Surviving the new normal: What to do when a customer asks to see your startup’s financials
It was 2008 Redwood City, and my startup Makara was riding the early cloud wave born of virtualization, trying to create what is now known as “containerized applications.” Early adopters for this technology were the typical early adopters: financial companies, technology companies, and the occasional retail company reinventing itself.
If your startup is doing it right, you have a website, brochures, videos, and all kinds of materials that make your company look bigger than it actually is. We were 15 people in a $1.25/sq ft 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 held sales calls on my Nokia cellphone in a little room in the back near the restrooms. We tried to present ourselves as if we weren’t next to the toilets but instead in a San Francisco highrise with the rest of the upper crust.
Startups use similar ploys today in order to present a better reality than really exists — we carefully select our Zoom backgrounds to cover up our kid’s toys and unmade beds. The tradition of putting your best foot forward while working with very limited resources is not an empty gesture; it’s an important test. In my current role as a venture capitalist, if an entrepreneur can convince me they are successful, then I believe they can convince the next person too, and so it goes until they actually are quite successful. If I’m going to take a risk on a new technology that might not be around next year, it should be with someone who can make things look better than they are. I want to buy that dream.
These memories of first starting out and taking extreme caution on how we were perceived came rushing back to me recently when a founder I work with texted me, “Hey, is it normal for a prospect to ask for financial statements?” Interestingly, an hour later a friend who is a VP at a startup called me and explained that while applying for a mortgage the bank had asked for financial statements from his startup. I asked around and this seems to be happening quite a bit more lately than normal. So my answer to the founder was, “Yes it’s somewhat normal, especially right now, but the way to handle it is probably not to just send them over.”
How to handle the request
Here’s how to deal with a request for financials if you get one:
Ask for a call to talk about it. Ask what their concerns are, and try to get a sense of what they really want. Do they want to know if you’ll be around? How can you help them understand that? Who needs to make the judgment? What criteria will they use? A certain amount of runway? Is this requirement actually optional and they just ask everyone?
Propose alternatives. “We’re a private company, we don’t generally share financial information. Could I have you talk to my investor instead? Are you concerned about our financial sustainability? You know we have over 25 customers, five in the Fortune 500, and expect to close 10 more this year — and we’re backed by the same VCs that backed big company X and Y.”
If they insist on financials, compress/redact them to get just to the point of whatever they’re looking for. If they’re looking for sales volume, only show that. If they want to know runway, show cash vs burn. Can you compress income and expenses to one line? Do they need it broken out for some reason? It’s really normal for financial folks to have long conversations about how much detail and what formats of information they’re going to share with each other.
Enlist your investors to help you. They are often masterful at explaining your company to their investors who are not usually knowledgeable about the particular market. Even getting them on the phone with your customer to help them feel a financial person’s excitement for the business and how they would be excited to invest more money if the customer consummated their purchase.
Find social proof. Enlist your other customers if you can to help explain why they found your product essential. Point to news articles, analysts, and other companies they may have heard of to help explain the wave you are riding. In our case with Makara, we were able to point to EMC’s purchase of VMware as a trend that illustrated how our business was riding a wave that would be around for a long time.
Explain your product’s usefulness without jargon or technical terminology in a way that sounds plausible to this purchasing person. Explaining how we were “just like Heroku but for enterprise Java apps” was lost on our customers’ purchasing departments. But teaching them how the latest Turbotax was being delivered on the web instead of in a box and how we would help that effort to scale up was something they could relate to.
The bottom line
Unfortunately few startups are in positions such as Notion, Preset, or Lattice where they have tens of millions in the bank that they don’t need and can just hand over their balance sheet and P&L statements without worrying how they might be perceived. Most are in situations where they have 6-18 months of cash in the bank, are losing money, and the income stream (in these times) is a bit unpredictable, as even stable longtime happy customers may suddenly go out of business.
The thing to realize is that by the time you’re in purchasing, the sponsor of this purchase wants to use your software. You don’t need the purchasing folks to love you or buy your grand vision. They just need to feel the risk is acceptable. But getting them there when your financial statements don’t look like that of a unicorn requires: more selling. Realize that you’re selling to the purchasing department and they probably don’t understand your product or market. You’re not selling them to use it for themselves, you’re selling the idea that other companies like them are going to need your product too, and therefore you will get more customers and receive more funding and stay in business for a very long time.
Issac Roth is a Partner at Shasta Ventures, an early-stage investor in enterprise, consumer, and emerging platform companies. He currently serves on the Board of Beautiful.ai and as an observer to Scalyr.