Capital is the lifeblood of a growing tech company. Yet fundraising is one of the most challenging tasks for the founders to perform. They need to master the nuances of a sometimes-new discipline – and still find time to run the daily operations of a complex business.
The chief financial officer (CFO) plays a surprisingly wide-ranging role in closing this fundraising talent gap at tech companies. While other members of the executive team distill the vision and strategy, the CFO brings a fluency with numbers that is critical during a process that relies on numbers. Perhaps this key fundraising role for the CFO should be no surprise – but many first-time tech founders don't realize it at first glance. They then regret not having discovered it sooner.
In truth, CFOs help tech companies raise capital throughout the fundraising journey – from the moment the founders consider third-party investment to the second all parties sign documents and beyond.
Valuing the company
To sell part of the company, founders need to first know its value. Giving away shares in any company requires the team to balance two factors: the amount of capital needed and the amount of the company the founders are willing to part with. The company's value is typically the key variable in this equation, and the CFO typically helps to define this value and limit unnecessary dilution.
The methods employed to value other businesses may not work the same way for tech startups. Traditional methods rely on historical performance, but most tech startups lack the metrics reported by their counterparts in other industries. The CFO's importance in tech companies grows to match this complexity.
CFOs also advise the team on the best time to raise capital. As the company grows, its value will increase. The founders will therefore need to give away less of the company in later stages to gain the same amount of capital. While raising funds, tech founders rely on the CFO to parse these numbers and analyze all scenarios.
First impressions count when meeting investors
Founders sometimes fail at fundraising because they don't speak the same financial language as their investors.
Consider the fundraising experience from the investor’s side of the table. The investor wants to see a return on investment before deploying capital in a new company. As a result, they need to see the financial past, present, and projected future of a company.
To cover the future, founders typically need to provide a financial model that reflects three years and monthly reporting. This stress-tests the business model on profitability and scalability and indicates the expected runway and future capital needs of the company. To cover the past, they need to demonstrate their performance and traction to date.
This step is more complicated than it sounds. Investors – and their accountants – expect the information presented in accordance with a specific reporting framework. If an investor receives the correct financial information but in the incorrect format, they won't be able to match the founders' story and plans to financial reality.
Showing up at the pitch meeting
Many founders bring their CFO to a pitch meeting. With so much at stake, they often prefer to focus their own efforts on the company's story and delegate the financials to the CFO, who can also assist with answering difficult financial questions from investors.
The tech leadership team often sees even greater benefits when using a CFO attached to a recognizable brand. Investors develop an additional level of confidence in the pitching team. They interpret the CFO's presence as a signal that the finances are in order and that the company's performance matches the founding team's claims.
From pitch to deal
A successful pitch eases the path to a deal with investors, but it only launches the process. To raise the capital they need, founders need to complete a well-defined process. The CFO helps the founders finalize the deal. Two consecutive steps stand out:
- Term sheet
The term sheet lists the investment terms that the founders and investors need to finalize the deal. While a term sheet covers a wide range of details that affect the future of the company, finances play a part. The CFO reviews these terms with founders and sometimes models additional expected dilution and exit scenarios.
- Due diligence
Once the term sheet is completed, the CFO helps the founders meet the investors’ expectations during the due diligence stage. In due diligence, the investors provide a checklist of items that they need from the founders to move forward with the deal. Many of the items relate to accounting and finance, such as financial statements, year-to-date statements, and evidence that the company stays compliant with the Canada Revenue Agency.
Once the parties reach a deal and the founders receive the investment, the investors want to know that the founder will use their investment for the agreed purposes. If the company uses the services of a trusted CFO, the investors have more confidence in the integrity of their investment. Some investors also require regular reporting from the company on how the cash is handled, performance on key metrics, and compliance items.
By providing investors with the information they expect, founders can make the founder-investor relationship a rich one. Founders need to manage many portfolios; the founder-investor relationship ideally will create few pain points. Even more: If all goes well, the relationship may spur further investment in later rounds.
BDO’s CFO Services team can help your tech business in all matters financial – from raising capital to back-office financial support. Get in touch with us to learn how we can help your tech business grow:
Warren Stevens, Partner, CFO/Controller Services