What governance practices matter at each stage of growth
Depending on where a company is in its life cycle, different governance priorities will dictate where to focus limited resources:
Venture capital firms look to obtain higher potential returns in exchange for taking more risk earlier in a company life cycle. They tend to be more sophisticated and obtain larger stakes in the company. With the risk that VCs take comes additional scrutiny. Therefore, VCs will typically want to see more robust financial statements, financial models, and relevant financial documentation for valuations and equity transactions. VC firms often expect more experienced management teams and the beginning of scalable internal processes to manage and mitigate risk. It’s even more essential for companies that operate outside of Canada as this can compound risks and complexity.
As capital has tightened, more creative structures are being deployed. While these structures can often help close investment rounds, the added layer of complexity comes at a cost and or potentially un-intended financial reporting results. This makes leveraging the right skills to build out financial models and statements more crucial than before.
At the growth stage, companies will often consider two paths: finding a PE investor or going public.
Private equity investment
Getting ahead of PE firms’ expectations enables companies to attract a better PE fund, therefore boosting the investment opportunity and their success. When a company seeks PE investment, it knows that the investment will bring additional stakeholders. These stakeholders bring their experience to drive company growth, but they have high expectations for the business and its overall performance. These expectations will likely include providing accurate financial information, implementing robust controls and processes, and installing a board of directors.
Going public
To improve the value of an IPO and prevent any future loss in value and confidence, it’s vital for companies going public to get their house in order. A company should start planning 18 to 30 months ahead of an IPO. Going public requires historical, current, and future financial statements to be audited and reviewed on a frequent and timely basis and compiled in adherence to accounting standards in the jurisdiction the company will list. In addition, a board of directors with public company experience is required to promote sound decision making and risk management for the benefit of the company and shareholders.
Private equity investment and going public require highly sophisticated knowledge in financial reporting and management to navigate internal reporting, controls, results, communication, and forecasting. The market for individuals with these skill sets is limited and often costly. This underscores the importance of carefully planning and budgeting each step in the life cycle to help ensure long-term success.
How BDO can help
Getting funding for your business requires strong governance practices, properly skilled individuals, and sufficient planning. Let us tackle your governance to-do list, or provide skilled CFO services so you can focus on getting the most out of a funding round or IPO. We have experience advising technology companies at all growth stages to help ensure they make the right governance decisions to grow and prosper.