How does a CFO drive the raising of capital?
By Mohamed Chaudry, Interim CFO Seajet Systems
Business growth and success rely on the effective raising and distribution of capital. Without an efficient financial strategy, companies face an uphill battle in finding investors and funding future ventures. The CFO is responsible for ensuring a degree of economic security and business growth through raising capital and financial management – but what methods can they use to drive fundraising? How does a CFO have to adapt to different business models, and how can they encourage successful business expansion?
What is the overall role of the CFO in a company?
The CFO is the chief financial officer of a company, primarily responsible for financial management. This includes planning, management of risk, record keeping, and compiling reports, alongside their involvement in raising capital. In summary, they are responsible for the past, present, and future financial stability of the company. When it comes to financing for a business, the CFO must be able to identify which methods of raising capital and investment are best suited to the company. Many methods are more suitable for growing start-ups and new businesses, whereas more established companies can seek more substantial investment through proof of profits/losses, their business model, and their business growth. This is where the CFO’s ability to craft a projection of the business’s potential and image of future success will often come into play.
What methods can a CFO use to raise capital?
One key method of raising capital is seeking investment. The CFO is responsible for presenting the financial potential of a business to investors, convincing them that their money is well placed and likely to give them healthy returns. There are two main types of investors – angel investors and venture capital investors. The type of investment that a CFO will seek depends on the nature of the business. Angel investors are individuals with capital to spare who are willing to take risks with their investment if they foresee potential significant returns. Venture capital investors can often provide larger amounts of money over a short time frame – however, it is important to keep in mind that they may demand a shorter payback time frame. Venture capital investors also expect a sizeable return, as they are usually investing on behalf of others from a venture capital firm. This means that businesses with slower projected growth could struggle with sourcing funding from venture capitalists and should potentially seek out angel investors instead.
Investment is not the only way for a CFO to raise capital. They can also look at other avenues such as crowdfunding (usually more effective for a specific innovative product), bank loans, credit, pre-sale, or bootstrapping. Most CFOs will be familiar with crowdfunding, loans, and credit. Pre-sale and bootstrapping are slightly different from these other methods. They do not involve taking out long-term bank loans or outside equity – instead, they focus on the accumulation of capital through customers paying for orders before the product is made, and short-term financing through leasing, credit cards, founder’s capital, and revenue.
What do these methods involve?
Strategy, creativity, and good communication are essential for a CFO to be able to identify and carry out the most effective fundraising for a company. When seeking investment, whether it is from an angel investor or venture capitalist, the company’s projected future must be demonstrated engagingly, backed up with data and metrics, and translated into a clear set of goals. The CFO must have a comprehensive understanding of the company’s current performance and how this will evolve in the future based on market activity, the target market, and financial development.
How does a CFO have to adapt in a pre-revenue company?
With pre-revenue companies, there must be an established plan demonstrating the direction of funds, an investable prototype or product, business traction (validating the customer demand), and an understanding of the market. The company should also be able to display its domain enterprise, experience, career trajectory, and overall team strength. These are some of the key features that will be examined by potential investors. A CFO will need to be able to demonstrate the capabilities and potential of a pre-revenue business without necessarily having an established positive cash flow or established profitability. The hard truth of pre-revenue companies is understanding investor intent – their goal is always to generate a return on investment. If business capabilities and potential can be demonstrated effectively, they will be more likely to invest.
How do you ensure that a company expands into a successful business?
The generation of revenue for expansion is complex, and it requires cohesive planning across multiple areas of the company. Certain capital-raising projects will require involvement from marketing and sales teams, finance teams, PR teams, those in charge of the distribution of products, amongst others. A CFO must be able to understand how these different departments and individuals will collaborate to create further opportunities for the business. They will also need to demonstrate how these collaborative efforts will lead to greater opportunities for investors and stakeholders. Once capital is raised, the CFO must ensure that it is used effectively to deliver what has been promised and to generate the best returns.
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