How to Analyze a Startups Financial Health (Without a Finance Degree)

A few years ago, I invested $2,000 in a startup that claimed to be “the Uber for lawn care”. Their pitch deck was slick, their founder was charismatic, and their app looked polished. Six months later? They’d burnt through their cash, pivoted to NFT-powered gardening tools (yes really), and vanished.

It turns out that I have skipped the most important step that I was supposed to do before investing in them, which is to dig into their “financial health”. Since that incident, I have made it my mission to decode startups financial health, of course without having MBA. In this guide, I’ll show you how to avoid my mistakes and evaluate startups like a pro.

The 3 Numbers That Matter Most In Analysing a Startups Financial Health

Forget complex ratios. When I analyse a startup, I focus on three simple metrics that you can also use:

 A. Burn Rate: How Fast They’re Spending Cash  

Burn rate = Monthly expenses – Monthly revenue.

For example, if a startup spends $50k/month and earns $10k/month, its burn rate is $40k. If they have $200k in the bank, they will eventually run out of cash in 5 months ($200k ÷ $40k).

My rule of thumb: A healthy startup should have at least 12–18 months of cash runway, by that, they are safe to invest in. If they are burning out too fast, they will be desperate for more funding to sustain themselves in the market, which could dilute your shares.

 B. Revenue Growth: Are They Scaling or Stalling?

Look out for their month-over-month (MoM) or year-over-year (YoY) revenue growth.

– A Good Startup: 10%+ MoM growth (e.g., $10k → $11k → $12.1k). A company that has $10K as their revenue this month, their following month’s MoM should normally be $11k which is 10% of their last revenue plus the last MoM

– A Bad Startup: Flat or declining revenue (unless they’re pre-launch). A startup whose revenue has constantly been $5k for the past 5 months or it is declining, such is known as a bad startup.

Pro Tip: Ask if their growth is organic, that is, if their traffic is coming from real customers or fake discounts or one-time deals. I once invested in a SaaS company with 50% MoM growth until I realised it was all from a 90%-off promo.

C. Gross Margin: The Profit Hidden in Every Sale  

Gross margin = (Revenue – Cost of Goods Sold) ÷ Revenue.

Example: A startup selling $100 widgets spends $40 to make each one. Their gross margin is 60% ($60 profit per widget). The gross margin is above 50%, and high margins (50 %+) mean the business can scale profitably. Low margins (<20%)? They will struggle to survive without constant fundraising.

The “Founder Financial Health” Checklist  

I have learnt that even great numbers can hide trouble if the founders don’t manage money well. Irrespective of their financial figures, these checklists never fail:

1. Transparency: Do they share financial updates willingly? If they dodge questions that deal with their financial status, run o.

2. Budget Discipline: Did they blow 50% of their seed round on a fancy office? Having a standard fancy office is not wrong, but when you use 50% of your revenue on furnishing buildings it is not wise enough.

3. Adaptability: Did they cut costs quickly during a downturn? One of my favourite founders slashed her team’s salaries, including her own, so that they could survive COVID.

4. Revenue Diversity: Do they rely on one big client for 80% of their income? This is a risky position to be in. Anything can happen between them and the client or to the client himself.

5. Debt Levels: Do they owe $500k to a bank with 20% interest? Having debt is not evil, but you need to have a solid payoff plan that will work.

Red Flag Alert: Founders who say, “We don’t need to make money yet; we only focus on business growth.” Any sustainable growth requires a path to profitability.

How to Read a Startups Financial Statements (Without Falling Asleep)  

Most startups share three key documents that can be used to read their financial statements. Here is what you can look for in each:

 A. Income Statement: The story of how they make money.”

– Revenue: Is it growing? Where is their revenue coming from?

– Expenses: Are sales/marketing costs justified? (Example: Spending $100k to acquire $50k in revenue is a problem.)  

– Net Loss: Most startups lose money early, but losses should shrink as they scale.

 B. Balance Sheet: The Financial Snapshot  

– Assets: Such as cash, inventory, and equipment.

– Liabilities: Every debt of the company, like loans and unpaid bills.

– Equity: The value left for shareholders after debts are paid.

My Hack: Compare their current assets (cash they can access fast) to current liabilities (debts due within a year). If liabilities > assets, they are in trouble.

C. Cash Flow Statement: The Survival Report  

This shows how cash moves in/out of the business. Focus on:

– Operating Cash Flow: Are they generating cash from their core business?

– Investing Cash Flow: Are they spending wisely on things like R&D or equipment?

– Financing Cash Flow: Are they raising too much debt or diluting shares?

4 Free Tools To Use For Analyzing Startups Financial Health

You don’t need expensive software. These basic toolkits can crack many things:

1. PitchBook (Free Trial): For funding history and competitor analysis.

2. Accounting software: You can use these following accounting software for financial management

3. Google Sheets: You can use a simple template to track burn rate and margins of any startups financial health

4. LinkedIn: I stalk the finance team’s backgrounds. A CFO with past exits? Green flag.

The Questions I Always Ask Founders  

I’ve turned these into a script you can use:

– “What’s your current burn rate, and how long will your cash last?” 

  (If they hesitate, they’re either disorganized or hiding something.)  

– “What’s your plan to hit profitability?” 

  (Vague answers = red flag.)  

– “What keeps you up at night about your finances?” 

  (Great founders are paranoid about risks.) 

Real-World Example: How I Analyzed a Fintech Startup  

Last year, I considered investing in a budgeting app. Before I take the huge risk of investing my money in their product, below are the steps I took to analyse the startup. Here’s my breakdown:

– Burn Rate: $30k/month. Cash runway = 18 months. ✅  

– Revenue Growth: 15% MoM (organic). ✅  

– Gross Margin: 70% (since their app was built). ✅  

– Founder Financials: The CEO had scaled and sold a previous startup. The CTO had a history of delivering projects under budget. ✅  

Result: I invested $1k. They’re now expanding to Europe, and my shares are up 3x of my initial investment.

The 1 Mistake New Investors Make And How to Avoid It  

Focusing only on the big vision and ignoring the numbers. I’ve seen investors pour money into startups with:

– No revenue plan.

– A founder who couldn’t explain their burn rate.

– Financial projections that assumed 90% market saturation in 6 months (delusional).

Fix This: Spend as much time on financials as you do on the product.

 Conclusion: You Don’t Need to Be a Math Whiz  

Analysing financials isn’t about crunching numbers—it’s about asking the right questions. Start small. Pick one metric (like burn rate) to master this week. Then layer in another.

Remember, even VCs get fooled sometimes. But by staying curious and sceptical, you will be able to avoid most traps and find gems hidden in plain sight.

Have you read this: How to Invest in Private Companies Like a Venture Capitalist

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