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The P&L Tells The Story
Fundraising in 2023 and for the foreseeable future.
Welcome to issue #43 of next big thing.
“What will our next fundraising round look like?”
It’s a question on the minds of most venture-backed CEOs right now. At Footwork, we’ve tried to simplify our advice to founders on the answer, by repeating the mantra “the P&L tells the story.”
What does this mean?
For a post-launch company raising its Seed, Series A, or Series B and beyond, one of the first items every potential lead investor will want to look at, after an initial pitch, is the profit and loss statement (P&L). In particular, the historical P&L for the past twelve months.
Why? It’s the ground source of truth for how the team has executed on the business. For a pre-revenue company, it shows how the team has made decisions on allocating capital between employee payroll, sales and marketing spend, and any other key expenses. For a company generating revenue, the P&L shows the quality of that revenue via gross margins, the consistency of changes in revenue and margins and expenses, and how the team may be trading off growth vs. capital efficiency. In an ideal world, businesses want to grow revenue and margins at a faster clip than the growth in expenses, and the P&L can tell that story, or point to the ability for the company to do so in the future.
In the 2021 market environment of frenzied venture capital activity and high valuations, many fundraises were based on the story of the vision; the promise of the business, the market opportunity, and the pedigree of the founders. The slides in the fundraising deck that investors were most drawn to were around the potential for what the company could become. But in 2023, the slides in the fundraising deck that investors are most drawn to are around the reality of the business today. And the P&L tells that story perhaps more than any other statement or data point.
Of course, the P&L is not the only thing that matters, and it doesn’t hold all of the answers. It does not, on its own, suss out key metrics such as the unit economics and customer retention. It does not give insight into whether the product is improving or getting worse, whether the business has network effects or any significant moat, what the competitive landscape looks like, whether the company can be category-defining, how large the market is and how it’s changing, and whether the team can scale the business from its historical position to a future state of success. Those elements will always be important for a company to be able to raise its next round.
But if you, as a leadership team, operate with the assumption that the P&L should tell the fundraising story, and can explain the decisions you’ve made through the numbers in the statement, we believe you have the maximum likelihood of success in today’s environment. And that’s also the case in every cycle, in the private and public capital markets, where there will always be investors who believe that the fundamentals matter, first and foremost.
This post is in a shorter, rougher format than others in the past. As I’m hoping to get back to writing next big thing on a regular basis, I’d love your feedback, questions, and comments!
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