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VentureCap_25356_F_ehla_VC 8/20/10 8:54 AM Page 40
To Becoming
a‘Must-have’
Company
for a
VC Portfolio
C
Chief financial officers at venture-
backed companies are always on the
lookout for ways to make their com-
panies a more attractive investment
for venture capital firms and their
fellow founder and management
team shareholders. Their success
depends on the extent to which they
grow the business and shape it into a
V E N T U R E C A P I TA L
strong initial public offering candi-
date or acquisition target that will be
in high demand.
As the business environment
becomes more complex, this task
becomes increasingly difficult, and
the demands on CFOs rise propor-
tionately. Like all companies, ven-
40 financial executive | september 2010
5
ture-backed businesses are being
asked to be more capital-efficient and
do more with less. Much of the
responsibility for accomplishing that
goal traditionally rests with the CFO.
So while it has always been a pre-
requisite to possess integrity, main-
tain relevant professional qualifica-
tions and have the financial knowl-
edge needed to stay abreast of
important accounting and tax issues,
today’s demanding VC investors
look for more in a great portfolio
finance chief.
In particular, they depend on six
key attributes that the best CFOs
bring to maximizing value.
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4 3
2 Good CFOs report on the past. Great
1
Great CFOs Maintain a Healthy
and Respectful Exchange of
Views with Their CEO.
Opposites may attract, but oppos-
ing viewpoints inside the enterprise
can be damaging unless they are
managed well. Of necessity, CEOs
tend to be optimistic and adventur-
ous; CFOs are more likely to be con-
servative, owing to the nature of
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CFOs take that knowledge and turn it
to profitable future advantage. Such
action makes a company a far more
attractive investment for VC investors.
B y B r y a n P e a rc e
their jobs. Ideally, these different per-
spectives will stimulate a creative
tension that yields a balanced, and
therefore realistic, view of the busi-
ness environment.
For example, when a company
forecasts its near-term cash flow, the
CEO may be more optimistic than
the CFO about when sales will close
and cash flow will be generated. It is
the CFO’s job to understand the sen-
sitive impact of the results on antici-
pated outcomes — to ask, for exam-
ple, what complications might arise if
the company were to hit certain rev-
enue milestones in 12 months rather
than six.
At a company where the CFO’s
opinion is given insufficient weight,
the CEO’s more optimistic projec-
tions might be accepted without fur-
ther analysis, leading the company to
run short of cash prematurely. Faced
with a difference of opinion, a great
CFO will construct scenarios that
take into account both the CEO’s
optimistic forecast and the CFO’s
own more cautious perspective, per-
haps leading the company to raise
V E N T U R E C A P I TA L
additional funds to help guard
against possible shortfalls.
CFOs and chief executives each
must realize they represent only one
half of a yin/yang balance. VCs look
for that balance in their portfolio
companies and view mutual respect
between CEO and CFO as a sign that
it is present in the enterprise.
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2
They Can See Around Corners.
VC firms want to invest in compa-
nies whose CFOs have enough real-
world experience to anticipate finan-
cial challenges and help the company
manage them preemptively. This
includes the ability not only to cope
with the unexpected blips that can
sidetrack any company, but also to
anticipate the natural challenges that
inevitably come with growth.
One such challenge that often poses
a stumbling block for early-stage com-
panies is the ability to meet investor-
VC firms want to invest in companies
whose CFOs have enough real-world
experience to anticipate financial
challenges and help the company
manage them preemptively.
specified milestones — often a condi-
tion for the next tranche or round of
financing. Forward-thinking CFOs
draw on their experience to consider
the potential problems that could re-
sult, should the company fail to meet
these milestones on a timely basis.
Such milestones can include mak-
ing a crucial management team hire,
for example, or securing a timely
contract from a major customer.
Experienced CFOs who have already
lived through such situations will be
equipped to advise their companies
on how to install dashboards, sys-
tems and other controls that reduce
42 financial executive | september 2010
the chances of inadvertently missing
key commitments.
Good CFOs report on the past;
great ones focus on recommending
improvements for the future. Truly
exceptional CFOs become a valued
part of the management decision-
making team by converting data into
insights about the company’s opera-
tional and business decisions, such as
“make or buy” decisions about
whether to produce something in-
house or outsource it to a third-party
vendor; decisions about the optimal
business model; or even basic choices
such as how best to bundle the com-
pany’s products or services.
The CFO should be at the intersec-
tion of these decisions and available
to offer a strategic perspective on
them, saying, in effect, “Here’s what
we’ve done in the past. If we change
a particular variable, this is what we
can expect in the future.”
The CFO’s responsibility often
extends to issues related to human
resources and facilities. Say, for
example, the company has been
operating with the base-level number
of employees. If it secures a contract
with a major new customer and its
revenue increases, it may need more
office space, more people, more mon-
ey — or perhaps all three.
Forward-thinking CFOs bear in
mind that their role isn’t limited to
finding problems, but also includes
anticipating the needs associated
with expansion and growth, and
proactively bringing implications
and situations to the fore.
3
They Have Good Relations with
Senior Management and the
Board of Directors.
Financial experts on the board, such
as members of the audit committee,
often want direct access to the CFO.
