How Outsourcing Can Help Emerging Hedge Fund Managers Stay Focused on Managing Investments

There’s both good news and bad news for emerging hedge fund managers in a new report from Hedgeweek. First, the good news: Emerging managers have outperformed hedge funds for three consecutive years by an average of 4.8%.

Despite this, investors remain hesitant to invest in emerging managers who don’t have a strong industry reputation, solid capital base or structured team. These are the results of the latest Industry Report from Hedgeweek, The Next Generation: How emerging managers are adapting to the new hedge fund landscape.

Capturing Investors’ Attention

The Hedgeweek report makes it clear that emerging managers are struggling to capture the attention of hedge fund investors. More than eight out of 10 emerging managers (defined as those with less than $300 million in assets under management, or AUM, and fewer than five years of experience) say that attracting investor flows is their single biggest challenge during the initial launch process.

Despite this positive performance and their reputation at previous firms, nearly half (46%) of emerging managers said that it’s harder to raise capital now than it was a year ago. Two out of 10 consider a lack of an established track record and industry reputation to be major hurdles to raising capital.

One survey respondent put it this way: “You may have someone who has a ten-year track record in a particular strategy launching by themselves and even though you can follow the breadcrumbs of the track record, investors are still reluctant. It is frustrating,”

Caution Abounds

It’s not really surprising that after a rough start to this year, some hedge fund investors have decided to err on the side of caution. As another survey respondent put it, they’re looking to avoid the next “blow-up” and don’t want to take on what they perceive to be more risk with an emerging hedge fund manager. But while there may be more risk, emerging managers do offer value and the potential for strong returns, as the Hedgeweek report makes clear.

For example, emerging managers often bring innovation and a fresh perspective to hedge fund management, which can lead to novel approaches to their strategies. Complacency, on the other hand, can lead to sub-par returns. In the 2022 Alternative Investment Allocator Survey conducted by Seward & Kissel, more than 70% of investors said they have invested in managers founded under two years ago.

Investors tend to look for three key attributes in hedge fund managers:

  1. The manager’s return history and previous experience.
  2. Enough AUM to cover operating expenses and business risks to ensure that investors are getting the exposure and returns they expect.
  3. Proof of concept and faith in the manager’s investment process to give investors confidence that the firm will grow over time.

An Early Path to Institutionalization

According to one survey respondent, emerging hedge fund managers need a path to institutionalization early in their life cycle in order to meet investors’ expectations. “Investors aren’t waiting on the sidelines for new managers to produce a three-year track record,” he said. “They’re making allocations earlier in a fund’s lifecycle, and with earlier support comes accelerated expectations.”

One way emerging managers can stay focused on managing investments and attracting new investors is to outsource the fund’s finance and accounting functions to a third-party service provider. This will free up fund managers to spend more time focusing on alpha generation.

These services are sometimes referred to as Finance as a Service, or FaaS. FaaS goes beyond outsourced accounting to include a full suite of staff to support startup and launch efforts, payroll and HR support and financial records and planning services along with software that’s capable of managing the firm’s finance and accounting operations. In other words, FaaS is a one-stop financial and accounting services shop.

FaaS features flexible and transparent pricing, which makes it easy to forecast costs as the fund’s needs change in the future. This means that a FaaS provider charges based on the service offered, not by the hour or based on the level of staff assigned to the firm. As a result, hedge funds know exactly what they’re paying for and how their costs will rise or fall as they scale up or down.

Consero: The FaaS Specialists

Consero offers Finance as a Service to emerging hedge fund managers, PE/VC firms and their portfolio companies. If you would like to discuss the potential benefits of FaaS for your fund, please request a complimentary consultation

 

Startup Funding Continues to Fall: How FaaS Can Help Boost Efficiency and Lower Costs for Investor-Backed Startups

After peaking at the end of last year, venture capital funding in North America has started to decline. Total venture dollar volume for the quarter ended on December 31, 2021, was close to $100 billion, but this fell to about $63 billion at the end of this June, according to data compiled by Crunchbase. This was a decline of 27% from the end of March and 25% from a year earlier.

The funding downturn has been especially sharp in the technology, healthcare, software and life sciences industries. This has spilled over into private startup valuations. Investors have not been investing heavily in pre-IPO rounds, which has also contributed to the downturn.

Breaking Funding Down by Stages

The sharpest funding declines occurred in the late-stage and technology growth rounds. A total of $36 billion was invested into these growth rounds in the second quarter of this year, which was down 33% from the first quarter and 30% from a year earlier. This marked the lowest quarterly funding total at this stage since 2020.

Round counts, meanwhile, fell to 371, which was down 25% quarter-over-quarter and 27% year-over-year. Big late-stage financings were done despite cuts and contracting valuations at many unicorns.

Early-stage investing has seen less contraction than late stage. A total of $23 billion was invested in Series A and B startups in the second quarter of this year, which was down 15% from the first quarter and 17% from a year earlier. Round counts fell to 1,015, which was down 15% from the first quarter and 20% from a year earlier.

