The rapid growth of the private equity industry over the past decade is breeding a new set of PE fund managers and firm founders. A new report from Prequin, an alternative data firm, predicts that private equity will gross $20 trillion by 2025.

In preparation for this growth, there are a number of considerations that new early-stage PE leaders should keep in mind as they venture into new areas, they might not be familiar with. One of these areas is finance and operations, or F&O, which involves managing finances and resources within the organization. 

Many of these new PE leaders do not have experience in behind-the-scenes F&O processes like accounting, fund administration and compliance. As a result, they often underestimate how much time and effort it takes to get F&O processes up and running. 

Primary F&O Considerations for New PE Leaders

Building out the F&O functions of a new PE fund is foundational to the firm’s success, so it’s critical for new PE leaders to understand the process. Here are five of the main considerations for new early-stage PE leaders when it comes to finance and operations requirements.

1. Financial statement audit readiness — Choosing an independent auditor is one of the first steps in building F&O processes for a new PE firm. The auditor should have experience in private equity and be accredited to provide audit and attestation services that meet annual or interim reporting requirements to remain in compliance with U.S. GAAP and IFRS protocols. The auditor should also be prepared to provide audit readiness gap assessments focused on current accounting knowledge, staffing and reporting frameworks.
2. Partnership and fund accounting — Early-stage PE firms should engage in accounting advisory services regarding how they will set up fund and partnership accounting. This includes critical elements such as general ledger, partner allocations, gain and loss allocations, fund controlling and valuations pricing.
3. Treasury management — Bankers at reputable financial institutions who have experience in the PE industry can provide valuable assistance and advice to new PE leaders. This includes helping them develop policies and procedures regarding cash management, cybersecurity, phishing scams and other types of cybercrime that are prevalent today. 
4. Regulatory risk and compliance — New PE leaders must decide if they will hire a full-time compliance officer or outsource this task. This role can sometimes be merged with the CFO, though this usually isn’t a permanent solution. The finance and compliance functions should remain separate but work well together.
5. Tax and advisory services — Tax operations for PE firms are more complex than ever, which makes it critical to engage with tax advisors who are experienced in the PE industry. The tax advisor should also have state-of-the-art technology so its services can scale as the PE firm grows.

Outsourcing F&O Using FaaS

Finance and operations functions are critical during the startup phase of new early-stage PE firms. One option is to outsource these functions to a third-party services provider offering Finance as a Service (FaaS) instead of handling them yourself.

Consero offers FaaS for investment management firms, including new early-stage private equity firms. As you prepare to launch your new firm, our team of professionals will work closely with you to handle F&O so you can focus on building your team, your portfolio and client relationships.

Our expertise is in finance and accounting for the Management Company (ManCo) back office. With FaaS for Investment Management Firms from Consero, you’ll benefit from a world-class platform that’s backed by experienced financial experts who specialize in the investment management industry. Consero’s integrated accounting platform features tested processes, procedures and solutions designed specifically for investment management firms, including new early-stage PE firms.

By outsourcing Finance & Accounting to Consero, you’ll have more time to focus on fund growth and positive fund results. 

Standard Services Include: 

• AP/AR, employee expense reimbursement, intercompany expenses, and cash management
• Rebillable process for Fund and Portfolio companies
• Month-end close and timely financial reporting 
• Oversees year-end audit and tax readiness
• Human Capital Services team supports administrative & technology tasks related to payroll/HR/benefits
• Institutional grade technology stack and industry best practices

Contact Consero Global to learn more about the benefits of using Finance as a Service to handle Management Company Finance & Accounting functions for your new early-stage Investment firm. 

The CFO position has evolved considerably in recent years, from what was sometimes derisively called a “bean counter” in the past to more of a strategic role. In fact, it’s not a stretch to say that the CFO-CEO relationship is the most important partnership in most businesses.

Jack McCullough, the founder and President of the CFO Leadership Council, knows all about the responsibilities and expectations of CFOs today. Throughout his long and distinguished career, he has served as the CFO for 26 different companies and worked with 35 different CEOs. 

McCullough has written a book titled The Secrets of Rock Star CFOs. He recently shared some of his thoughts about these secrets in a recent webinar hosted by Consero.

