I was recently comparing the metrics of two companies which were founded at similar dates and operating in the same space.
Despite this similarity, there was a 15-fold difference in the companies’ core performance metric. This order of magnitude difference was the result of just two key choices which differentiated the approaches of the two companies.
Very often we look for operational improvements to gain a few percentage points here and there. And these are indeed important.
However, they only become important after you have made the right choice in those areas that create an order of magnitude difference in performance. Such areas often exist. And given the large payoff they offer, it’s worth spending time to think about what they are for your business.
If you’re a fast growing startup, there can be a considerable difference between your KPI’s and financials at the time when you receive an investment offer and when the investment is completed. I’ve seen companies grow their gross profit by as much as 1.5X from the time of receiving an offer until the time the round is completed. The longer this time period, the larger this change in performance is likely to be.
However, the increase (or decrease) in a company’s performance during this time period rarely produces a corresponding change in investment terms. The terms agreed upon at the time of the offer remain the terms at which the investment is completed. For a fast growing startup, this can mean leaving considerable money on the table.
The solution is to, at the outset of your investment talks, set the terms of the investment to be contingent on the company’s performance in the time period immediately prior to the closing. For example, if a company’s valuation at the time of the offer is based on a combination of a gross profit multiple and an annual growth rate, the valuation at the time of the closing would be updated to reflect the company’s most recent gross profit and annual growth rate.
Whether investors accept this approach depends on the specific investor and the specific company. If you’re a fast growing company with interest from multiple investors, you’re likely to be able to negotiate this approach with most of them.