Money Talk - Communicating with and about liquidity

Why is investor reporting often carried out incorrectly or irregularly?

It is well known that regular and open communication is the foundation of any good relationship—and the same holds true between startups and their investors. In reality, however, this communication is often far from ideal. Too little emphasis is placed on communicating with investors, as startups often assume that everything important has already been covered, or that investors only care to hear about major, positive milestones.

A lack of knowledge also harms communication between the two parties. In the absence of a universal reporting standard, startups often don't know what investors expect from reporting—or whether they expect regular updates at all. And in the often chaotic day-to-day business, there is simply no time left for proper, detailed reporting.

Which stakeholders must be included in communication regarding liquidity?

In general, stakeholders are institutions and individuals directly or indirectly connected to the company who have a vested interest or expectations of it.

When it comes to communicating with and about liquidity, there are key stakeholders—depending on the company and investment model—who cannot be overlooked in your reporting. What the following stakeholders have in common is that they act as financiers for the startup. This naturally gives them a vested interest in the startup's current status, and investment agreements often establish reporting frameworks that require the startup to provide regular updates.

Venture Capitalists

Venture capitalists (VCs) provide founders with capital for their product or service. Alongside funding, VCs frequently offer expertise and acquire equity in the company. Naturally, this investment comes with a responsibility toward the investors, who expect to be kept regularly informed about current progress. Routine reporting helps VCs assess the risk of startup failure and step in if necessary.

Business Angels

Business angels typically become crucial for startups at a very early stage. They contribute expertise and their professional network, serve as advisors, and invest in the startup. While they generally invest less capital than VCs, they take on greater risk due to their early involvement.

Banks and credit institutions

Traditional banks and lending institutions also belong on this list, as they remain common sources of capital for startups. However, liquidity communication here is usually only essential when applying for a loan; ongoing reporting on liquidity status is not standard practice.

How should liquidity communication be structured for these stakeholders?

The basic rule for communication is that it should be prepared in consultation with the investor in appropriate formats (PDF, Excel, etc.), be error-free and clearly structured, and contain all liquidity metrics relevant to the stakeholder. The reporting rhythm is determined individually between the startup and the investor, though a 3-month cycle is often sufficient.

Fundamental liquidity metrics that should be communicated to investors:

• P&L/BWA for the past period, including an overview of revenue and expenses (wages, rent, marketing costs, investments, etc.)
• Balance sheet for companies required to maintain accounting records to show the asset situation
• Cash flow statement for tracking cash flows
• Burn rate: A measure of negative cash flow, expressed as cash spent per month.
• Cash runway: The time a company has left with negative cash flow before it runs out of money

Metrics whose relevance for investors depends on the startup's business model:

Beyond the general liquidity metrics that apply to every business, key performance indicators depend heavily on the specific business model. For e-commerce companies, for example, communicating average order value is essential, whereas for subscription-based businesses, customer lifetime value is a critical metric.

A selection of potential liquidity KPIs relevant to your business model:

• Churn Rate: The rate at which customers leave over a given period
• Customer Acquisition Cost: Marketing and sales expenses required to acquire a new customer
• Customer Lifetime Value: The average value a customer brings to a company throughout the entire relationship
• Average Order Value: The average value of a customer's shopping cart
• and much more.

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