Seed-stage funding remained near historic highs in the second quarter, though it was down from its peak at the end of the first quarter. A total of $3.5 billion was invested in seed-stage companies in the second quarter of this year, which was down 30% from the record-setting first quarter and 6% from a year earlier. However, round counts fell to about 1,300, which was the lowest level in more than two years.

VC-backed Exits and Acquisitions

With regard to venture-backed exits, these are mostly coming from acquisitions. Acquirers bought VC-funded companies at a brisk clip, including several for more than $1 billion. While a few VC-funded companies made market debuts in the second quarter, the IPO window was mostly closed. 

As this data shows, the second quarter wasn’t great for VC-backed startups. Startups are facing more pressure to reduce burn and preserve cash reserves, especially given falling public market comps for unprofitable technology companies.

But there is a silver lining: Given the fact that the funding downturn has been much more pronounced at the late-stage growth rounds, investors seem to be more confident about the prospects for early-stage and seed-stage deals. These deals stand a better chance of reaching maturity under better market conditions.

Boost Efficiency and Lower Costs with FaaS

With the slowdown in venture capital funding, many companies are looking for areas where they can boost efficiency and lower costs. One way to accomplish this is to outsource the finance and accounting function using Finance as a Service, or FaaS. This approach goes beyond outsourced accounting to include:

  • A suite of remote and skilled finance & accounting staff
  • Well-documented processes with digital workflows
  • Cloud-based software that’s capable of managing the entire finance and accounting operation

Using the FaaS model can help PE and VC-backed businesses grow quickly while maintaining a low-cost finance and accounting function. FaaS offers flexible and transparent pricing, which makes it easy to forecast costs as a company’s needs change over time. The FaaS provider charges based on the services offered, not by the hour or based on the level of staff assigned.

In other words, you only pay for the finance and accounting functions you need, when you need them. As a result, you know exactly what you’re paying for and how your costs will change as you scale up or down.

Consero: The FaaS Specialists

Consero offers Finance as a Service to growing investor-backed businesses. Get an optimized finance and accounting function using FaaS and increase efficiency while reducing costs in the current tight finding environment. 

Contact us by requesting a complimentary consultation to discuss your situation in more detail.

Driving Change Through Finance & Accounting What Issues Are CFOs Grappling with Today?

A company’s need for an optimized and rigorous finance and accounting (F&A) function becomes critical after it closes an investment from private equity and venture capital institutional investors. 

Institutional investors immediately expect finance and accounting to serve as a value driver for the business by providing clean data and KPIs, along with strategic direction to the CEO, board and investors. Functional and technical skillsets and the ability to deliver timely and accurate financials are just table stakes.

Consero recently surveyed 100 CFOs of institutionally backed companies in the technology and business services industries to find out what issues CFOs are currently grappling with. More specifically, we wanted to learn what the optimal state, size and organizational structure are for the finance and accounting function as a business scales.

The survey also explored whether CFOs should consider investing at different inflection points as a business scales, as well as hidden costs and spending time on value-driving activities. In addition, the survey inquired about the expectations of CFOs in working with institutional investors and the board of directors and how partners with ready-made solutions can offer support at the most critical time in a company’s growth.

Following is a recap of the survey results broken down by the three main survey categories.

The Ideal State

With a short hold period, institutional investors have little time or patience to build an optimized F&A function from scratch or to curate a collection of talent. PE-backed companies need to know if they’re going in the right direction and be able to quickly change course if they’re not. Therefore, we asked the CFOs in our survey what are the most important F&A functions for optimal performance and growth. Here are their replies:

Functional skillsets of the team 20%

Ability to deliver timely and accurate financials 20%

Ability to deliver KPIs 17%

While CFOs stated that the emphasis on F&A hires should be on functional skillsets, they believe the emphasis on the CFO role should be on strategic planning. The survey respondents said that 53% of their time should be spent on strategic planning activities while 47% of their time should be spent on day-to-day operations.

The major consequences of a poorly run F&A function are an inability to make strategic investments and accounts payable/accounts receivable delays. Both were listed by 44% of the respondents.

Benchmarking the Back Office

One of the first things investors evaluate as part of their due diligence process is the cost and effectiveness of a company’s back office. Those CFOs that have previously run the investor gantlet warn of relentless pressure to optimize costs to free up dollars that can be allocated to top-line revenue generating efforts across sales and marketing.

Investors first look to overhead and fixed costs — this makes getting their own house in order critical for CFOs. Most survey respondents said that F&A spend should be less than 10% of company revenue. And three-quarters advise having fewer than 10 F&A FTEs at companies with $10 million or less in annual revenue. Even that finding belies the ideal efficiency that investors demand, given that recent data from Robert Half’s “Benchmarking Accounting & Finance Functions” report indicates businesses with less than $25M in revenue need only 3 F&A employees. 

The need to wring more functionality out of fewer employees necessitates an alternative approach. One solution is Finance-as-a-Service (FaaS), which can help reduce costs, increase efficiency and mitigate the risks to business continuity of the finance function. FaaS prepares businesses to scale and can be especially beneficial when you consider that 67% of the survey respondents said that as a company’s revenue grows, the percentage of revenue ration should decrease or stay the same. 

