What are venture capital investors looking for in companies these days? What’s more important – growth or profits? What’s the best way for CFOs to provide information to venture capital investors, before and after they become board members?
This was the focus of the NYC Chapter of the CFO Leadership Council at its November panel discussion. Moderated by Sean Cross, CEO and Managing Partner of Silicon Alley Advisors, the panel included CFOs and principals from several venture capital firms. This included Liza Benson, Partner at StarVest, Kenneth Bronfin, Senior Managing Director at Hearst Ventures, Gary Deutsch, CFO at LiveIntent, and Anthony Rosen, CFO at Adore Me. Here are the highlights of the panel discussion.
What Venture Capital (VC) Investors Are Looking For
The panelists agreed that a marketable product and quality team are key. How complete the team is can vary based on the level of maturity of the company. A head of Sales, Information Technology (IT), and CFO are important roles. Another key factor is whether the company has true growth potential and high aspirations.
The Venture Capital investors on the panel also mentioned the red flags they’re looking out for. This includes having a clear business model, potential for great margins, and strong competitive position – if these are missing, that’s a red flag.
Another key factor is the dynamics of the management team and the behavior of the team in disclosing information – this is watched closely during the “dating” period. Rapid follow-up and the accuracy of information provided are important. VCs depend on the CFO to deliver the right information with a high degree of accuracy.
What Venture Capital Investors Put Companies Through
CFOs often get the brunt of the information requests and try to disclose everything requested. CFOs should take burden off the CEO and work closely with the VCs. This can be challenging when there are other priorities in motion, such as the annual budgeting process.
The CFOs on the panel commented that the best way to manage the situation is to understand what the VCs are interested in. CFOs should get VCs the story or information they need to get them excited and should resolve any concerns.
The VCs on the panel mentioned they will ask the CEO and CFO the same question separately to compare answers and see how aligned the executive team is. So it’s important for the CEO and CFO to be aligned on key financial metrics. This includes understanding the impact of marketing spend and pipeline development, and communicating this to VCs.
What VCs Are Looking for Once They’re Engaged
The panelists agreed that transparency is key. VCs need to work with the CFO to understand key performance indicators (KPIs) and how the VC can help grow the business. CFOs typically provide monthly and quarterly reports on KPIs, which should include a view into performance of key competitors vs. company. VCs are there to help drive value, not govern the business.
The best approach for the CFO is to provide the right metrics for the business, not overwhelm investors with too much detail. Quality of revenue is important, including new accounts acquired and forecasts for future revenue.
The CFOs on the panel mentioned that the most interesting questions often come from associates, after a board meeting. These are important to follow up on. The panelists also recommend using storytelling in the presentation of KPIs. VCs appreciate hearing the story behind the numbers – for example, key customer saves that prevent churn.
Delivering an Effective Message Throughout the Year?
The panelists commented that early stage companies often have lumpy revenue and billings. Panelists recommended that CFOs shouldn’t hide behind the numbers. Instead, they should share bad news and good news, including key wins.
The biggest “red flag” for investors is signs of running out of money, so CFOs need to keep a close eye on cash flow. They need to do scenario planning to ensure enough lead time on raising additional funds. VCs get worried 9 months before cash burns out and typically need 6 months of lead time on fundraising.
The CFOs on the panel highlighted that a 13-week cash flow forecast is easy to build and is a valuable tool for management and investors. It also helps to make employees aware of cash position and plans and to communicate any limits on spending. Panelists recommended doing some hedging to prevent over-spending and to provide broad communication to employees to set the right tone.
The Best Way to Manage Upwards to the Board? Avoid Surprises
VCs prefer to have a close relationship with the CEO and CFO so that red flags are reported prior to board meetings. VCs need to know about key issues, such as potential customer churn, in advance. They also need to know critical KPIs of the business.
CFOs should create a dashboard or report to communicate the results. This should include top customers, top vendors, and a scorecard for status on key initiatives. This enables communication prior to board meetings, where CFOs need to avoid surprises. It also forces CFOs to think about what’s really important and get everyone on the same page.
VCs have the expectations of other partners to meet in terms of reporting the results of investments. They want to avoid surprising other partners with an emergency funding need.
Growth vs. Profitability Factor in Exit Plans
The VCs on the panel highlighted that the market values growth vs. profitability differently. Profitability is more important now. It drives more value than just growth. However, this depends on the stage of maturity of the company. Investors need to understand all KPIs and plans to reach breakeven cash flow.
VCs on the panel recommended that the CEO and CFO need to be aware of their company’s potential exit strategy – who possible buyers might be. The CEO and CFO need to shortlist the buyers, engage with and track potential buyers, discuss their interests, and find out what they value (e.g., cash flow, talent, customers, etc.). Then the CEO and CFO must build the business to be more attractive to prospective buyers.
The CFO and CEO should tune the business model to make the company more appealing to potential buyers on the shortlist. The CFO and CEO should partner with shortlisted potential buyers, if possible, and leverage advisors who can help make the company attractive to potential buyers. At the same time, the CFO and CEO should keep the company visible to investment bankers, private equity, and others who could connect the company with potential buyers. Many buyers are coming in from other international markets with money to invest.
How EPM Solutions Can Help
As I listened to the panelists during this session, I saw many opportunities where enterprise performance management (EPM) solutions can and are helping CFOs and CEOs engage more effectively with potential venture capital investors and with board members after investors are on board.
One example, and a basic requirement, is quickly consolidating financial and operational results and creating accurate financial statements that can be presented to potential investors. These can include both financial and operational KPIs that will be of interest.
EPM solutions can also help in the production of board books and presentations. This includes automating this process and removing manual steps to eliminate errors and ensure the accuracy of this information – which can include text, charts, graphs, and reports. When potential investors or board members identify one error in a presentation or book of reports, that can reduce their confidence in the entire set of reports.
Another critical need in communicating with current and potential investors is providing accurate forecasts of revenue, expenses, and cash flow. This is another area where EPM solutions can be invaluable. Often replacing spreadsheets and manual processes, EPM solutions can automate data collection and accelerate the budgeting and forecasting process while improving accuracy by eliminating errors.
Having a robust budgeting process, and the ability to review results and update planning assumptions on a regular basis (e.g., quarterly or monthly rolling forecast), is essential to controlling hiring and costs. Both are also essential to having the agility needed to make mid-course corrections.
And for fast-growing organizations, cloud-based EPM solutions are becoming the solution of choice, as they can be deployed quickly, provide a low cost of ownership and scalability to support future growth and complexity.
To learn more about how cloud-based EPM solutions can help CFOs of companies looking to raise capital or those who need to effectively communicate financial and operational results to investors and board members, check out this free white paper: “Financial Consolidation in the Cloud.”