4 November 2015
Going for Series A? CFO is a must!
It was unanimously agreed that at the seed stage it may suffice to have a team that can focus on product, technology and traction, but while preparing for the Series A funding round it is crucial to have a financial expert in the team.
Jonathan Roomer, leader of KPMG@Interchange and a start-up advisor added that it can be a CFO or a financial controller, but a full-time resource dedicated to financial planning is advisable to ensure that the company’s financial status & capability is well represented.
Simon Menashy from MMC Ventures shared that in the instances where they have had companies fail, it was often the case that the finance function was not strong enough; so despite a good business model, the company was not able to manage or see the cash crunch coming.
Carl Wong, founder of Living Lens confessed that initially he was not convinced with his investor’s proposition to hire a CFO, but at a point he himself realised that he had invested way too much of his valuable time in preparing financial reports, which could have been easily made by a financial expert. And once they had a CFO, it completely changed how they articulated their business model.
Moral of the story: Hiring a CFO is an investment, not an expense!
A good chairman and couple of experts on the board and you’re all set!
A question was raised whether it helps to have an advisory board/committee. Our panelist John Spindler, CEO of Capital Enterprise and co–founder of LCIF, advised that a good chairman and couple of experts on the board is all you need. Simon added that it helps to have an experienced chairman who is actively involved in your business and is always within your reach to solve your problems. Having too many boards/committees can distract you from your core activities unless they are addressing a special concern for a specified period.
Don’t be scared of KPI’s, use them to your advantage!
Carl Wong was terrified when his investors asked him to define KPI’s. It was only later that he realised how helpful it was to define key metrics for performance measurement.
Each business can choose their own metrics, but it is imperative that they do so in order to track their progress and take reactive steps. These metrics if chosen correctly can guide strategic decisions for the company.
Defining factors of a successful business!
Valuations and the size of funding rounds may suggest good performance, but to define success for an early stage business, the key indicators are:
- Achievement of KPI’s
- Sustainable Business Model
- Ability to expand territory and technology
- Sales and profit margin depending on particular funds or investors’ criteria
Bridging the funding gap!
There are several conversations around the trend of bridge rounds, which suggest that too many bridge rounds in between the Seed and Series A round can dilute the ownership and can also negatively affect the valuations.
Our panel had a completely different take on this. They believe that no matter what you name it, at the end it is a funding round! And different companies use it for different purposes, so it’s hard to say if they do more harm than good or otherwise.
A bridge round from your existing investors makes sense when you are going for a specific opportunity which will improve your business/scale/take you to the next milestone in your development. This in turn should mean that you achieve a better valuation at Series A.
On the other hand, easy access to small capital may slow down your pace which may otherwise have been aggressive to prepare for the Series A. The panel pointed that some companies use bridging rounds to have a large Series A round, which can garner significant attention, but in reality it does it mean anything?
Exit Strategy…Touchy Topic!
An exit strategy is very important when you go for Series A as your potential Series A investors will need to understand it. However, before Series A, you should focus on your business and delivering your business plan. Carl Wong went on to stay that it is important to “live in the moment” and build a successful business as in the future we may not need an exit or may not have one (to which investors were alarmed!) but today our focus should be on “painting our vision”.
Convertibles are good only when you know what they will convert into!
Our audience was equally participative in the discussion and Shane Leonard from Stockflare raised a very important issue – use of convertible loan and debt. The panel explained that the problem with debt is that companies fail to realise that it is supposed to be paid back! Simon Menashy warns against the use of open-ended convertible loan and debt instruments. According to him, it is always advisable to define the terms of conversion from the very start, if left undefined it may be seen as a risk factor by future investors.
Brace yourselves! It only gets tougher!
Start-ups claim that it’s difficult to find seed investors and once you have crossed that line it gets easier, but our panel cleared the air by pointing out that it is even more difficult to find investors at Series B and later stages. John Spindler advised the companies to be ready for an uphill journey as the course gets tougher with every funding round that you complete; expectations rise and responsibilities just mount up. John and Jonathan both stressed the importance of proving your business model.
We’re here to help!
As mentioned earlier, LCIF’s objective is to help our portfolio companies scale into great tech businesses and we are committed to fulfilling this objective.
So far we have invested £4.5m in 32 companies and our co-investment model has helped raise an additional £20m for the portfolio companies. We have helped create 70 new jobs and safeguard 55 existing ones.
As we approach the first anniversary of the launch of LCIF, we are delighted to have already participated in follow-on rounds for two of our successful investments and we look forward to supporting our portfolio companies in the future.