Automating your financial processes and systems will allow you to provide better data to your potential investors.

Prepare Your Business for New Funding, Whether IPO or Private Equity (Bonus: a handy checklist inside)

In spite of the news about Silicon Valley Bank and similar institutions, there’s still funding out there. Getting it might just take a bit more due diligence on your part.  

There’s no doubt that, even pre-SVB, funding levels were way down from the post-COVID boomlet. Here are a few of the headlines from Pitchbook’s recent publication 2023 US Venture Capital Outlook:

• Series C and D rounds will see the most down rounds, as these companies are currently the most starved for capital.
• Seed-stage startup valuations and deal sizes will continue their ascent, reaching new annual highs despite a slowdown in total deal value and count.
• Venture growth deal value will fall below $50 billion in the US.
• 2023 US VC mega-round activity will fall below 400 deals, hitting a three-year low.
• US VC fundraising will fall between $120 billion and $130 billion in 2023.

What caused the gloomy outlook?

Regulatory mandates, economic uncertainty, as well as changing market conditions (can you say “higher interest rates”?), have prompted many companies that may have considered an IPO earlier to now stay private longer, and obtain financing through venture capital, private equity, and debt financing.

The bottom line for companies looking to gain the advantage in these current circumstances is that they need to show that they have strong governance, financial processes, and automated systems. This is both in terms of accessing and providing timely information to prepare IPOs or to continue to satisfy and attract private investors.

The Song Remains the Same, Whether It’s IPO or PE

The methods for getting a financial organization ready for an IPO or going for a PE are similar in nature, but they take different routes. To ease stakeholders' concerns, make smart decisions, and provide a roadmap for sustainable business initiatives, both require access to historical data and real-time access to financial and operational data. Automating the procedures and providing easy access to this information is critical to the success of your organization, whether required by law in the case of a public company or simply an expectation of private equity firms.

In my experience, investors want to see that your organization can provide detailed information about its five-year strategic plan, provide data that will help analyze market share, and answer tactical performance questions about budgeted vs. actual spending, sales pipeline, and cash flow analysis.

Toward this end, I’ve compiled five action items that your company can take to have to make sure that your financial procedures and system environments are ready for the investors’ tough questions.

1. Upgrade your finance organization

To prepare for an IPO, your company's finance team will need to have the necessary skills. This includes things like managing day-to-day finances, preparation for additional leadership and strategic oversight, and monitoring risk and compliance issues. In lieu of additional funding, your CFO will need a strong controller on their team. Additionally, companies will need to hire other high-level professionals who know about financial forecasting, budget planning, automated finance and accounting systems, SEC regulations, complex tax codes and reporting, and financial compliance mandates.

Today’s PE firms place a greater emphasis on the CFO role, requiring them to have strong financial reporting skills. Additionally, private equity firms are looking for individuals who have experience in a fast-paced environment and are well-versed in systems and processes.

That’s why I recommend that, if don’t have a CFO currently, utilize an interim CFO for advisory purposes at a minimum, until you get a permanent CFO in place.

2. Improve your systems, processes, and controls

Having an ERP system for your back-office can improve the accuracy and speed in your financial processes, however for some, the main impetus for investing in such software is to prepare for an upcoming IPO. Private companies, however, need access to accurate financial data to make sound forecasts.

Integrated, automated finance processes are beneficial because they allow companies to close the books quickly and meet reporting and auditing requirements. This helps private companies and public companies that charge for their products or services on a subscription basis to comply with new ASC 606 standards.

3. Establish good corporate governance

Good corporate governance is essential for limiting risk and ensuring compliance in capital markets. A board that is well-informed about the industry and the company’s challenges is key to providing sound and objective views and opinions. A governance framework helps both the board members and executive management understand their roles and responsibilities. There are a variety of best-of-breed offerings available to help with governance, but it is best to implement proper processes from the start to ensure a successful system. Cloud-based software makes it easy to include governance features in your daily operations.

4. Develop risk management capabilities

Two key factors to consider when complying with SOX are to a) ensure that proper compliance processes are in place and, b) staying aware of potential cyber security threats. The cost of SOX compliance can be high for smaller companies; however cloud-based software can help to keep your systems up to date and vulnerabilities patched in real time as needed.

5. Establish good investor relations and communications

Do you have an investor relations (IR) professional on your team? If so, you know that they are especially skilled at communicating with shareholders, investors, and the media. They have a deep understanding of your company’s finances and legal requirements, which makes them a valuable asset to any company – but especially one looking for capital market funding.

An effective IR function is essential when publicizing a company's presence and communicating its key financials to interested investors and the public.

“When investors and bankers ask about our financial system, we tell them we run on NetSuite and they move on to the next question.” - Eric Sailsbery, VP of Finance, Workfront

The Bottom Line: Automate

Today’s capital markets have much higher expectations than ever before. To meet – and exceed – these, I strongly recommend automating your back-office processes and systems. Automation will help you address many of the challenges that the markets are putting forth to companies seeking funding. Here are a few:

Expedited month-end closes. Automate and expedite daily financial transactions, accelerate the financial close, and ensure compliance. Capital markets want to see real-time visibility into your company’s financial performance from a consolidated business level all the way down to individual transactions.

Ease regulatory compliance. Revenue recognition, including accruals, recurring revenues, and more require sophisticated processes, and doing this manually via spreadsheets won’t go over well with investors (trust me they will ask). The only real solution is to automate the recognition, allocation, and auditing of revenue from sales transactions, and doing so in compliance with new regulations like ASC 606.

Integrated planning, budgeting, and forecasting. People who are giving you money want to know where it’s going. So you need world-class financial planning and budgeting tools – not spreadsheets. (For the record, I love Excel, but it’s not for everything.) Using an integrated, automated back-office platform, like NetSuite for example, will let you do so for company-wide as well as a departmental planning.

Checklist: Capital Markets and Readiness Execution Timeline

Use this handy checklist to determine what you need to do to attract IPO or PE funding