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5 tips for finding financing with the right investors

Companies are under the microscope from the moment they attract a key investor. “Potential investors are making assessments and determinations throughout the whole process—not just right at the start,” RoseRyan director Stephen Ambler warned during a recent webinar. “You’re under the spotlight for quite a period of time,” he added.

For private companies on the funding hunt, their quest is especially tough during the early stages of searching for investors and the process for connecting with them and winning them over. It’s an infrequent occurrence for the team involved, who has to pull their attention from their day-to-day work. And it’s a process that’s rife for possible setbacks as a mismatch could add to the time the company has to wait for much-needed funding.

Here are just a few of the tips Stephen offered in his webinar:

1. Start early.

A last-minute, desperate search is more likely to lead to a bad deal—or no deal at all. Securing financing can take a long time, between three and six months. Build in time to both prepare your company to find the right investor (or a few—as a deal may fall apart), and undergo detailed scrutiny when you do.

2. Get your house and business plan in order, and be prepared for an open conversation.

You should have both up-to-date documentation and your business plan for the next two to three years in place. Not only do you want to show you have good records, but you want to show potential investors a plan, with support, that is attractive, realistic and achievable. They won’t invest unless they see that.

You also need to lay out any dirt you have for possible inspection. No one expects a perfect world, so be open and honest. Investors will not be pleased to find out about a lawsuit after they’ve agreed to work with you. Potential investors want to know where the possible holes are in your business, and they want to be fully aware of any reputational risks they’re taking on once they sign the dotted line. “No investor wants their name in lights,” Stephen said.

3. Seek out the perfect match.

Many investors will only go with companies that fit within the boundaries they have set up for themselves. They might consider only late-stage companies, for instance, or companies that are in a particular industry or already have a rigid exit plan.

Fortunately, many investors explain their parameters right on their website. You can also ask around, to your current investors, board members and trusted advisors, for recommendations. A warm introduction is ideal—cold calling around for your next investor will be time consuming and is less likely to be effective.

4. Make a good first impression.

Professionalism goes a long way with investors who want assurance that your company is on the up-and-up. That first meetup is where the first impression truly counts. A company once called Stephen for help in frustration that they couldn’t get financing. Part of the problem: They had a habit of dulling investors with over two hours of slides. Nearly 60 pages, in fact!

“Your key facts should not read like War and Peace,” Stephen said. “No one wants to see that—it sends a bad signal.”

In just 15 professionally designed slides, you can fit in essential details while showing off the passion the team has for the company, its mission and prospects.

5. Be ready for an onslaught of scrutiny.

If investors are interested, that’s when the real questions will begin as they conduct their due diligence. This is where any prep work you did ahead of time can help tremendously.

Investors want to see key metrics to fully understand how the business is managed and whether they can stand behind it. In addition, you will need basic information that’s up to date and at the ready to keep the potential deal on track—including management accounts, revenue by product, receivables and payables.

Talk about a huge undertaking! Finding and securing investors consumes more time than many executives new to the process realize. They can save some valuable time and increase their chances of making a promising investor match by checking in with trusted advisors who have helped with similar deals and are on top of the trends in the investment community.

The right investor could be just around the corner—you just need to know how to find and keep their interest.

What happens after you find the right investor? Listen to the online webinar “Attracting Funding: What Does an Investor Look For?” at your convenience to hear Stephen’s advice before signing the term sheet and learn important tips about what investors look for as they scrutinize potential investments. This event was originally broadcast on December 15, 2016 and was hosted by Breakaway Funding.

Stephen Ambler is a director at RoseRyan, where he oversees the CFO practice area and handles client CFO requests. He has over 30 years of experience helping a wide range of companies with their financing needs. His interim CFO stints at RoseRyan have included a social media company and the management of the financial integration process at a company acquired by Oracle. He previously held the CFO position for 13 years at NASDAQ-listed companies.

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Round of applause for Salena Oppus, winner of RoseRyan’s TrEAT Award

Efficient, reliable, respectful and inspiring—those are a few of the words that immediately spring to mind when describing senior consultant Salena Oppus, the recipient of this year’s RoseRyan TrEAT Award, which honors the guru on our dream team who best exemplifies our values (Trustworthy, Excel, Advocate and Team).

The TrEAT Award is a coveted honor within our firm. Our four values are part of our overall culture’s foundation and guide RoseRyan’s gurus as they work together, help clients and contribute to our firm’s overall success.

They’ve helped us form a supportive culture made up of people who consistently go above and beyond in helping clients, collaborate with one another, and are team players in every scenario. The evolution of our cultural journey has enabled us to launch consultant-led initiatives, to have more innovation and risk-taking, to be more open in our communication and to build a stronger community. We have been named a Bay Area Top 100 Workplace for the past two years, and on a national level, we were named a Great Place to Work. These awards are based on employee input and largely reflect our culture and how our employees feel about it.

The large number of nominations over the past year spoke to the common thread that our culture encourages. Each one gave a reason why a consultant should be considered for the award.

“They all described ways that we each live our values each day—how we support each other, support our clients, enhance our reputation in the market and contribute to the growth of the organization,” said RoseRyan VP Pat Voll during a company meeting when Salena was announced as the TrEAT winner by RoseRyan CEO Kathy Ryan.

