For many years, business pundits have positioned securing venture capital (VC) or private equity funding as an essential step in business success. Widespread media coverage of the latest megadeals and success stories has created an atmosphere where most entrepreneurs believe they must secure outside funding. This myth continues to hold on despite the fact that the funding process is complicated, expensive, distracting and, in most cases, unsuccessful. The Harvard Business Review estimates less than 1% of U.S companies get capital injections from VCs, and the numbers are only marginally higher for later stage private placements. Despite this incredibly low chance of success, every year thousands of businesses invest countless hours of high-value executive time dressing themselves up to catch the eye of a small group of “all-powerful” investors.
As a veteran CFO, I’ve served as front-line counsel to multiple CEOs who seem to be firmly split into two camps: those who believe the inferred credibility of VC funding is worth investing time and a potential loss of control and those who opt to maintain independence and potentially a much slower growth trajectory.
While CFO at FreeConferenceCall.com, I recently had the chance to explore a third path: preparing for, receiving and ultimately rejecting two private equity funding offers. Looking back at that process, I can unequivocally recommend this exercise to any established midsize business focused on continued growth and long-term value. The rigorous processes adopted, lessons learned and changes required for success are worth the time and investment, regardless of the outcome.
As background, FreeConferenceCall.com is a 17-year old company that provides free conference call services to millions of customers worldwide. I joined the company as CFO three years ago at a key inflection point. Having achieved remarkable organic growth, founder and CEO David Erickson was looking to accelerate international expansion and begin selling to larger enterprise clients. He began that process by hiring a CFO with varied experience in public, private and investment banking finance. As that CFO, my first assignment was to help him explore all options for monetizing the value in the business without taking our focus off our customers.
This exploration included a two-year process of working with outside investors to showcase our company as an ideal target for investment. The process included a complete review and restatement of several years of financials, multiple and sometimes painful staffing changes, extensive updates to our operations structure and getting used to absolute adherence to a consistent set of metrics and measurement tools across every person and department in the company. Such dynamic organizational change didn’t happen overnight, and we are still evolving. However, we emerged from that process a stronger and more laser-focused company with a better functioning leadership team, streamlined operating processes and rigorous measurement structures.
Having outside experts review every aspect of our business and decide to offer funding was a tremendous validation of the strength of our financial model and the lasting nature of our competitive advantage. That validation confirmed our projections and allowed us to confidently say "no, thank you" to outside investment. In addition, the credibility inferred by the process has already created opportunities for us in some surprising ways.
Over the next several months, I will dig into the details of the process, highlight the surprises and try to short-cut the lessons for other CFOs considering their options. I will provide detailed recommendations for financial auditing, creating innovative financial structures to protect revenue and intellectual property and reorganizing operations to drive consistent reporting. And, I will share what we’ve learned in this process across the organization. Although the funding process is driven by numbers, success truly requires the support, compliance and buy-in of the entire team. Most importantly, I will share how you can use the process to increase market valuation and external credibility, even if you don’t secure funding or decide to continue driving growth organically as we did.
Tips For Deciding On The Best Funding Path For Your Company
Most businesses looking for funding will turn to private equity. Private equity is defined as capital provided by private investors in exchange for company equity. Private equity firms usually look for high-growth opportunities or companies that have great potential but aren’t currently profitable. Venture capital is a kind of private equity most often awarded to start-ups in high-risk, high-reward sectors such as biotech or software development.
When deciding whether to accept outside funding, company leadership should answer three key questions:
1. How long do we want to run this business? Investors will require a defined timeframe to return on investment that could include selling the company, a public offering or asset liquidation. If you’re in for the long term, these strategies may not be in the best interest of company leadership or your customers.
2. Are we willing to accept outside control? Accepting funding means business decisions will be made by an investor-driven process, which can be a big change for entrepreneurial leaders used to making independent decisions.
3. Do we really need the money? An injection of funding can drastically accelerate growth, but there may be other ways to reach the same goals.
For us, the funding process reaffirmed our answers to these questions. We cemented our commitment to providing great quality, free conferencing services well into the future and admitted we weren’t ideally suited for outside control over decision making. We also realized we had everything we needed to continue to drive long-term growth, including innovative industry partnerships and a proprietary global network.
With this knowledge, we chose a third path you could define as "organic growth plus." Our growth plan remains focused on adding customers and increasing network usage with the added “plus” of more rigorous, public company-level internal processes and increased market credibility conferred by the thorough review and approval of two well-respected private equity firms.