Secret #1: Think Strategically

The CFO should serve as the strategic partner to the CEO. “It’s the single most important relationship in the company,” says McCullough. “CFOs must have a strong, strategic relationship with their CEO who sees the value they add to the company.”

McCullough notes that sometimes there’s a lot of pressure on public company CFOs to hit numbers for the quarter in order to please investors. “But you can’t mortgage the future for short-term goals,” he says. “Sometimes the CFO has to be the one to emphasize this.”

Secret #2: Provide Ethical Leadership

Integrity is critical for organizational strength, so it’s important to create a corporate culture where ethics are emphasized. “The way I like to put it is you have to be ethical even when it’s inconvenient,” says McCullough. “Once you make the first ethical compromise, it’s easier to make the next one and then the one after that.”

Secret #3: Master Dealmaking

It’s up to the CFO to assess the risk of potential deals and help identify opportunities. “When it comes to dealmaking, the CFO is the most important executive on the team, right along with the CEO,” says McCullough.

Traditionally, the CFO’s job when analyzing deals was to try to avoid making mistakes. But McCullough believes CFOs today should be more proactive in looking for reasons to make a deal happen. He refers to this as “CFO-go” instead of “CFO-no.”

Secret #4: Build Elite Teams

McCullough sums up this secret as follows: Hire people who are smarter than you and don’t be afraid that they’ll outperform you. “Also, be forward-looking when building your teams: Hire for what you’ll need in three years, not what you need today. Look for employees who can grow with the company and who share your passion, energy and work ethic.”

Secret #5: Learn Continuously

This isn’t just about ongoing formal education like an MBA. It also refers to peer-to-peer networking, which McCullough believes is just as important. “Elite executives learn from each other,” he says. “For example, we have informal networking for an hour before and after CFO Leadership Council events.”

Secret #6: Develop Board Relationships

McCullough believes it’s important for CFOs to talk regularly with board members without the CEO around. “For example, plan to meet with a couple of board members every month and really get to know them. Nothing bad has ever come from having good relationships with your board members.”

Secret #7: Perform Cross-Functionally

The old-school accountant approach to the CFO role doesn’t work in today’s world. A CFO’s job today has to be cross-functional — they must understand the entire business and overall corporate strategy, including sales and operations.

“CFOs shouldn’t think of themselves as financial executives,” says McCullough. “They should think of themselves as an enterprise-side executive who happens to be a financial expert.”

Secret #8: Maintain Financial Expertise

A CFO can be strategic, but if they can’t perform basic financial functions like closing the books, it won’t matter. “If the numbers aren’t right, then nothing else is credible,” says McCullough. When it comes to financial expertise, “the buck stops with the CFO,” he says, “not the controller.”

Finance as a Service (FaaS) can help CFOs accomplish the basic blocking and tackling tasks involved in financial operations, like closing the monthly books, more efficiently. This frees them up to spend more time on strategic tasks that add value to the company.

Secret #9: Keep Your Work and Life in Balance

Studies have consistently shown that workaholics usually aren’t the best performers, so it’s important to maintain a healthy work-life balance. “Exercise regularly, eat right and don’t spend too many hours at the office,” says McCullough. “Also, guard your mental health by participating in hobbies or anything else that you find enjoyable and relaxing.”

Contact Consero to learn more about how using Finance as a Service could help strengthen your position as a strategic leader for your organization. 

You can also order this book on Amazon.

There’s at least one characteristic shared by most seed companies that achieve a successful exit: an early focus and emphasis on audit and due diligence preparedness. Unfortunately, many owners and CFOs don’t think about this as early as they should, which can lead to delays in deals getting done and lower deal values.

Why Early Preparation is Critical

A lack of audit and due diligence preparation can lead to lead to a number of problems, such as:

• Internal control issues
• Delays in deal completion
• Higher deal costs
• A lack of proper documentation
• Overwhelmed staff

In a worst-case scenario, a lack of early preparation can lead to failing the audit and due diligence phase of the deal. Conversely, being audit and due diligence ready at all times can yield a number of benefits, such as:

• A fast and simple due diligence and process
• Lower audit fees
• Less strain on employees
• Preservation of valuation
• Accelerated exit

Due diligence is part of a liquidity event, so it’s never too early to start planning for it. Follow these three tips to help your company be audit and due diligence ready at all times.

