By Carol Wagner at Abbott, Stringham & Lynch
Is your company hoping to close another round of financing in 2011? In my role as a Principal at a Silicon Valley accounting firm, Abbott, Stringham & Lynch, my opinion is that venture funding is tighter now than it has ever been. If you are counting on your venture capitalist to put in more money in 2011, don’t consider it a slam dunk. Even when management teams were confident they could go back to the well, I have seen VCs walk away. How can you improve your odds of renewed funding, even in a tightening financial ecosystem? This is my list of five ways your management team can keep venture funding alive in 2011:
1. Communicate on a regular basis with your financing sources. Just like any business partner, VCs don’t like surprises. It’s important to communicate prior to, during and after board meetings. Make every effort to understand your position with investors. Provide information on strategy, finance, the competitive landscape, marketing and sales, product updates and other pertinent information. Today it is crucial to constantly assess your VC’s financial commitment. Providing information helps VCs understand your direction and get involved in a positive outcome. If you do not provide the information that the VC needs in his/her decision-making process, whose fault is it if financing falls through?
2. Make the most of the advice you are given. Seasoned directors can provide excellent advice—and it is important to follow through on that advice. VCs have seen, again and again, what works and does not work. Keep an open mind to their ideas, even if you are confident in your current direction. Be especially alert to advice surrounding corporate governance to avoid running afoul of regulatory issues. For instance, VCs may weigh in on the timing of a valuation or audit. They may also provide ideas on exploiting new markets, advertising venues, and management team composition. When you get good advice, demonstrate to your VCs that you can follow through. You don’t want to miss opportunities and future financing because you are caught up in day-to-day business activities.
3. Get your internal accounting in order. While this advice sounds basic, you would be surprised at the number of mistakes we see made by executives when they present financial information to the board. VCs want to know that you have a handle on what they have given you so far. Ensure that your chief financial officer has a clear grasp of the big picture as well as the details, including key issues such as revenue recognition, and can answer questions that arise at board meetings. Don’t cut corners on your CFO—hire an experienced part-time CFO if you cannot afford a full-time position. Get the best you can afford. You don’t want to present your VCs with interim financial statements that look a whole lot different at the end of the year.
4. Make everyone aware of commitments and contracts. Stay alert to communicating commitments on advertising, the hiring of executives, and contract manufacturing. Making what are perceived as unreasonable commitments can damage your team’s credibility in the eyes of investors. Advertising budgets need to be justified, especially when cash is tight. If you are planning to commit to an aggressive marketing and advertising campaign, share the plan with your board prior to signing the contract. Similarly, if you make an offer to an executive that includes unusual payouts, share the plan with your board. When making an offer to a star executive, it may seem totally reasonable at the time to promise a large lump-sum payment should a separation occur, but you need to have the VCs on board with that decision.
5. Continue to make progress with your product. Due to the creativity surrounding technology innovations, it is easy for a company to get off track. You want a strategic approach to product development, shared with the board, and verified by continuous market testing. Don’t let your programmers get sidetracked with what looks cool at the moment. Stay in tune with prospects and customers to verify that there is a market for the products under development. You want to know that your people are working on an app that will sell.
While there is no “secret formula” to ensuring additional rounds of funding, management teams should not ignore any one of the five tips for staying close to your VCs. Have a good strategy, share what you are learning, demonstrate your progress, and tell them how you plan to move forward.