Hidden Costs and Risks

PE-backed CFOs need to watch out for hidden costs in terms of both expenses and time. It’s often assumed that companies on a growth trajectory will either be operating on an enterprise-grade solution or have the funds to upgrade as they grow beyond the small or mid-sized F&A software they were accustomed to. But this process is costly and time-consuming.

Nearly nine out of 10 (88%) survey respondents said they underestimated the time it would take for a full financial transformation that includes fully implementing an enterprise-grade ERP and the necessary software stack. This includes 62% who significantly underestimated the overall effort or underestimated by more than a little.

The true impact of this isn’t just late nights and a timeline far longer than many CFOs anticipated. The time and effort spent focusing on basic components like documenting workflows and processes is time not spent on the company’s most important strategic growth initiatives. This represents a worst-of-both-worlds scenario — incurring the risks of a suboptimal F&A organization while also spending an unrecoverable currency: the CFO’s time.

The CFOs in the survey agreed that most of their time should be spent on strategic planning. However, they estimated that they spend an average of 13 hours per week recruiting, assessing and hiring talent. This adds up to one-third of a standard workweek, or six full days every month.

The CFO as a Strategic Partner

Receiving an infusion of capital from private equity backing puts the F&A team squarely in the spotlight since it is tasked with meeting elevated expectations at an accelerated pace. The CFO is expected to deliver timely and accurate financials and produce clear KPIs while developing a forward-looking growth plan. This places a greater emphasis on the CFO’s role as a strategic partner to the CEO and board.

Fortunately, there are solutions to empower CFOs during this high-wire act. For example, FaaS will set up the F&A team for success while positioning CFOs to be the strategic leaders investors and CEOs expect them to be.

Consero can help you build an optimized F&A team using FaaS so you stay focused on strategic planning and other growth initiatives. Contact us by requesting a complimentary consultation to discuss your situation in more detail.

How CFOs Can Better Manage Key Relationships

Consero’s COO and CFO Mike Dansby recently served as the moderator for a panel hosted by The CFO Leadership Council’s Austin Chapter. Members of the panel — which discussed Best Practices for CFOs in Managing Key Relationships — included Dominica McGinnis, CEO and Executive Coach with BridgeField Group; John Berkowitz, Founder and CEO of Ojo Labs; and Tiffany Kosch, Managing Partner with CenterGate Capital.

The following is a recap of some of the highlights of the panel discussion.

The CEO-CFO Relationship

John Berkowitz started things off by pointing out that the CEO and the CFO are a duo so they should complement and augment each other. They might have very different personalities and styles — one might be more financially conservative while one is more aggressive, for example — but that’s OK. “Strong communication between them will lead to success,” said Berkowitz.

“Sometimes people will say, “This is what the CEO should do, or this is what the CFO should do,” said Berkowitz. “But this assumes that every CEO and CFO are the same — which, of course, they’re not.”

Dominica McGinnis added that while people often say that the CFO and CEO should strive to develop a strong relationship, they often don’t know how to do this. “CFOs and CEOs should try to get to know and understand each other not just professionally, but also personally,” she said. “They should know that they’re on each other’s side and are there to help each other succeed.”

A good CFO-CEO relationship often comes down to managing expectations and building trust. “They both have to be credible and reliable and selfless,” said McGinnis. She used a marriage analogy in describing the CFO-CEO relationship: “Sometimes it seems like CFOs are from Venus and CEOs are from Mars, so try to align around a common language and approach.”

“Figure out where you are in the relationship,” McGinnis added. “Have you experienced anything difficult together yet? If not, it can be hard to build trust.”

CFO Relationships with Board Members

Relationships between CFOs and board members can be some of the most vexing of all. “It’s an interesting dynamic,” said Tiffany, who called this a “three-headed dog: the CFO, CEO and board members.”

Berkowitz has an eight-member board for his company, Ojo Labs. “My CFO and I meet with each board member individually before the board meeting because they all have different opinions and view the business differently,” he said. 

CFO Relationships with Bankers

The banker relationship is obviously one of the most important relationships CFOs have. Berkowitz encouraged CFOs to put themselves in their banker’s shoes and think about what their banker needs from them to help their business succeed. “This way, when you need support, your banker will know you and your business and be ready to help.”

McGinnis stressed the importance of building a relationship with your banker before you need help. Dax Williamson, Managing Director of Silicon Valley Bank who attended the panel discussion, concurred: “I get several ‘ace in the hole’ cards every year to use with customers. I always use them with customers who have taken the time to build a strong relationship with me, not ones who show up once a year to renew their credit facility.”

Dax also stressed the importance of being transparent with your banker. “As bankers, we can always deal with bad news, but bad news deferred is never good,” he said. “If you have bad news about your business, share it with your banker immediately. Waiting is never a good idea.”

CFOs should view their bank as more than just a vendor. “There’s a big difference between a banker as a vendor and a partner,” said McGinnis. Dax added, “If you just look at us as your vendor and go for the cheapest source of capital, you’ll get what you pay for.”