Salena’s TrEAT prize is a gorgeous hand-blown glass bowl in the shape of an open shell that can be admired as itself or stuffed with special treats.

Congrats to Salena Oppus!

As the ultimate team player in our office and within her clients’ finance organizations, Salena was noted by her peers for being quick to volunteer for projects, expressing her opinions in an honest, straight-forward and respectful manner, and being a creative thinker.

Feedback from our clients demonstrates Salena’s talents in being able to “hit the ground running,” thoughtfully observing client workflows and offering insightful recommendations for streamlining and efficiency moves that the client hadn’t considered. These are qualities we look for in all our consultants, who have the can-do attitude, nimbleness and deep set of finance skills to seamlessly fit in with technology and life sciences companies around the San Francisco Bay Area. Salena becomes an integral part of her clients’ finance teams to solve problems and get the work done.

A well-deserved honor

Salena thrives when helping clients (which have included Nvidia, Onmeon, Netflix and Quantum) reach their goals, and in turn her clients benefit from her enthusiasm, out-of-the-box ideas and problem-solving skills. She can dig into the details and then pull back and assess improvements a company needs to make, such as ways it can make the most of its resources and time.

“She lives the values of honest communication, being reliable, having the courage to say the things that might not be well received, doing what’s right for our clients and, above all, being a good friend,” a coworker wrote when nominating Salena for the TrEAT Award.

The inclination to bring the best ideas forward and be helpful in every situation fits right into our collaborative and supportive culture. “I was so excited when I heard I won the TrEAT Award,” says Salena. “I am gratified that my colleagues took the time to nominate me, as I truly admire and am inspired by their expertise and talents every day.”

As one of those colleagues said, Salena is an “amazing teammate.” Thanks for being a part of our team, Salena!

Like what you see here? If you think you’d fit right in with the RoseRyan culture and you have the right stuff, we’d love to hear from you. We’re always on the lookout for top talent—full-time and part-time. Contact Michelle Hickam at [email protected].

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How to amp up your year-end disclosures for the revenue accounting changes ahead

It’s always healthy to take a fresh look at your disclosures and discussions in your annual reports. Situations change, boilerplate language doesn’t always cut it, and changes in accounting policies make it a necessity. This year, more than ever, several drivers make such a review a can’t-miss effort.

A number of new accounting standards are coming down the pike that will significantly change the information you provide. And investors and analysts want to understand now how these accounting changes will impact your financial statements and how you’ll report what is happening in your business.

So, we’re highlighting a few areas to focus on this reporting season, and we’re giving you a head-start on what you may want your related disclosures to say.

The new revenue standard

Arguably, this is the biggest change in accounting we will see in our lifetime—a generational change. Anticipating the shifts companies will be making in how they recognize revenue in the years ahead, the Securities and Exchange Commission has high expectations for your next round of disclosures. They’ll be looking out for the effects the new standard will have on your accounting through what’s commonly known as SAB 74 disclosures.

The SEC said from the start that they expect these disclosures to evolve as implementations progress. The SEC Corp Fin staff is now saying that they are done waiting, and it is no longer acceptable to limit your disclosures to boilerplate “we are still evaluating” language in your calendar Q1 2017 filings (10-Ks, 10-Qs). They upped their scrutiny in this area with Q3 filings and expect to see more robust disclosures for year-end.

Companies that don’t meet these expectations will likely receive a comment letter asking for more information. The SEC enforcement staff has even gone so far to say that they will pursue enforcement actions if SAB 74 disclosures are not robust enough.

So, what should you be saying?

In your footnote disclosures, you should assess the expected impact of the new revenue standard or, at a minimum, provide directional guidance in the areas that are relevant to your business. See below for some examples:

  • The timing of revenue recognition.“The Company expects revenue recognized on a cash basis today to be recognized earlier under the new standard.”
  • How revenue allocations among multiple deliverables will change.“The Company expects the revenue allocation between software licenses, maintenance, and other services to change, since the estimated consideration will be allocated between each performance obligation based on relative selling prices rather than using a residual method for software licenses under the current guidance.”
  • The impact of variable consideration estimates, such as contingent payments, customer discounts, and price protection rebates.“The Company expects to include sales-based milestone payments that are probable of payment in our estimates of variable consideration, resulting in more revenue recognized as associated performance obligations are delivered rather than waiting for the milestone payment to be paid.”
  • The impact of shifting from a sell-through to sell-in revenue recognition model when estimating returns.
  • Changes in the timing of revenue recognition from separating financing components from contract consideration.“The Company expects contracts with extended payment terms to be recognized earlier after separating a financing component from the consideration.”
  • The capitalization of costs that are incremental to each contract and recognition concurrent with the associated revenue.
  • Quantification of the overall impact of the standard.

Have you done your diligence with the new standard and believe it won’t make much of a difference? If you expect the impact of adoption to be immaterial to your financial statements, you still need to address it and explain your reasoning. Here’s an example of language you could use:

  • “The Company expects the impact of adoption to be insignificant to its financial statements, since its contracts are simple with only one performance obligation delivered at a point in time for a fixed price. The only new accounting element will be the capitalization of costs incremental to each contract and recognition concurrent with revenue, which is accrued when the order is placed and recognized when the goods are delivered.”