The company must establish a struc-
tured, formal channel of communica-
tion to create this access, along with
clear procedures for using it.
For example, the CFO can be
proactive in working with the board
and audit committee to ensure that
the financial and operating informa-
tion he or she is delivering is in the
format and with the frequency that
will provide the greatest assistance. It
is important that the CEO support
this channel and co-develop a proto-
col with the board to ensure smooth
functioning.
After setting up a formal channel
for communications with the board
and any relevant committees, great
CFOs focus on building the necessary
level of trust by responding to board
requests for financial information in a
timely fashion and ensuring to the
greatest extent possible that such
information is unassailably accurate.
No board wants to hear a CFO
restate financial numbers previously
given as definite.
4
They are Adept at Managing Cash.
In today’s business environment,
VC investors regard capital efficien-
cy as king. Making every dollar
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count, doing more with less — these
widely used catchphrases have been
transformed in recent years into real
business imperatives. The reason is
simple: VCs know that they cannot
generate adequate returns for their
limited partners unless portfolio com-
panies exercise disciplined cash man-
agement — whether in research and
development, sales and marketing or
general and administrative expenses.
For this reason, CFOs have a criti-
cal role in balancing the desire to
grow fast — which requires spending
money on R&D, sales, marketing and
advertising, etc. — with the need to
manage the company’s cash burn
rate in a way that does not drain the
coffers prematurely.
With each round of financing,
VC-backed companies agree to
accomplish certain goals related to
product development, sales volume,
key hires, new customers and other
milestones.
If the company hits these targets,
its value can be expected to have
increased by the time a subsequent
round of capital is needed. Everyone
agrees with this arrangement at first,
but soon temptations arise. Maybe
there’s a new salesperson available
and a member of the management
team suggests this person be hired
now, instead of in six months, when
the company has a product to sell.
Such opportunities to spend mon-
ey inevitably come along, and they
often sound like good ideas. But
companies that act on all of them risk
losing the focus needed to hit the
goals they agreed on with their
investors. More importantly, they
risk running out of cash before those
goals are achieved, potentially forc-
ing the company to raise cash at a
discount compared to what they
might have enjoyed had they
attained their milestones.
Great CFOs ensure that their
companies maintain the discipline
needed to “meter out” cash so the
company has enough operating
capital to hit the strategic mile-
stones that generate additional val-
ue, thereby increasing the likeli-
hood that additional VC funding
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will be available at reasonable valu-
ations when it is needed.
5
They Have Proven Networks
That Help Achieve Broad
Organizational Goals.
Among the most important
things CFOs bring to their compa-
nies are the networks of profes-
sional contacts they’ve built up
over years. These networks can
include the VC community — not
j u s t a c o m p a n y ’ s c u r re n t i n -
vestors, but those who could be
useful in the future when the
company needs additional fund-
ing for expansion. Networks can
(and should) include commercial
bankers, in anticipation of a time
when a company needs a lending
relationship.
In addition, VC-backed enter-
prises need professional services
providers such as accountants,
attorneys, insurance brokers and
public relations firms. Great CFOs
increase access to these experts so
that the portfolio company gets the
best strategic counsel available giv-
en its stage of development.
Finally, top CFOs support the
company by drawing on their own
personal networks to assemble the
best possible executive team. By
recruiting people with whom they
have worked in the past, CFOs can
save the company time and money.
Perhaps more importantly, their
personal networks give the CFOs
themselves access to valuable
advice. The reality is that most
CFOs work at companies where
they are the most financially
knowledgeable people at the enter-
prise. That makes it especially
important for them to have outside
peers and advisers with whom to
consult when they run into thorny
problems; such networks can add
enormous value to the company.
6
Great CFOs Make Sure Their
Enterprises are ‘Exit Ready.’
Opportunities often come along
unexpectedly, so forward-looking
CFOs think about what the company
will need in the event of an IPO, sale
or additional round of financing.
Clearly, certain basics must be in
place — financial statements must be
current, for example.
In addition, great CFOs make sure
all relevant corporate information is
stored securely in a data room,
including important contract infor-
mation for customers, employees,
key vendors and other stakeholders.
They will also see to it that all
board minutes and records are main-
tained, current tax documents are
filed and that anything a buyer might
ask to see as part of its due diligence
will be readily available. Otherwise,
the company might miss an opportu-
nity to be sold at an attractive price
or be forced to negotiate a steep dis-
count because the buyer must spend
additional time preparing documen-
tation needed for due diligence.
Besides the actions listed, great
CFOs undoubtedly take other steps
that maximize enterprise value and
ensure the continued support of VC
investors. For example, technology in-
frastructure must be in place, as must
good accounting procedures that en-
sure effective budgeting and financial
reporting. Great CFOs effectively use
these tools, to be able to present deci-
sion-making information in a timely,
credible and compelling fashion.
By focusing on the attributes and ac-
tivities outlined above, CFOs can per-
form so as to maintain the interest of the
VC community and ensure the contin-
ued enhancement of enterprise value.
BRYAN PEARCE (bryan.pearce@ey.com ) is the
Americas Venture Capital Advisory Group
Leader for Ernst & Young LLP in Boston.
september 2010 | financial executive 43
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