Securing investment: The CFO's role in nailing the pitch
Nearly three-quarters of businesses have failed to secure external finance on their first try, with two in five companies racking up three failed attempts, according to Smith and Williamson’s Dream Bigger report. What’s going on?
Spare a thought for 9% of respondents to Smith & Williamson’s Dream Bigger report: they’ve racked up five failed attempts at raising capital. The reasons offered vary, but the main culprit appears to be the management team.
It should be noted that ‘scaleups’ -- that is, businesses undergoing rapid growth -- are more successful than non-scaleups at securing funding. Part of the reason is that these businesses are simply more attractive to investors -- but there’s another reason at play, too.
Over half of scaleups asked as part of the report had a concise business plan in place (compared to 29%). They are also more likely to know exactly how much money they need to raise from the outset (39% vs 24%) as well as the route they want to pursue (39% vs 23%).
However, when scaleups failed to secure funding, the reasons were similar to non-scaleups: well over two fifths (43%) of scaleup founders stated the reason they were unable to secure external finance was the lack of strength in the management team.
For FDs and CFOs, who form an integral part of the management team’s pitch to an investor, it raises the question of what is the ‘right way’ to deal with investors. Of course, it’s not quite that simple, but there are common mistakes, said Andy Shambrook, an experienced FD and AccountingWEB columnist.
“The biggest problems I see are being able to concisely communicate the business idea and to get investors excited about it. Have an elevator pitch, challenge yourself to see how can you bring the idea to life in just 60 seconds.”
This story is embedded in the financial model and it is the CFO’s job to, as Shambrook likes to put it, bring the numbers to life. “Investors don’t want massive slide decks of projections and analysis,” he said.
“For example, you have marketing plans but what is the expected cost per acquisition, how long is the payback, what’s the customer lifetime spend? Investors want to see the market commercial opportunity and then they want confidence that the management team can translate it into cash flow.”
The financial model is critical to success, explained Alastair Barlow, co-founder of accounting firm Flinder, who frequently acts in a CFO capacity for scaleup firms. “Investors want to see a pitch deck,” he said, “but ultimately the equity backer will have a team of analysts that will kick the tyres on the financial model.
“If the financial model isn’t up to scratch, they’ll kick it into touch unless the business is utterly compelling.”
Investors have common questions, said Shambrook. “What is the expected cost per acquisition, how long is the payback, what’s the customer lifetime spend? Investors want to see the market commercial opportunity and then they want confidence that the management team can translate it into cash flow.”
And it’s not just the numbers, appearance is important, too. “The model should be well formatted, colour coded, colour formatted,” said Flinder’s Barlow. Flinder has actually hired a data modeller to construct its clients’ financial models. Although that’s not an option for everyone, it’s indicative of just how important it is to have an adequate model to present.
“Investors are analysts, and they like Excel built models,” Barlow said. “And they like it when there’s a clear rationale present: the number of customers, price per customer, how much we want to spend on marketing. In other words, the investor can already start to experiment with the business model.”
A figure like revenue isn’t enough on its own. “The investor will want to break it down,” Barlow said. “I’ve seen it happen where the investor has asked ‘If this part of the business doesn’t come through, can we cover our fixed costs?’.”
Often, it’s the accountant that will be the investor’s main point of contact because many of them are finance people, too. “You’re almost a translator between the management team and the investor,” Barlow said. “Investors want comfort with what they’re investing in. When it comes to due diligence, they want someone who knows what they’re talking about -- and usually, that’s the accountant.”