a particular month (or period). Plus, a detailed set of numbers and KPIs covering a longer-term trend.

When talking with companies, they often focus on what happened last week, last month, or last quarter, but they should not lose sight of their longer-term perspective. Here businesses can demonstrate how they assessed the impact of business decisions they took last year or several years ago.

How can a spend management company like Payhawk help businesses seeking VC investment stand out?

There is a lot of competition for funding, especially in these uncertain times. So, what's the best way to demonstrate that you can control your company's cash flow and business health? Add an expense management software like Payhawk to your arsenal.

According to Arsham Memarzadeh of Lightspeed Venture Partners, a spend management solution like ours can help businesses with both spend visibility and control, critical to achieving sustainable unit economics. In addition to automating many tedious tasks involved with expense management, card reconciliation, and ERP data entry using integrations, it also reduces the need for bloated finance departments and saves hours and even days of productive time.

When asked the same question, Dobromir Ivanov at BESCO shared that Payhawk not only helps businesses to optimise costs but also demonstrates their attention to detail. Working with us helps businesses show their investors that they know how healthy their cash flow is in real time and can respond with agility when necessary. In turn, this spend visibility focus clearly signals that the business will be careful with investors' money.

Final takeaways: spend automation and visibility

All the experts who took part agreed that automation is crucial for success in modern scaleups. At Payhawk, our solution allows businesses to automate manual, time-consuming processes to improve efficiency and increase spend visibility throughout the company (beyond the finance team). This information lets decision-makers make informed choices about future budgets and take quick actions when necessary.

Book a demo to learn how your business could control spending, save time, and get accurate visibility to support decision-making.