1. Set Goals and Expectations

Start with the end in mind: What will you need to support a due diligence exercise? Of course, this starts with a set of financial controls and processes that will result in a clean audit. You’ll also need an approach to document management and a plan that supports an efficient and timely audit. Treat each audit as practice for when you’ll be going through due diligence.

Create a standard due diligence checklist (your banker or attorney can help you with this) and map your internal processes to the data needs outlined in the list. Not all items will be within your operational purview, so share non-financial items with other leaders to help them prepare. Often, the most troublesome areas are contract management and employee document management. You can save a lot of time in due diligence by keeping them well-organized and up to date.

A few questions to ask:

• What are your financial and organizational goals?
• What are your prescribed audit requirements?
• What is the timeframe for a potential sale?
• Are there proper staffing, processes and controls in place?

2. Build Relationships

Identify and build relationships with professional service providers such as your Finance as a Service (FaaS) provider, banker, attorney, CPA and insurance broker. Tap these relationships regularly throughout the year — don’t just wait until it’s audit time to talk to these professionals. 

Consero, a Finance as a Service provider hosted a webinar titled: 3 Tips to Be Audit Ready And Why It Matters. The discussion was led by Mike Dansby, a CFO with more than 35 years of combined management and consulting experience in multiple industries including software, tech, and services. Leveraging a Finance as a Service partnership ensures you will be GAAP and ASC 606 compliant while also being Audit and Due Diligence ready. 

Consult with an audit firm to set a timeline that works for everyone and also talk to them about complex audit requirements. Many companies are now choosing to do their own quality of earnings analysis before going to market. Talk to a provider to find out how they might approach this and then incorporate their viewpoints into your internal reporting and review processes. The key is to gather as much data as you can ahead of time so the deal isn’t held up later when you’ve got a buyer.

3. Make Document Preparation an Ongoing Process

Document preparation should be an ongoing process throughout the year — not a one-time event when there’s an audit. This requires documented and updated policies and procedures along with monthly balance sheet and account reconciliation. This can serve as the basis for audit review schedules, thus minimizing audit prep schedules.

Also stay up to date on accounting standards and pronouncements like those from the AICPA and remain GAAP-compliant at all times. And work with your human resources team to make sure employee documents are organized and digitized. Pay especially close attention to proprietary information agreements and intellectual property assignments. It’s nearly impossible to get these from employees after they’ve left the company.

Consider these specific document preparation steps:

• Record company accounting and financial policies
• Gather documents on internal control processes
• Prepare reconciliation documentation for financial statements
• Anticipate audit procedures and due diligence requests when designing day-to-day processes

How FaaS Can Support Audits and Due Diligence

Audits and due diligence exercises don’t have to be a necessary evil. You can impress your auditors, owners and prospective buyers by planning for these activities ahead of time and building their considerations into your day-to-day processes.

Consero Global offers Finance as a Service (FaaS) that can support your audit and due diligence efforts. FaaS is a modern alternative to building an in-house finance and accounting team that delivers greater financial visibility and improved operational scalability, along with a lower and more predictable cost structure. 

Contact with us to learn more about how FaaS can help you be audit and due diligence ready at all times: https://conseroglobal.com/request-a-consultation/

As the hedge fund industry grows and evolves, the fortunes of emerging managers are coming into sharper focus. While many larger funds have weathered the recent storms, start-up funds and emerging fund managers face a growing number of hurdles.

A new Insight Report from Hedgeweek, The Next Generation: How emerging managers are adapting to the new hedge fund landscape, examines how emerging hedge fund managers have fared in this environment. One of the most prominent findings in the report is the desire of these managers to outsource non-core functions of the business, such as finance & accounting and HR support, in order to free up more time to focus on alpha generation.

Outsourcing Back-Office F&A Administrative Functions

One-third of emerging hedge fund managers said they plan to outsource more of their administrative and F&A operational functions in the future, according to the report, while none of the managers said they plan to outsource less. This is almost double the industry average (17%) of hedge fund managers who plan to outsource in the future.

In the report, some managers said that the shift to remote work caused by the pandemic demonstrated that certain activities no longer have to be performed under one roof. This helped further accelerate the outsourcing trend. As one respondent put it, “We had 10 years of digitization within one year.”

Another respondent attributed the trend partly to the pandemic, along with other factors such as the changing landscape, the importance of cybersecurity and the “importance of information technology in running a modern business.”

