The following is a guest post from Diya Sagar, CFO at AWA Studios. Opinions are the author’s own.
Before becoming a CFO, I had spent my career in roles that sat on the outside of the finance function of companies — as an investment banker analyzing company financials and advising CFOs on strategic uses of capital; as a corporate development and strategy leader allocating cash to CFOs of competing operating companies; and as an investor investing in businesses and holding CFOs to account in the boardroom. What is, unfortunately, highly apparent time and time again is the gap in expectations that exists between the providers of capital (investors) and the recipients of capital (companies). Now that I sit on the other side of the boardroom as an operator, I’ve reflected on the key pitfalls that I’ve seen and how we as finance leaders should seek to close that gap.
Don’t make promises you know you can’t keep
In my time as an investor, I reviewed hundreds of company pitch decks. Unsurprisingly, most of them display soaring revenue projections, and for those that are not yet profitable, a clear path to break-even. While it is natural to try to entice investment into your company by presenting an attractive financial profile, the numbers you present have serious implications.
Investors view your projections as implicit promises for investing — that your company will deliver the level of revenue and cash flow that you stated, and on the timeline that you said it would be delivered. The numbers themselves and the timing are both critical factors in investors’ calculus: If your company falls behind on either, or worse, both, you won’t be tracking to the return they required to invest in the first place. It’s like buying a house in a rundown neighborhood and being told that in the next five years, the neighborhood will be gentrified. However, in reality, it doesn’t improve, or you’re told it will take 10 years instead. Would you still have bought the house?
To be sure, I am not saying that all companies that miss their numbers are failing investments, or that all investors are financially motivated to the same degree. But if you want other people’s money, think twice before making any promises.
What’s taken must be given back, and more
Realizing liquidity on an investment is just as important as the decision to invest. Generally speaking, investors plan to exit a business after a few years on the expectation that the cash they get back will be more, and typically multiples more, than the amount they originally invested. As exciting as it is to secure funding for your company, it’s what you do with the cash that really matters.
A key driving force of any commercially driven enterprise should be to build equity value. For every dollar that your company spends, consider how it impacts the value of the business. Is that new marketing initiative actually growing your brand in a way that quantifiably outweighs the spend backing it? Will expanding your operations support monetizable opportunities that are accretive to the bottom line? Similarly, realizing efficiencies can be value-enhancing if the business can do the same with less, but destructive if it cripples growth.
Timing matters here, too. A company that doubles its equity value in three years is a dramatically more compelling investment than one that doubles it in five years, assuming the same amount of cash went into both. And the more capital invested, the more you have to work to create value with it. Simply put, other people’s money doesn’t come for free.
There’s no reward if you can’t protect what’s at risk
Ask any investor about their investments, and they’ll proudly tell you about the companies that succeeded. For obvious reasons, no investor wants to talk about a company that managed to convince them of their worthiness, accepted their capital, but ultimately burned through it and couldn’t build the business they had envisioned. And that’s precisely the point.
When a company receives investment, investors are risking their capital on you. They expect you to prove that their investment decision was the right one, versus all the other companies that they could have invested in at that time. But what if the business just isn’t going to plan? It is during these crucial moments that I have seen some companies still emerge as winners, despite the most challenging of circumstances. Those that recognize that their No. 1 priority is to protect investors’ capital can quickly enact operational changes in pursuit of this singular goal.
First, communicating several months in advance of any impending doomsday scenario shows that you’re trying to get ahead of a problem, even when it’s somewhat ahead of you. Second, transparency throughout the year, not only during board meetings, helps to build trust with your board and investors. And third, offering up options that you can enact inside the company at pace brings your board into decision-making when it matters most.
Last-minute surprises not only show a lack of respect for those relationships but likely also reduce any chance of being rewarded with future investment. At that point, no number of excuses will persuade other people that they were right to bet their money on you. As CFOs, it’s on us to get that formula right.
