Venture Capital Funding: Why Engage a CFO Partner?
When it comes to obtaining business financing, owners and entrepreneurs have two main options: debt or equity. Debt is simply a loan, usually from a bank, that must be repaid with interest, while equity is the sale of ownership shares in the business to outside investors.
There are several types of equity investments, but perhaps the most common is venture capital funding. Venture capital firms invest money in promising new startup businesses in exchange for an ownership stake in the company. Often, venture capital firms require a controlling ownership stake in the companies they invest in.
Venture Capital Funding Is Not a Panacea
Many business owners who watch TV shows like Shark Tank or read about the glamorous world of venture capital funding in magazines like Inc. and Fast Company think that venture capital is a panacea that will solve all their financing challenges. The reality, though, is quite different.
While venture capital firms can provide much-needed financing, this money often comes with a significant trade-off: a loss of control over many aspects of running the business. It’s true that venture capital funding doesn’t have to be repaid with interest, but this doesn’t mean that venture capital is “money for nothing.” Once you accept venture capital funding, you could lose a great deal of control over the growth and direction of your business.
Your company could experience multiple challenges and negative impacts when obtaining venture capital funding, including the following:
You may face intense pressure for a rapid return on investment due to an over-emphasis on short-term results to the detriment of long-term success.
Venture capital investments are usually only for short periods of time, such as one year or less.
The lack of long-term financing stability can create uncertainty for customers, vendors and other stakeholders.
If venture capital investors get too large a share of non-cash incentives like stock options, this could serve as a detriment to hiring the most talented employees.
Venture capital investments can come with a high cost of capital once dividends and investment preferences are included.
Also, startups and businesses in the development phase typically need a long cash runway to execute. But cash flow is always a major concern when working with venture capital firms. An over-emphasis on cash can lead to detrimental operational decisions.
How a Part-Time CFO or Project CFO Can Help
An on-demand CFO from a CFO services firm can help you overcome some of the challenges and obstacles involved in obtaining venture capital funding. This high-level professional will be able to provide accurate, timely and concise financial information to venture capital investors, which will mitigate some of the concerns they may have about investing in your company. By articulating a long-term financial plan, a CFO partner will lay out the cash requirements well in advance, which will help mitigate the short-term funding mentality.
In addition, a part-time CFO or project CFO will be able to investigate the relative value of alternative financing methods, such as loans and asset-based financing. This could reduce your dependence on venture capital funds. And a CFO will be able to attract a wider range of venture capital investors at a lower cost by accurately portraying your company’s potential value.
Your business could realize many benefits by bringing in a CFO partner to help secure venture capital funding, including the following:
You’ll have access to a wider range of potential venture capital investors, which will result in more investment stability for your company.
You’ll receive timely levels of funding when you need it, which is integral to achieving your operational and strategic objectives.
Financial stability will make it easier to attract the high-quality employees you need to grow your business.
Venture capital investors will be more informed about where your company stands relative to your short-term and long-term objectives.
Many business owners think that venture capital is a panacea that will solve all of their financing challenges. While venture capital firms can provide much-needed financing, this money often comes with a serious trade-off: a loss of control. Once you accept venture capital funding, you could lose a great deal of control over the growth and direction of your business. An on-demand CFO from a CFO services provider can work closely with you to overcome some of the challenges and obstacles involved in obtaining venture capital funding.
Mark S. Becker, Partner, CFO Edge, LLC