In Search of Specialized Expertise

According to the report, cost-squeezed emerging hedge fund managers are now willing to outsource more of their business functions to third-party service providers, like Consero, that can offer specialized expertise across a variety of areas including technology, finance & accounting administration, HR support and payroll functions. Meanwhile, they are keeping core competencies like portfolio management and trading activities in-house.

Outsourcing has helped ensure that emerging managers are better able to focus on alpha generation so far this year. This, in turn, is helping them build a track record that investors are willing to commit to in the increasingly volatile market environment we now face.

The report noted that the expansion of outsourced services is bringing a degree of comfort to newer hedge funds. This is especially true for quantitative-focused managers who face particularly acute administrative and technology challenges.

Outsourcing Finance and Accounting Functions

Finance & accounting, human resource management and payroll administration are examples back-office administrative areas where it often makes sense for emerging hedge fund managers to outsource. A third-party service provider can handle all of a fund’s finance & accounting functions along with administrative functions on an outsourced basis, freeing up the fund manager 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, services and software that’s capable of managing a fund’s entire finance and accounting operations. In other words, FaaS is a one-stop F&A and administrative 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 fund. 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. 

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. 

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.

4. 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.
5. 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.
6. 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.
7. 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.
8. 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. 

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)

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.

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.

Owners and CEOs often don’t think about due diligence and audit preparedness during the early stages of the business startup. But maybe they should.

Research has indicated that between 90% and 95% of companies that receive seed funding don’t achieve a successful exit. This raises the question: What’s the difference between seed companies that achieve a successful exit — whether this is going public or some other type of exit — and those that don’t?

Of course, one of the biggest factors is achieving the right product-market fit. But another factor that isn’t talked about as much is an early focus and emphasis on due diligence and audit preparedness, especially as the company moves through the various stages of capital fundraising.

Growth Stages and Funding Milestones

Following are some of the key steps that should be taken from a due diligence and audit preparedness standpoint for each major growth stage and funding milestone. Note that there is more complexity at each milestone, requiring greater sophistication on the part of the financial management team.

Pre-seed to Seed:

• Build your financial system and organize financial files

• Implement financial controls

• Set up collections processes to maximize efficiency

Fundraising Series A:

• Financial modeling and long-range planning

• Fundraising project plan and investor presentation

• Series A fundraising overview, current trends and term sheets

Fundraising Series B:

• Financial metrics, benchmarking and data analytics

• Annual financial planning/forecasting and cash flow management

• Board financial reporting packages

• GAAP accounting and revenue recognition

Fundraising Series C:

• Financial guidance for strategic decisions

• Merger and acquisition assistance (if needed)

• Board/investor presentations

• Potential international expansion

“The key is to maintain funding readiness throughout each of these stages,” says Jason Burke with Consero. “This should always be top of mind for seed companies. For example, make sure compliance is up to date, financial records are maintained and documentation is prepared so when opportunity arises, you’re ready to take advantage of it,” he notes. 

Get Started Early

Jason stresses that due diligence and audit preparedness should begin on day one of the startup. “It’s never too early to get started,” he says. “You’re going to need a lot of supporting information to back the numbers in your financial statements.”

He lists the following due diligence and audit preparedness steps:

• Gather formation documents such as articles of incorporation, bylaws and shareholder agreements.

• Identify and build relationships with professional service providers including a CPA, banker, attorney, insurance broker and industry-specific consultants.

ª Gather such information as internal control narratives and a summary of related party transactions.

• Prepare revenue and gross profit projections by product offering.

• Obtain audited financial statements for the last two years, or three years for a public company buyer.

• Consult with an audit firm about complex accounting requirements.

“It’s important to maintain your own financial documents and not rely on your CPA firm for this,” says Jason. “If you switch firms, important data that substantiates a tax position could be lost.”

Jason also stresses the importance of keeping financial statements in good order and maintaining adequate internal controls at all times. “Failure to do so can lead to numerous problems when it’s time to exit the business, not to mention higher taxes,” he says.

Your Finance and Accounting Team

Building a strong finance and accounting team is critical to proper due diligence and audit preparedness. This can be done internally or on an outsourced basis, which tends to be more common among seed startups.

Consero can help you build the finance and accounting team you need to assure adequate due diligence and audit preparedness. Contact us today and schedule a complimentary consultation.