Face-to-face negotiation and human chemistry still play an important role during fundraising rounds. However, that is changing as data becomes the defining factor in negotiations. The past year and a half, in particular, has shone a spotlight on the value of data in how a business’ potential is assessed. This puts the onus on CFOs to consider how they use data analytics when making a case for funding.
Traditionally, any investor, whether that’s PE, VC or private, will conduct due diligence at the start of a funding round looking at four pillars – legal, operational, commercial and technical. It will look closely at the target’s current performance against that of its peers. This is a moot point given the market is currently readjusting in the wake of a highly atypical pandemic trading environment. It’s much harder for investors to gauge what constitutes ‘normal’ at the moment. As such, if revenues are starting to flatten, the CFO must be able to show how this sits within the context of industry-wide trends.
Revenues are just the conversation starter
Actually, in a digital-first world the revenue figures themselves are only half the story. An investor needs to understand where the opportunities for future growth lie. Having those answers is predicated on a business having a framework to identify where these are.
As such, the contemporary CFO needs to be able to talk to more than simple revenues. Successful growth planning is contingent on having a firm handle on unit economics at a granular level; for example, gross margin, sessions, conversion rate, customer acquisition cost, repurchase rate etc. Any potential investor will need to see a target business aligning this data to the contexts around cohort, product or industry to inform commercial decisions.
Building on this data, a CFO will be responsible for building a forecast model for investment, which should be informed by these core metrics. For instance, assumptions on increases in traffic need to be supplemented by changes in conversion rate, changes in customer acquisition cost and subsequent lifetime values.
This bottom-up granular financial model will show potential investors clarity in thinking and is more defendable. Once a PE and VC investor has validated this forecast model, it will be in a stronger position to develop a growth plan around it.
Story telling becomes story proving
Telling a good story is no longer enough. The real beauty of data lies in transparency and now due diligence tools are arriving on the market that allow a potential investor to plug direct into the APIs of the target’s ERP and related systems and review the (anonymised) live unit economics.
Consequently, it isn’t possible to hide behind data – quite the opposite in fact. Most investors will work on the assumption that the commercial application of data is a now a given in the current landscape. Therefore, the CFO must be able to use data to qualify any assertions and should have the means to interrogate it to respond to any ad hoc questions from the investor in a timely manner.
The digital due diligence itself is now largely about checks and measures. However, there will still be a tick list of data best practice and red flags that will guide any funding decision.
Applying customer data
Hygiene factors play a part and investors will pay attention to how data is stored and quality control within that set-up. This means no data duplication, no inaccuracies and certainly no trying to game the system.
The target must then be able to prove it has solid data management processes in place. First, this means daily reporting to react to customer and competitor activity. This makes it possible to identify and act upon anomalous trends that could result in customer churn, these are typically easily remedied and can be as simple as a broken affiliate link or a glitch in a payments system.
Ideally, businesses seeking funding should already be using the customer data they hold to proactively inform defined growth strategies for the short, mid and longer terms. This proves they’re not falling back on lazy assumptions about where to find new audiences or product development, as well as making the most of existing customers.
A potential investor is able to get a sense of how well the target will use data to guide growth strategies, both in the short and longer terms, by looking at how data already informs marketing practices for both customer acquisition and retention. In particular, these should clearly demonstrate a business is able to balance outreach strategies with ROI. Not taking lifetime value into account only highlights poor business instincts – especially if the cost of acquisition is more than the purchase.
The specific metrics an investor will be seeking out on loyalty and retention are repurchase rates and lifetime value metrics, which combined identify the high-value cohorts to nurture.
Investing in data culture
Any Investor will be evaluating where a target is on its data-transformation journey, and actually the data processes and thinking in place can be as valuable as the data itself. Ultimately what investors are looking for are high growth and minimal risk – and businesses that operate a future-fit data culture are among the safest bets.
These are often collaborative in nature and structured around organisation-wide growth targets. A clear indicator for this is shared access to data, rather than it being held in departmental silos.
Securing funding means putting your data house in order before entering into any conversation with a potential investor. Many businesses are already sitting on a treasure trove of customer data and this will only become more valuable in the post-Cookie world. It’s this data combined with having the means to analyse and act upon it through data-informed strategies that will best position your business as a safe investment with a clear path to growth.
