The process of raising equity for a company has a number of steps, many of which the CFO leads or is a part. It all depends on the stage and culture of your company. Sometimes the CFO is a participant, the manager of a process or the direct leader. There is no “right” role for the CFO in an equity raise, and a company can benefit from matching the talents of its CFO to the various different parts of the process.
The first step in any raise is to determine how much money you need and what you will spend it on. The CFO’s role here is critical, since there is a heavy amount of financial math involved to determine the cash needs. Whether it’s a Series A for growth capital, an IPO for the initial investors to cash out or a future public issuance to fund an acquisition spree, the general initial process is the same. How much money do you need and what you do you plan to spend it on.
Crucial in this step is explaining the narrative. The numbers need to support the story; they can’t be the story. This is where a CFO works with the founder or CEO in a support role. No matter how much of the process the chief executive and the board want the CFO to run, in the end, investors invest in the vision and leadership of the CEO/founder, not the financial savviness of the CFO.
Depending on the type of capital you are looking for, the CFO will either take an active leadership or managerial role. If you are looking for institutional investors, an experienced CFO can lean on their contacts to get meetings and rely on their reputation to get your foot in the door. Again, the CEO still needs to manage the pitch, but the CFO can facilitate many of the introductions.
An experienced CFO can be crucial to evaluating and determining the “right type” of investor. Some funds are looking for you to continue to raise money and grow at a breakneck pace. Other investors are looking for a quick “bump” in your stock price and can be expected to sell as soon as their reasonable return is locked in. None of these investors is bad per se, but it is crucial that you know your investors’ expectations before you take their money.
If you hire an intermediary, such as an investment banker or an investment relations firm, the CFO’s role will change to that of a manager. The banker and IR firm will be on the front lines, actively pitching, setting up meetings and serving as a deliverer of firm opinions so the executives and the investors don’t hurt their future relationship. The phrase “I’m sorry, but my banker is pushing for these terms” is pretty common. While the CFO isn’t actively leading the investor process when the company has an intermediary, it’s still their responsibility to manage them and the process.
An important principle for a CFO to keep in mind is that while the investor is investing in the CEO, the time the CEO spends on finding investors takes him or her away from focusing on growing and managing the business. An active investment pitch is the time a company can least afford a downturn in performance, which often happens when a CEO is busy on investment roadshows.
What to put in the “data room” to satisfy investor due diligence is part process and part art. At a basic level, the data should be easy to follow and back up the financial model and all parts of the pitch deck. The CFO should go through the model and the deck with a fine-tooth comb to ensure that all claims are backed up with data, and if there is contradictory data, have a very good explanation.
A good data room backs up all numbers without giving away company secrets. Even though a potential investor signed a non-disclosure agreement, you might not have the resources to pursue a lawsuit if they choose to violate the NDA. Some investors just want to see who your customer base is since they may be evaluating numerous companies in your space. The amount of data you make available is different if you are planning to sell your company versus raising capital.
Once you hit the public markets, the reporting complexity and governance requirements drastically increase. Most CEOs, even if they have been previous public company executives, won’t be able to manage this process. A CFO, by themselves, cannot manage this process. The company will need a team to put together the quarterly filings and press releases, as well as SOX compliance and governance processes and procedures. Securities attorneys, transfer agents and broker dealers are all members of this larger team. The CFO is the leader and ultimate owner of these processes, but cannot “run” the process alone.
CFOs are necessary in the capital raise and at their best, provide guidance and structure to the process and comfort to investors that the company has fiscal responsibility. While investors invest in founders, CEOs and their management teams, a good CFO can shorten the time to raise capital, make sure the investors are the right fit, and get the best price and terms for the equity.