Tiffany points out that private equity firms have long-term relationships with bankers, but the CFOs she works with might just be working with them on one deal. “So we start with what we call a ‘have a beer chat’ between the CFO and the banker so they can get to know each other.”

General CFO Relationship Management Advice

The panelists offered the following general tips for CFO relationship management:

Dominica McGinnis: “A CFO can be a bridge builder since you have interactions with so many people. Strive to be a trusted advisor both within your organization and with key stakeholders on the outside.”

John Berkowitz: “As the CFO, don’t limit yourself to just one role, like being ‘the cost cutting person.’ View yourself more dynamically.”

Dominica McGinnis: “Managing staff can be a big transition for new CFOs. It doesn’t matter what your title is: If you’re directing others, you’re a leader.”

Contact Consero Global to Learn More

If you would like more guidance on managing key CFO relationships, this article may be helpful. You can also request a complimentary consultation from Consero. 

Planning a Successful Exit: 8 Steps to Remain Funding Ready (Part II)

In our last article we explained the differences between private equity and venture capital, along with the various stages of venture capital financing. In this article, we discuss the importance of remaining funding ready and how to accomplish this.

Venture capital companies have an insatiable appetite for cash. It takes capital to invest in the technology, R&D, new product development and staff needed to fund ongoing growth.

This capital is usually raised in stages, starting with the pre-seed and seed stages then progressing through Series A, Series B and onward for as long as capital is needed. Unfortunately, four out of five companies that receive pre-seed and seed funding never make it to Series A. And nine out of 10 companies that receive pre-seed and seed funding don’t achieve a successful exit.

Prepare for Financial Due Diligence and Auditing

The key to making it to the next funding stage is remaining funding ready at all times. This starts with preparing for financial due diligence and auditing during the pre-seed and seed stages. These steps typically include the following:

  • Gather formation documents (e.g., articles of incorporation, bylaws, shareholder agreements).
  • Identify and build relationships with professional services providers (e.g., CPA, banker, attorney, insurance broker).
  • Prepare revenue and gross profits by product offering.
  • Obtain audited financial statements for the last two (private company buyer) or three (public company buyer) years.
  • Consult with an audit firm about complex accounting requirements (e.g., revenue recognition, leases, stock options, convertible debt).

It’s also critical to adopt financial best practices during the pre-seed and seed funding stages. This starts with building a top-notch financial and accounting system with well-organized financial files. Your system should include monthly reporting and establish strong internal controls over financial reporting while accommodating corporate tax requirements and deadlines. Also invest in an appropriate enterprise resource planning (ERP) system for your needs.

8 Steps to Remain Funding Ready

Here are eight more steps you can take to remain funding ready at all times:

  1. Implement accurate budgeting and forecasting. These provide the foundation for successful financial management. Investors want to compare current and previous periods so budgets and sales forecasts should be prepared on a monthly, quarterly and annual basis. There should also be common definitions of finance functions across the various time periods.
  2. Establish sound collection practices. This is especially critical for early-stage venture-backed companies. Statistically speaking, the longer invoices go uncollected, the less like they are to ever be converted to cash. Therefore, early-stage companies should implement policies and procedures designed to ensure prompt collection of accounts receivable.
  3. Utilize financial metrics, benchmarking and data analytics. Sometimes referred to as key performance indicators, or KPIs, these are quantifiable statistics that help define and measure progress toward key business objectives and other critical success factors. Common financial metrics include debt-to-equity, accounts receivable (AR) and accounts payable (AP) days, days sales outstanding (DSO) and inventory turnover.

These metrics should be benchmarked to previous time periods (e.g., the last month or quarter) or industry standards to spot trends and help reveal potential problems while you can still address them. RMA’s Annual Statement Studies is a good source for industry-specific financial metrics.

  1. Incorporate cash flow management. Startups can burn through cash quickly, making cash flow management critical. The key is to decide which expenses are essential and will lead to increased market share and growth and which expenses are wasteful. Devise monthly cash flow plans to make sure your business remains liquid at all times.
  2. Create a formal sales compensation structure. Sales is the main engine that will drive growth, so your sales comp plan needs to be structured and formalized no later than the Series B funding stage. Most sales comp plans today include a base salary plus benefits in addition to commissions and bonuses to incent and reward top salespeople for high performance.
  3. Create a fundraising project plan and investor presentation. At each funding stage, investors will want to see how you plan to raise enough capital to carry the company through to the next stage. Prepare a formal presentation with these details that you can share with investors during your “pitch” meetings.
  4. Use GAAP accounting and revenue recognition. Series A and Series B investors will expect to see financial statements prepared in accordance with generally accepted accounting principals, or GAAP. At this stage, GAAP reporting should be timely and accurate.
  5. Prepare for potential international expansion. Depending on your products/services and your industry, Series B and Series C investors may inquire about how your company can tap growth opportunities overseas. So, prepare an international expansion plan that details these opportunities, along with the potential risks and costs of overseas expansion and any statutory international compliance requirements.

