5 Ways to Keep Venture Funding Alive

Jan. 4, 2011 - PRLog -- SAN JOSE, Calif.—Is your company hoping to close another round of financing in 2011?  According to Principal Carol Wagner of Abbott, Stringham & Lynch, a Silicon Valley accounting firm, venture funding is tighter now than she has ever seen it.  “If you are counting on your venture capitalist to put in more money in 2011,” says Wagner, “don’t consider it a slam dunk.  Even when management teams were confident they could go back to the well, we’ve seen VCs walk away.”  How can you improve your odds of renewed funding, even in a tightening financial ecosystem?  Wagner says there are five ways management teams 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,” says Wagner.  “It’s important to communicate prior to, during and after board meetings.  Make every effort to understand your position with investors.”  Wagner suggests that you 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.  According to Wagner, 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.”  Wagner says to 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.”  Wagner says, “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,” says Wagner.  “VCs want to know that you have a handle on what they have given you so far.”  Wagner says to 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.  She suggests hiring the best CFO you can afford.  “Don’t cut corners on your CFO—hire an experienced part-time CFO if you cannot afford a full-time position.  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,” says Wagner.  “Making what are perceived as unreasonable commitments can damage your team’s credibility in the eyes of investors.”  Wagner says that 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,” says Wagner, “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,” says Wagner.  She suggests 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.”  
   
Wagner says that 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.”

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About Abbott, Stringham & Lynch (ASL): Abbott, Stringham & Lynch (www.aslcpa.com) is a full-service Silicon Valley accounting and consulting firm. ASL serves emerging and middle-market companies throughout the San Francisco Bay area and beyond. Services include tax planning and compliance for privately held firms and their owners; assurance services; international business consulting; succession planning; mergers and acquisitions; start-up support; and trust, estate and tax planning for high net worth individuals. Clients of the firm include those in the technology, service, manufacturing/distribution, construction, real estate, and non-profit sectors. ASL is a member of PKF North America, an international network of independent accounting firms.