I’ve been consulting startups for over 12 years. And there are things that are crucial to know about a financial advisor for entrepreneurs. Working with the need of this person all the way to how qualified they should be. Let’s get to it.
Financial Advisor for Entrepreneurs: Yay or Nay?
I get a lot of clients who ask me every month when they’re starting to work on a new business or when they’re trying to raise funds. Do we need a financial advisor or do we not? And if so, where can we find the best financial advisor?
In order to answer that, we have to get a little bit back to the need of a financial advisor. Most startups need financial advisors in order to help them project numbers or in order to enhance their financial somehow. There are accountants who work on bookkeeping and to make sure that all the numbers are correctly formatted. That’s one thing.
But financial advisors in the other sense could help you more in terms of financial projections. As in if you start a new restaurant, how much money will you be making in a year? How much money will you be making in five years? This is something that mostly financial advisors are specializing in.
The Reality of Financial Projections
But there is a reality that they all never mention when it comes to projecting such numbers. Our reality is that those projections highly depend on industry knowledge. Let me give you an example. Let’s stick with starting a new restaurant. If you’re wanting to start a new restaurant in California, and the restaurant is a vegetarian restaurant for example, you’ve got two opinions on how much money you’ll be making in five years.
One from a California restaurant owner who has been working there for 10 years versus a Deloitte or a McKenzie financial advisor. The numbers are variably different. I would trust more the experienced person who is the owner or the previous owner of a restaurant in California.
The reason why I’m saying that is because industry knowledge, knowing a market and living it on a practical level, is much more valuable than a consultant’s advice or a financial advisor’s advice. Keeping this in consideration, you need to know that sometimes it is not crucial to go and find financial advisors.
Sometimes You Can Do It Yourself
I’ve worked on my own startup when I was 19 years old and when I was starting to look at a financial model, a lot of VCs advised me to go to a financial advisor’s. Yet my team and I chose to project numbers based on what we know. So I decided to do that, sparing costs because of course when you’re a startup and a starting startup, costs are really what matters at that stage.
So we didn’t pay thousands of dollars to a financial advisor. We just use our industry knowledge, our market knowledge, to start putting the exact number of revenue that we’ll be making each year. And we usually broke that number and performed better than expected.
Now in that sense, this was a very good idea to skip the financial advisor. But we did eventually meet with one financial advisor at a VC who gave us an advice that we did not follow and that I personally regret after over 10 years of listening to that advice.
Entrepreneurs Financial Advisor Verdict
That financial VC advisor was having a meeting with us because we were thinking of shifting into AI, shifting our business model into AI and virtual reality as it will be more scalable. Our old models that were revenue-generating are not very scalable. They were similar to hosting events or things that required our presence.
So the financial advisor looked at my team and then he said, “Guys, this sounds amazing. You need to shift into being more scalable but never kill a money-making product.” And that was our intention. Our intention was in order to give time and room to create an AI or a VR product, we had to stop doing this brick-and-mortar unscalable product. And we did that. A few years later, the company was bankrupt and we went out of business.
Key Takeaways: Financial Advisors for Entrepreneurs
A financial advisors for entrepreneurs is important, but it really depends on the stage. Don’t immediately go and say that you need a financial advisor unless you tried it out yourself. You need to try out projecting and thinking based on the market you know. You need to do your own market research. Market research is sometimes much stronger than a financial advisor.
And at the end of the day, a financial advisor would use market research. They would never just immediately tell you, “Oh, you’re a restaurant in California. All right, so you’re going to be making 10 million in 10 years.” That’s not how it works. They would start by studying the market very well and then checking out the projections, whether they’re reasonable compared to the competitors.
And this is where you can do a lot of elements in that matter. You can think of how most of these things are. Then, you can do your own research – competitor research. You can understand their pricing, their revenue, and how it happened. This will empower you to become a better entrepreneur rather than rely on a financial advisor from day one.
Eventually, when you’re starting to scale up, you definitely need financial advisors in order to tell you which direction would result in a better outcome for your financial documents or for your cash flow statements, for example.
WeWork, one of the biggest co-working space companies in the world, failed big time because they didn’t have proper financial advisors or they at least didn’t follow the opinion of proper financial advisors. They chose to keep growing, growing, growing with a certain vision and they disregarded minor elements like profitability, which they never reached resulting in their bankruptcy or years of operations.
So a financial advisor for entrepreneurs is crucial, but it really depends on the stage. Knowing that, you can embark on starting to research the needs of a financial advisor and actually grow from there.