Using FaaS to Build an Optimized Finance and Accounting Team

Venture-based startups can build an internal finance and accounting team or outsource this function. Outsourcing using Finance as a Service (FaaS) tends to be far more effective for the majority of pre-seed and seed companies.

Building an optimized finance and accounting team in-house typically takes from 9 to 18 months, but an outsourced FaaS approach can accomplish this in as little as 30 to 90 days at a fraction of the cost. With this approach, you only pay for the finance and accounting functions you need, when you need them. 

Consero can help you build an optimized finance and accounting team using FaaS so you remain funding ready at each stage. Request your complimentary consultation today. 

Planning a Successful Exit: Understanding the Various Stages of Venture Capital Financing (Part I)

Like kindling to a campfire, most startup businesses need capital in order to grow. This capital comes in two main forms: debt and equity. Debt is self-explanatory: This is money that’s borrowed from a lender or raised from a bond issuance that must be repaid with interest. 

Meanwhile, there are two different kinds of equity: private equity (PE) and venture capital (VC). There are important differences between them that you should understand before seeking equity financing for your company.

VCs Invest in Growth Companies

To understand these differences, you must first understand the different objectives of PE and VC investors. In short, private equity investors want to invest in businesses that are profitable, while venture capital investors want to invest in businesses that are going to grow. There’s a big difference between the two.

Right now you might be thinking: “But doesn’t every business want to be profitable?” Yes, but profitability isn’t always the main objective, especially during the early stages of a startup company. Technology giants like Amazon and Google are good examples of companies that operated at a loss for years so they could invest all of their cash back into the business in order to grow. 

These companies and their investors were taking the long view: They weren’t worried about becoming profitable right out of the gate. Instead, they wanted to grow as much and as fast as possible so they could eventually dominate their industries. They knew that if they could become the dominant online retailer and search engine, profits would soon follow. Of course, this strategy worked well for both of them.

Also, market capitalization — which is a main focus for VC investors — is calculated as a multiple of revenue, not earnings. So, the faster a company grows, the higher its sales and market cap will be.

Stages of VC Financing

Venture capital is usually raised in stages because successful growth companies always need more money in order to keep growing. Think of it like pouring gasoline on a fire: The more capital a business has, the more salespeople it can hire and the more it can invest in technology, research and development, and new product development to spur growth.

Pre-seed Stage:

The first stage is called the pre-seed stage. Here, there may not even be a real business yet — it might just still be an idea or concept in an entrepreneur’s mind. Funding at this stage usually comes mainly from family and friends or out of an entrepreneur’s own pocket, not from venture capital investors. 

Seed Stage:

The next stage, or the seed stage, is the first stage where venture capitalists might get involved. There still might not be a lot of revenue but there’s strong evidence that the seeds of a successful business have been planted. Real (not prototype) products and services are being delivered to the marketplace and a management team is in place that’s capable of executing the business plan.

Series A Stage:

The next stage of funding is called Series A. At this stage, VC investors want to see a real, operating business with repeatable sales and marketing processes that can acquire customers on a consistent basis. The business should be utilizing financial modeling and long-range planning and have adequate internal controls, along with a fundraising project plan and investor presentation

Series B, C and Beyond:

Subsequent funding stages after Series A are called Series B, Series C and so forth for as long as the business needs to raise capital. Venture capital investors will have specific expectations at each funding stage.

Always Be Funding Ready

The biggest thing to keep in mind when it comes to venture capital financing is the importance of being funding ready at all times. Remember that as long as you intend to keep growing, you will always need more capital — so you should always be ready to proceed to the next stage of funding.

Unfortunately, four out of five companies that receive pre-seed and seed funding never make it to Series A. And nine out of 10 companies that receive pre-seed and seed funding don’t achieve a successful exit.

Building a strong finance and accounting team is critical to maintaining funding readiness This can be done internally or on an outsourced basis, which tends to be more common among pre-seed and seed startups.

Consero can help you build the finance and accounting team you need to stay funding ready throughout each financing stage. Contact us by requesting a complimentary consultation to discuss your situation in more detail.

Next article: Planning a Successful Exit: How Venture-Backed Companies Can Remain Funding ready at All Times (Part II)

Understanding the Various Stages of Venture Capital Financing

Like kindling to a campfire, most startup businesses need capital in order to grow. This capital comes in two main forms: debt and equity. Debt is self-explanatory: This is money that’s borrowed from a lender or raised from a bond issuance that must be repaid with interest. 

Meanwhile, there are two different kinds of equity: private equity (PE) and venture capital (VC). There are important differences between them that you should understand before seeking equity financing for your company.

VCs Invest in Growth Companies

To understand these differences, you must first understand the different objectives of PE and VC investors. In short, private equity investors want to invest in businesses that are profitable, while venture capital investors want to invest in businesses that are going to grow. There’s a big difference between the two.

Right now you might be thinking: “But doesn’t every business want to be profitable?” Yes, but profitability isn’t always the main objective, especially during the early stages of a startup company. Technology giants like Amazon and Google are good examples of companies that operated at a loss for years so they could invest all of their cash back into the business in order to grow. 

