As a founder focusing on growing your business, assessing the current capability and future needs of your finance function may not be a top priority. But establishing sound foundations for your finance operations will help you prepare for and complete a venture capital (VC) deal.
What expectations will VC’s have of your finance operations?
When investors look at your business, they are attracted by the potential to build customers, grow revenue, and in the longer term to deliver a strong margin and turn profit into cash. If a VC investment round is on the horizon, your business is more likely to be at an earlier stage in its development – and probably incurring substantial costs (e.g. on customer acquisition) in order to drive the growth of revenue. VC investors will therefore be interested in the quality of your management team as much as the results of your business.
Investors will want to see sufficient expertise in your leadership team that demonstrates an ability to analyse and interpret management information and to use that information to build accurate forecasts on which investment decisions that drive strong revenue growth can be based.
VC investors may not expect you to produce complex financial statements just yet, but will want to see that you understand how and why the business is investing its money, and that you have appropriate financial systems in place. This doesn’t mean your accounting systems need to be complex or bespoke. Good, reasonably priced accounting packages are available with bolt-ons to track various expense types and streamline processes for reporting.
"As your business grows and reported numbers increase, investors will become more focused on understanding both historic, underlying and forecast performance and your finance team will need to support this."
In the run up to a VC investment, you need to ensure you can easily access all key information, such as contracts with key customers or key supplier agreements. Such information will be essential for data rooms and due diligence during any VC transaction.
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What tends to trip up founders looking to raise VC money?
Fundraising is a time-consuming and stressful process. The individual or individuals responsible for managing the process will inevitably have less time to spend on their ‘business as usual’ activities. This can often slow down the growth and development of the business.
For example, if you’re the company’s founder who typically concentrates on attracting new clients, you may no longer be able to do so if you’re also leading the VC transaction. If you’re the head of finance and taking much of the transaction strain, you will inevitably have less time to offer strategic or operational support to the business. It’s therefore important to make sure your in-house team has enough capacity to manage the fundraising process while maintaining growth momentum.
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Maximise your finance functions productivity whilst staying focused on growth
As your business develops, make sure that all the information likely to be needed by VC investors in a data room is easily accessible. It’s much better to maintain orderly records along the way, rather than trying to complete a one-off exercise compiling information only when your business is looking for funding. Documents left ‘stored’ in email can be hard to find two years later. Keep all key contracts in one place and make sure all key terms are clearly understood and identifiable.
Make sure that you are monitoring the right KPIs that add value to your business – a VC investor will be interested in the same – then make sure your business is tracking these accurately and consistently. This might involve adjusting internal systems, reporting processes and leaning on your advisors to help set up bespoke reporting dashboards to help monitor progress against KPIs.
Ensure existing financial reporting and accounting systems are being used optimally, making use of relevant functionality. Automate finance function processes as much as possible – to avoid manual data inputting and to streamline reporting. Manual interventions waste time that could be valuably spent on monitoring KPIs, analysing performance and supporting investment decisions to drive growth. They also hold back finance systems as you scale.
Lean on your advisers to add value throughout the VC investment journey
Growing businesses in the stages before VC investment often do not have access to all the expertise and resources they need or could benefit from.
"Advisers can bring an objective eye to your business and its financial information – helping to identify any areas of weakness and how these could be addressed."
In such ways they help you to prepare for the scrutiny your business will come under during any fundraising process.
Advisers can advise on whether your existing finance and accounting technology stack has the capacity to support your business effectively as it grows and how they could be optimised or improved.
Advisers can act as a sounding board and share insights into many issues, such as identifying relevant KPIs, optimising systems, improving management information and demystifying the fundraising process. They can also use their breadth of experience to benchmark the business.
Advisers can even act as informal coaches, sharing their experience and guiding your management team along your VC investment journey. They can help you navigate any pitfalls or challenges along the way and develop ideas for accelerating business growth after VC investment.
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Making sure your finance function has the right support, at the right time
Sometimes in-house teams may not have the spare capacity or technical expertise to identify and address potential red flags, or to adjust to the additional requirements that may come after a VC transaction. Many businesses fail to realise that their advisors are often able to provide a temporary resource boost by providing a professional accountant on secondment. Have you considered how beneficial it would be to have someone brought into your team to ensure your financial reporting and underlying systems are appropriate in the run up to a VC investment? Or to help with meeting the information needs of potential VC investors during the transaction process?
"Outsourcing all, or part, of your back office activities can ensure that high standards of accounting, payroll and financial reporting are maintained, while also addressing any vulnerabilities associated from a maintaining a ‘lean’ in-house finance team."
Contact Andy Huddleston for further information on how an outsourced approach can best prepare your business for an upcoming funding round.
Maximising productivity from your finance function
If you’re looking for further insights into ways to leverage technology and maximise productivity within your finance function, visit our ‘Rethinking the Finance Function of the Future’ hub.
RETHINKING THE FINANCE FUNCTION OF THE FUTURE
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