MedCity Influencers

Three financial red flags that will send investors running (and how to avoid them)

Disorderly books cause potential investors to lock up their wallets and throw away the key. It's not just because it looks unprofessional; it’s because every piece of a business is entwined with finances.

A wind torn red warning flag indicating danger on an English beach.
Many health tech startups blame the economy when fundraising efforts go awry. Yet more often than not their failed fundraising boils down to the basics of business. These digital health entrepreneurs are overlooking areas of their business that investors want to scrutinize.
 
Investors are scared away when the books are a mess, even when a startup has a unique idea. As a result, many startups never get their ideas discovered or funded. Today’s private investors, seed funders and angel investors – want more detailed reporting. They’re more astute to burn rates and detailed projection models, relying less on tax statements.
 
I’d like to believe investors in the health tech space are more sophisticated than they were just five years ago.
 
Aside from a good business idea, investors expect a startup to set itself apart via solid business and financial fundamentals. Here are some red flags that might prevent a health tech startup from winning over investors.
 
Using Excel as an accounting system
My company works with many startups and we continually see their founders using Excel for accounting. Running financials on an Excel document is a tedious practice, inadvertently leading to basic human error; just one incorrect manual input leads to the distortion of numbers that are important in company decision-making.
 
Using error-prone spreadsheets communicates the wrong message to investors. This practice is viewed as unprofessional, especially since it is not compatible with scaling a business. When the company scales, founders will spend too much time focusing on manually updating and linking spreadsheets.
 
As the company’s Excel accounting system becomes more complex over time, this knowledge is not easily shared with new employees, let alone investors. It is increasingly hard to understand how the system of spreadsheets fits together.
 
There is a quick fix — invest in a professional accounting interface system. Programs like QuickBooks Online and Xero will prepare any health tech startup from day one. An accounting system is more efficient and allows a startup to scale more quickly.
 
No due diligence reporting
Here is why you need that accounting interface. It will help you quickly generate reports. As soon as a pitch is made to investors, they will want the startup to show due diligence. This validates that a startup has an organized business model and is ready for capital investment.
 
The best way for a startup to show due diligence is with financial data, yet most startups do not have anything on hand other than bank statements and spreadsheets. Investors want to see a bottom-up financial forecast and a detailed analysis of cash flows to back up projections.
 
Potential investors will want to see departmentalized sales reports, enhanced expense reports and salary reports. An operating expense plan based on actual numbers is not only more concrete but also more realistic, two traits investors are looking for. These documents will show investors that the startup has a real understanding of its cash flow, revenue and variable expense projections.
 
No competitive research
Most startups are internally-focused and do not check industry comparisons before heading to investors. A startup will fail to raise money if it does not have as much knowledge of main competitors as it does of itself. Albeit, a startup with a new concept may not likely have the advantage of competitive research but a disruptive startup without peer benchmarking is a red flag
 
All investors will do an industry comparison. They will analyze all competing firms on similar revenue lines and compare the projections of their potential investment to existing companies. Investors will check to see what competitors are paying for supplies; if a startup is off the charts on variable expenses compared to competitors, it will need to come into the meeting with an explanation.
 
For this reason, startups are expected to know what industry comparisons will show on items like sales, revenues and expenses. This information is readily available with software like Qvinci.
 
Disorderly books cause potential investors to lock up their wallets and throw away the key. It’s not just because it looks unprofessional; it’s because every piece of a business is entwined with finances. All health tech startups can better prepare themselves right now for successful fundraising by instituting professional accounting and competitive research.
 
Photo: John-Kelly, Getty Images


Avatar photo
Avatar photo

Mark Gilbert

Mark Gilbert is the Founder and CEO of MBS Accounting Technology & Advisory, which provides bookkeeping, accounting technology integration, and C-Level financial management solutions to SMBs and not-for-profits. The firm hosts its Annual Accounting Event, CalcuTech, in September.

This post appears through the MedCity Influencers program. Anyone can publish their perspective on business and innovation in healthcare on MedCity News through MedCity Influencers. Click here to find out how.

Shares0
Shares0