These companies and their investors were taking the long view: They weren’t worried about becoming profitable right out of the gate. Instead, they wanted to grow as much and as fast as possible so they could eventually dominate their industries. They knew that if they could become the dominant online retailer and search engine, profits would soon follow. Of course, this strategy worked well for both of them.

Also, market capitalization — which is a main focus for VC investors — is calculated as a multiple of revenue, not earnings. So the faster a company grows, the higher its sales and market cap will be.

Stages of VC Financing

Venture capital is usually raised in stages because successful growth companies always need more money in order to keep growing. Think of it like pouring gasoline on a fire: The more capital a business has, the more salespeople it can hire and the more it can invest in technology, research and development, and new product development to spur growth.

Pre-Seed:

The first stage is called the pre-seed stage. Here, there may not even be a real business yet — it might just still be an idea or concept in an entrepreneur’s mind. Funding at this stage usually comes mainly from family and friends or out of an entrepreneur’s own pocket, not from venture capital investors.

Seed:

The next stage, or the seed stage, is the first stage where venture capitalists might get involved. There still might not be a lot of revenue but there’s strong evidence that the seeds of a successful business have been planted. Real (not prototype) products and services are being delivered to the marketplace and a management team is in place that’s capable of executing the business plan.

Series A:

The next stage of funding is called Series A. At this stage, VC investors want to see a real, operating business with repeatable sales and marketing processes that can acquire customers on a consistent basis. The business should be utilizing financial modeling and long-range planning and have adequate internal controls, along with a fundraising project plan and investor presentation

Beyond Series A:

Subsequent funding stages after Series A are called Series B, Series C and so forth for as long as the business needs to raise capital. Venture capital investors will have specific expectations at each funding stage.

Always Be Funding Ready

The biggest thing to keep in mind when it comes to venture capital financing is the importance of being “funding-ready” at all times. Remember that as long as you intend to keep growing, you will always need more capital — so you should always be ready to proceed to the next stage of funding.

Unfortunately, four out of five companies that receive pre-seed and seed funding never make it to Series A. And nine out of 10 companies that receive pre-seed and seed funding don’t achieve a successful exit.

Building a strong finance and accounting team is critical to maintaining funding readiness This can be done internally or on an outsourced basis, which tends to be more common among pre-seed and seed startups.

Consero can help you build the efficient and scalable finance and accounting function you need to stay funding ready throughout each financing stage. Request a complimentary consultation today.

2022 CFO Outlook Survey: CFOs Are Optimistic, Despite Ongoing Growth Obstacles

A recent survey of middle market CFOs contains both good and bad news for business leaders. First, the good news: More than a third (66%) of CFOs expect their businesses to be thriving a year from now.

The bad news? Most middle market CFOs say their companies’ growth didn’t meet expectations last year. Just 38% of them said that their company experienced strong financial performance in 2021. These are just a few results of the 2022 BDO Middle Market CFO Outlook Survey, which is conducted annually.

Hurdles to Business Growth

The path to business growth in 2022 and beyond will not be without hurdles, according to the survey respondents. The biggest concerns voiced by CFOs in the survey are:

  • Ongoing supply chain disruptions (84%)
  • Talent shortages (79%)
  • Tax reform (79%)
  • Potential COVID-19 resurgences (78%)

While challenges abound, so do opportunities. This is especially true when it comes to embracing new priorities at the forefront of business and stakeholder agendas like impact, purpose and sustainability. About one-third (64%) of the CFOs who responded to the BDO survey said they believe that implementing an environmental, social and governance (ESG) program will improve their long-term financial performance.

While just one out of three (36%) CFOs said their companies are actively pursuing a sustainability strategy now, virtually all of them (99%) said their company has at least one stated ESG objective this year.

BDO CEO Wayne Berson put it this way: “The next ten years will be driven by a mindset of sustainability and stewardship that prioritizes the needs of all stakeholders while accelerating digital innovation to create lasting business value.”

More Survey Responses

Digging deeper into the survey responses, CFOs view rising material costs (cited by 41% of respondents) as the greatest supply chain-related threat. This was followed by supplier delays (36%), supply shortages (35%) and transportation costs (35%). Accurate demand and inventory management was listed as CFOs’ top supply chain priority this year.

The top workforce challenge listed by CFOs this year is retaining key talent (42%), followed by attracting new talent (39%). To address workforce challenges, CFOs say their companies plan to invest in flexible work arrangements (42%) and increase employee compensation (40%).

Innovation was listed as the number one business priority for 2022 by the survey respondents. Their top strategy for achieving this is collaborating for greater network value (48%), followed by pursuing a joint venture (25%).

Mergers and acquisitions also appear to be a part of CFOs’ plans this year. On the heels of the hot M&A year in 2021, about one-third (31%) of the survey respondents say their companies plan to pursue M&A in 2022, which is up from 24% who said this last year and 25% who said it in 2020. 

The number one strategic goal cited by CFOs for pursuing M&A deals is enhancing their digital capabilities. Over half (53%) of CFOs said their companies plan to pursue digital transformation this year.

