How to build your capital stack as a modern-day CFO
“The CFO should really be a thought partner with what's the perfect product to fund the business at the current moment in time.”
One of the biggest entrepreneurial struggles is obtaining capital to grow the business. Venture capital has long been the go-to option for tech companies and early-stage startups.
But over the past two decades, the landscape of fundraising has evolved immensely. Using more powerful data analytics and process automation tools, CFOs, finance teams, and entire workforces are operating businesses more efficiently, with less investment risk.
Capital lenders are now able to more accurately assess and predict profitability and success in specific business markets. This has led to the growth of more financial lending options and products for founders – notably in the tech and SaaS sectors.
We invited CFO at Pipe, Lukas Wagner and Managing Director at Anthemis, Farhan Lalji to share their thoughts and expertise on this topic. In this article, we’ll recap the most insightful takeaways from our webinar session.
About the experts
Lukas Wagner, CFO at Pipe - a financing platform that transforms recurring revenue into up-front capital for growth without dilution or restrictive debt.
Farhan Lalji, Managing Director at Anthemis - a fintech-focused venture fund invested in early and late stage startups committed to resiliency, transparency, access and equity.
Table of contents
Building effective finance teams in scaling startups
Lukas: “I think the first key principle just has to be that you're willing to roll up your sleeves and do things…and then really find where finance adds value to the business.
I see hiring in finance and mostly in startup land in general, where you go from hiring only generalists, because you need everything, to hiring very specific talent. I think that's really the wave that a startup always goes through, from generalist to subject matter expert.
I think the second big question to answer is what does finance mean for your business? There's very large fortune hundred companies where finance is just a support function, but then there's other businesses, and Pipe is one of them, where finance is the business model, so it has much more strategic value. So you need to be a little bit more focused on finding real rock stars for the finance team really early on.
Whereas if you are running a fairly simple financial business model, like a B2B SaaS business, you might be able to get away with focusing on hiring for the other teams first and do a lot of it yourself.
In general, I think you should never overhire on finance. I think outsourced services and tools like Spendesk and other accounting systems have gotten so good and automated. Between doing it yourself and outsourcing some of it…I think finance is really something where if you cobble together the right pieces, you don't need to overhire, but you also don't want to miss the boat.
The moment you have a high evaluation and a lot of investors that are interested, you can't really afford to have any major lapses. So you need to strike that balance and I think that's where I've seen a lot of companies struggle.
And if founders or CFOs ask me, that's where I say, 'Don't focus on it today, but definitely check in. Make sure you don't miss the boat on that one.'"
Painting a full financial picture for investors
Farhan: “As an investor, I love to see when the finance team, it might be one individual, but he can show actually what platforms he's using for different functions at the early, pre-seed piece. And then as they're growing, you can see actually, 'Oh, wait, they've got people for certain functions and they've got products and services for other functions.'
What pieces are outsourced versus what pieces are productized? How a CFO thinks about that is really, really interesting and I think seeing how involved the CFO is in the fundraising process as well, is really interesting, especially in fintech.
You might have a debt provision company, and the CFO really has to think about the portfolio of debt or whatever else on that front.”
The changing landscape in startup fundraising
Lukas: “Historically as a business, ideally, you were profitable. You were self-funding. Then at some point in the second half of the last century, venture capital rolled around. That was really the only game in town for a while, because it was so risky, really a power law distribution of outcomes.
Now, that has changed a little bit. I think some of the new internet-enabled or tech-enabled business models have become so predictable in their performance. So for folks like our platform or even just classic bank lenders, it's much easier to evaluate whether a business is creditworthy and give it a credit rating or underwrite a different type of financial product. Which means that a founder or founding team now has many more choices than they did even 20 years ago.
20 years ago, APIs, and all of that good stuff didn't really exist, at least not at scale, so business models like Pipe, but also new age, e-com lenders just couldn't have existed. Now they can and now they do.”
The CFO’s role in the new fundraising
Lukas: “The old saying is the CEO's real role is: ‘Get the right people on the bus, make sure the bus is going in the right direction, and make sure the bus has enough fuel to actually get there.’ I think that's still true.
You do want your CEO to be your chief evangelist and play a key role in working with investors and obviously in hiring, but I do think it's gotten a lot more complex.
Now, it's getting so much more complex that for a non-finance person, it's quite unfair for them to be expected to understand the ins and outs and trade offs of all of these different products.
So I think now the CFO (or head of finance, VP of finance, depending on what stage you are in) should really be a thought partner with what's the perfect product to fund the business at the current moment in time.”
How modern financing platforms evaluate investment risk
Lukas: Pipe is a marketplace that transfers risk. We take recurring revenue businesses that are being paid on a monthly, quarterly cadence, and we plug into all of their core financial information systems. So their accounting systems like Xero, QuickBooks and their payments processor like Stripe, and their bank accounts.
We evaluate the financial health of the business and those revenue streams in an automated way. What it means is we're basically getting live data feeds and we're able to basically standardize and stack rank businesses in their vertical, in their business segment, in their size segment, and calculate what the probability is that this business will still continue to generate these revenue streams.
With that in mind, we've really allowed companies that have this predictability in their revenue to make smart financial decisions. We don't force capital upon anyone. Nobody has to trade in any given timeframe, but it's really as an operating partner to the businesses.
Why recurring revenue loans won’t make venture capital obsolete
Lukas: “CEOs put their blood, sweat and tears into it and they ended up owning 4% of the company at IPO. That's unfortunate. We don't think that that makes a ton of sense. Now, if you are an R&D-heavy business, you're biotech or something like that, where you need risk capital that needs asymmetric payoffs, that makes sense. Raise as much equity as you need to go get there.
But the moment you've gotten there, you have to rinse and repeat, go-to market motion. It does not make sense to go sell 20% of your baby to just go pour it into Facebook ads and Google search ads.
That's an inefficient way to think about capital. Especially once you’re at, ‘If I throw a dollar in here, I'm going to get over the next 24 months $3 back. If it's that predictable and you're at that stage, that's really the moment where I think with the introduction of Pipe and similar types of financial structures, we hopefully make those obsolete.
I think folks like [Farhan] and like Anthemis at large, I think, will always have a place because companies that don't have any revenue yet, they can't trade their revenue. They somehow need somebody that believes the vision and helps them build to this predictable revenue when we can come in. I think it's a perfect symbiosis. We're absolutely not an absolute alternative to venture capital.”
How to raise capital in the current market
Lukas: “I think that for different businesses, it's a different decision. For different risk tolerances, it's a different decision, but I think there's just no binary decision anymore where it's like, now it's equity, now it's this.
Because there's just so many different products out there and there's new ones popping up every month. I think it definitely helps to have a finance partner for any founder out there to really think through it.
[The current market] doesn't look too hot. I think obviously it's starting to spread into the private markets as well. We all know that.
I think what founders and CFOs or heads of finance really need to do is, take a long, hard look at their current capital stack and see, A) What is your true runway? Can you get to the next milestone where you would usually raise around?
But most likely assume that unless you are really in the top 10 to 20 percentile...Valuations are a bit lower than last year, but there is still enough venture capital out there to fund these types of players.
If you're not one of those companies, when you still have some runway is really the time to take a look at other financing options. If you're a recurring revenue company, that might be Pipe, if you are a real asset-heavy business, maybe go to your house bank or specialty lender and try to borrow against those assets.
Your financial situation is most likely not going to be better six months from now than it is right now. Now, the market might be better, but you are not going to be in a better shape unless you're a profitable business, in which case, you're probably good anyways. But really, that's what I always say to founders."
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