Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.

By Gerry Langeler

OK, so I have a case of alliteration envy!
 
Anyway, this post is a reflection of a recent conversation with the CFO of a potential new investment for OVP, as we are getting our arms around their business.  Having started the diligence process outside-in (if they build it, will customers come), now I’ve flipped over and am looking inside-out (if the customers come, will it matter).
 
One of the first things that needed doing was to take the firm’s incredibly detailed financial documents and make them consumable by mortals (or at least this mortal).  As a word of advice, great detail is great, and usually necessary – but please, please start with a simple summary income statement and balance sheet that matches the way the world looks at documents such as those.  The company in question chose to break out salaries & benefits by functional area from other operating expenses by functional area, and then offered an “adjustment” category that rendered any analysis of the previous categories moot.  One phone call and one email delivered the fix, but it shouldn’t have been needed.
 
On the balance sheet, there was an unusual entry of negative value for previously purchased preferred stock.  I’ve been looking at balance sheets for 30 years and never saw that before.  Again, not a big deal, and easily fixed – but a little less detail in the multiple tabs of Excel, and a little more attention to detail on the basic summary pages would have avoided confusion.
 
Next, this happens to be a company that already has a few years of operating history and a revenue stream. That’s a bit unusual for OVP as lead or co-lead Series A investors, where we usually invest pre-revenue. But it does make for more interesting reading of financials, since in this case they are not all purely speculative.  In looking at the historical financials, we’re trying to find trends and patterns.  For example, how are revenues growing over time?  Here, all the historicals were monthly which made that analysis very difficult.  I found myself doing the quick math to add groups of three months (quarters) to see what was happening.  Interestingly, the last year or so of quarters was essentially flat.  Now, maybe this is fully explainable (lack of financial strength to expand the sales force before this venture round gets raised), but it would have been far better for the company to provide that perspective than for me to ferret it out.  The last thing you want is for VC’s to think they’ve found bad news that was being covered up.
 
Finally, we dove into a round of “cap-table 101.”  Again, this is a firm with some years of history and multiple rounds of angel investment, so it wasn’t as simple as if it were a new startup.  I found myself trying to tease out of the numbers a couple of things that matter a lot to us: who owns what percentage? how much of an option pool is authorized and still available for future employees should we choose to invest?  It turned out the numbers here were actually comforting, but it took more work than needed to peel back that onion.
 
In the end, all these issues are essentially minor irritants in the diligence process.  If the company’s business is exciting, the management team strong and the upside large, we get past the financials.  I’ve often noted that the only thing we know for certain about financial projections is that they are wrong.  (historicals…that’s another story)
 
But, in a game where you are competing against other well-managed teams with promising business prospects, the last thing you want to do is introduce friction into the due diligence process.  So, when you put together your numbers, think about your customer (in this case the VC) and make their life easy.  It can’t hurt, and might just help!
 
 
 
 
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