Using FaaS to Achieve Growth Objectives

One way CFOs can achieve business growth objectives in 2022 is by managing their finance and accounting function in the cloud. Finance as a Service, or FaaS, makes use of the best finance operation management practices by leveraging advanced technologies like artificial intelligence, machine learning, cloud computing, automation and more to streamline finance and accounting. This can result in lower costs and greater scalability and financial visibility to improve decision making for CFOs.

FaaS is also flexible and provides more control over finances than traditional accounting systems. This will enable you to spend less time on administrative tasks by eliminating the need for manual data entry while eliminating work cycle delays that occur due to waiting for accounts payable or payroll department approvals.

The (79%) concern for talent shortage is easily solved with the Consero FaaS solution. Consero offers a fully managed software & services platform that’s equipped with a skilled finance team along with pre-integrated, enterprise-grade finance and accounting software, featuring digital processes and workflows. With Consero’s FaaS cloud-based finance and accounting solution, you can complete a full digital transformation in 30 to 90 days — much less time than it would take to build an in-house finance and accounting function. 

CFO’s report 1/3 of their workweek is dedicated to managing a finance team. With Consero’s FaaS, business continuity risk is also lowered because companies leveraging FaaS do not need to recruit, hire, train, retain and backfill the finance team. This leaves executives more time to focus on what they do best, growing the business.

To learn more about the benefits of FaaS and Consero’s integrated finance and accounting platform, please request a complimentary consultation.

How to Realize Value from Cloud Computing

Cloud computing has come a long way in recent years as business leaders have overcome initial concerns about the security of storing and transmitting sensitive data in the cloud. Fully three-quarters of business leaders today are engaged in a cloud strategy, according to PwC’s inaugural US Cloud Business Survey, while nine out of 10 say they are “all-in” on cloud or have adopted it many parts of the business.

In addition, more than half (56%) of executives see the cloud as a strategic platform for growth and innovation. Unfortunately, nearly as many business leaders (53%) say they have yet to realize substantial value from their cloud investments. In other words, there’s a substantial value realization gap when it comes to recognizing and realizing the potential of cloud computing.

What Executives Want from Cloud Computing

The main business outcomes executives who responded to the PwC survey said they seek are improved resiliency and agility, better decision-making, and product and service innovation. Each was listed by about a third of the survey respondents. However, only about half of them said they have achieved these cloud objectives.

So what can business leaders and executives do to try to close the value realization gap with cloud computing? The PwC survey suggests four potential strategies:

1. Get in alignment on strategy and value. The survey found disconnects among executives when it comes to defining and quantifying the value of cloud computing. About a quarter of them define value as achieving faster innovation, while 20% define it as improved resilience and 19% define it as increased revenue. These differing views are symptomatic of the fact that some companies haven’t made clear strategic choices when it comes to their cloud investments.

The key is to make your cloud strategy part of your overall business strategy. To do so, you must make specific choices about how cloud computing can differentiate your business. For example, what digital and technology capabilities will cloud computing allow you to develop? What customer problems will it help you solve? And how can you embed cloud computing to enable end-to-end digital transformation?

2. Bridge the digital talent divide. The shift to the cloud has intensified the talent challenges many businesses today are facing. More than half (52%) of respondents to the PwC survey say that a lack of technology talent (such as cloud architecture and cybersecurity) is a barrier to their companies realizing full value from their cloud investments.

One way to solve this problem is to implement digital upskilling for all employees, not just technology employees. A digital upskilling program should focus not only on enhancing technical skills, but also on teaching new ways of working and creating new learning pathways. It should also develop programs designed to cultivate cloud computing skills.

3. Address risk concerns and build trust. Half of the PwC survey respondents view security and business risks as a significant barrier to realizing the value of cloud computing. In particular, they’re concerned that relying on third-party cloud service providers could increase their vulnerabilities and erode trust with customers, employees and other stakeholders.

To overcome these concerns, strive to build trust in cloud-based services. For example, some cloud services providers issue trust-based attestation reports assuring customers that their products and services have been thoroughly reviewed and certified by a third party. Addressing risk concerns early on provides an opportunity to build trust with customers and differentiate a company’s product and services.

4. Use cloud computing to advance ESG goals. Cloud computing can play an instrumental role in corporate efforts to achieve goals related to environmental, social and governance (ESG) issues. One-third of the PwC survey respondents said that they understand the impact of the cloud on governance aspects of ESG and they have implemented a plan to leverage the cloud to improve their ESG strategy and reporting.

Cloud computing can support companies’ ESG efforts in several different ways, including through cloud-based data management and reporting. This helps automate the reporting process while standardizing data and increasing transparency. Moving data to a third-party cloud service provider can also help reduce a company’s carbon footprint, since emissions from a data storage facility are usually considered scope 1 or scope 2 emissions.

Managing Finance and Accounting in the Cloud

Finance as a Service, or FaaS, has emerged a service offering with one of the most popular cloud applications today. With FaaS, all aspects of finance and accounting are managed by a third-party SOC 1 certified service provider.

Consero offers a fully managed software platform that’s equipped with pre-integrated, enterprise-grade finance and accounting software, featuring digital processes and workflows. This platform provides access to a comprehensive set of finance and accounting tools including:

  • Cloud accounting software
  • Customer invoicing and vendor billing
  • Employee expense approvals and payments
  • Statutory and management financial reporting
  • Task management and workflow software
  • Graphical metrics and KPIs

With Consero’s cloud-based finance and accounting solution, you can complete a full digital transformation in 30 to 90 days — much less time than it would take to build an in-house finance and accounting function.

To learn more about the benefits of FaaS and Consero’s integrated finance and accounting platform, please request your complimentary consultation today.

Talent Migration: Attract and Retain Skilled Finance & Accounting Talent

Attracting and retaining talent remains a huge challenge for businesses as the nation begins to emerge from the upheaval of the pandemic. According to the 21st edition of the EY Global Capital Confidence Barometer, six out of 10 middle-market companies say they face difficulty when it comes to finding and keeping skilled employees.

“The much-mooted threat to jobs from technology is not playing out as many had predicted,” states the EY report. “Indeed, as more jobs are automated in routine tasks, companies are finding it more difficult to attract and retain talent with the right technical and digital skills to benefit from these efficiencies.”

Pervasive Throughout All Industries

Talent acquisition and retention is the top concern among business leaders in 2022, according to a survey conducted by Protiviti and NC State University. “Most if not all of the organizations that we’re speaking with are struggling with things like attracting, retention, engagement, upskilling,” Protiviti Managing Director Fran Maxwell said during a recent webcast. “It’s pervasive throughout all industries, throughout all organizations now.”

Some employers are trying to attract and retain talent by boosting compensation. In November, hourly private sector wages rose 4.8%, according to the Department of Labor. And companies have budgeted 3.9% wage increases for this year, which is the biggest bump since 2008, according to the Conference Board. Unfortunately, these increases aren’t keeping pace with soaring inflation, which reached 7.9% in February, a four-decade high.

However, Maxwell notes that raising pay isn’t the only way to attract and retain talent. He recommends that businesses also make efforts to improve the employee experience — for example, by offering flexible or hybrid work arrangements, access to learning and development programs and creating a work atmosphere of well-being.

“Organizations that will win the talent war will focus on differentiating an employee experience, making it different for each employee,” said Maxwell.

Competing with Big Businesses for Talent

Large corporations have historically held the edge when it comes to brand marketing and employee recruiting. In the current environment, however, some middle-market firms are finding that they can compete with their bigger brethren by positioning themselves as an attractive alternative to large organizations.

One way to do this is to focus on the “power of purpose.” In the 2019 Mission and Culture Survey conducted by Glassdoor, eight out of 10 respondents said they consider a company’s mission and purpose before applying for a job there.

Purpose answers the questions: Why does your company do what you do? And for whom do you seek to create value? It’s often easier for middle-market companies to clearly articulate their purpose to employees and live it out authentically than it is for large corporations. Doing so

enhances the employer value proposition for employees, including highly skilled candidates looking for the right employer.

Another way middle-market companies are successfully competing for talent against large corporations is by offering employees accelerated career advancement opportunities. These companies often have more flexibility when it comes to things like giving employees earlier and more frequent client interaction, greater job responsibility and autonomy, more supervisory responsibility, and participation in strategic decision making.

More Middle-Market Advantages

With their agility, middle-market companies can also usually create flatter management structures. These tend to give employees more opportunities to interact with upper managers and move more freely between management layers throughout the company.

Embracing technology and creating a culture of innovation is yet another strategy middle-market companies can adopt to attract and retain talent. Large organizations are often slow to adopt the latest and greatest technologies, but nimble middle-market companies can usually implement technology and innovation more easily.

In the EY Global Capital Confidence Barometer survey, half of the respondents said they are leveraging technology and automation to improve workforce productivity. After watching so many innovation-driven startups quickly transform themselves into some of the world’s most valuable companies, many talented young employees now view organizations like this as attractive places to advance their careers.

Finance as a Service, or FaaS, can be a solution to finance department staffing challenges faced by many middle-market companies today. With FaaS, finance and accounting software and technology is managed by a third-party service provider. This includes recruiting, hiring, training, retaining and developing all finance and accounting team members. FaaS is a fully managed solution which gives executives more time to focus on strategic planning, analysis and forward-looking initiatives.

Questions to Ask

As you consider how your company can scale and compete successfully with large corporations for the best and brightest employees, ask yourself whether you’re really thinking about the mindset of the employees you want to attract. Also, do you know what factors give you a hiring edge over large organizations and are you capitalizing on them?

And perhaps most importantly, are you creating an exciting, dynamic corporate culture that embraces technology and innovation? These are the kinds of organizations most of the high-demand young employees today are looking for.

Could You Benefit from FaaS?

Could you be leveraging a third-party service provider to handle hiring and retention of your finance and accounting staff for you? Doing so could reduce the amount of time and resources you spend on tasks that take your focus away from growing the business.

To discuss the potential benefits of FaaS for your business in more detail, please request your complimentary consultation here.