You should also include facts about your implementation of the new standard:

  • When you expect to adopt and your planned transition method.“The Company intends to adopt the new revenue standard as of January 1, 2018, with a modified retrospective transition approach.”
  • The status of your implementation.“The Company has completed our evaluation of the changes in accounting for representative transactions under the new guidance.”
  • Significant areas you still need to address and when you expect to address them. “The next areas to address in the implementation are: (i) establishing relative selling prices for each performance obligation, (ii) assessing the accounting impact to the financial statements, (iii) developing tools to monitor the additional information needed, (iv) preparing the accounting entries for adoption, and (v) writing supplemental footnote disclosures. The Company expects to complete these efforts by the fourth quarter of 2017.”

In your MD&A discussions about the new revenue standard, you should emphasize the future impact of the new accounting treatment:

  • Material changes and trends: Under the new standard, for instance, do you expect more variability because revenue will be recognized earlier, or will you have to make significant estimates?
  • Financial and non-financial impacts: For example, changes in the balance sheet for contract assets and liabilities may affect key financial ratios that are embedded in debt covenant requirements.
  • Significant estimates and judgments: Consider estimates related to variable consideration and the constraint on variable consideration, including returns, price protection rebates, and cash discounts or the probability of milestone payments. Another example is the estimation of standalone selling prices and the allocation of discounts and variable consideration in allocating the transaction price.

Other areas to refresh

While the new revenue standard may be the most significant change that you need to address in your financials this year, a few other areas also warrant your attention.

Management’s assessment of going concern

You are now required to perform your own assessment as to whether there is substantial doubt about your company’s ability to continue as a going concern within one year after the date you’ll be issuing your financial statements (so if you file your 10-K in March 2017, you would need to assess your ability to continue as a going concern through March 2018).

If conditions or events raise substantial doubt about your ability to meet your obligations, you need to consider management’s plans to mitigate those doubts if (1) it is probable you can implement those plans and (2) those plans will mitigate the doubt.

Substantial doubt about the company’s ability to continue as a going concern will require expanded footnote disclosures that cover the period through 12 months from the date of financial statement issuance (instead of prior disclosures that focused on 12 months from the balance sheet date).

SAB 74 disclosures for other new standards

Don’t forget, you also have SAB 74 disclosure requirements for other new accounting standards, including:

  • Leases, which is scheduled for adoption in 2019 for public companies and 2020 for private companies. Example language beyond standard boilerplate might include:“The Company’s leases are limited to operating leases for the Company’s corporate headquarters and regional sales offices. Management is currently evaluating the impact of adoption. While management cannot yet estimate the amounts by which its financial statements will be affected, the Company has identified the following changes. The Company expects the recognition of expense to be similar to current guidance under the new standard. And there will be a significant change in the balance sheet due to the recognition of Right of Use Assets and corresponding Lease Liability. The Company plans to adopt the new Leases standard effective January 1, 2019, following a modified retrospective transition method.”An item to consider highlighting in your MD&A discussions would be any expected impact on debt covenant financial ratios caused by leases coming onto the balance sheet.

During this refresh process, keep at the top of your mind the changes that have caught your attention or caused you concern. Provide enough information to investors and analysts to help them understand the significant impacts of new standards on your business.

No one likes to be at the bleeding edge by expanding disclosures before they have to, but don’t be left behind. Expect that across the board, companies will be sharing expanded disclosures about new accounting standards this 10-K filing season—particularly related to the new revenue standard.

You will be the odd man out if you don’t make your own disclosures more robust.

The exact language you use for your disclosures depends on your facts and circumstances, of course. Feel free to contact us if you have any questions about the accounting changes ahead and how to deal with them.

Diana Gilbert, who heads our Technical Accounting Group, has been a member of the RoseRyan dream team since 2008 and has 30 years of professional experience. Frequently tapped for her insights by Compliance Week, Diana excels at technical accounting, revenue recognition, SOX/internal controls, business systems and process improvements.

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Top 5 financial mistakes that startups make—and how to avoid them

The odds are tough for any startup. The business model is unproven, and the shift from prototype to product can take awhile. It’s all-hands-on-deck, which can be rough going when the team is so small. On top of that, everyone’s getting used to working together, and no one person is an expert in every aspect of running a business.

The good news: Even the smallest, youngest companies can better their odds when they recognize their skills gaps and seek out ways they can build a strong foundation for the future—yes, even as they struggle with the here and now.

We’ve worked with hundreds of tech and life sciences startups in the San Francisco Bay Area since 1993, and they usually have this burning question: How can we avoid the typical mistakes that startups make in finance?

This is where experience comes in handy. Learning from past mistakes and those of others is a huge advantage. We’re going to let you in on the common financial mistakes we see companies about to make when they’re starting out.

1. Forgetting about finance

Understandably in any startup, getting the finances is in order is not the number-one priority—it’s usually about getting a great product out the door. The finance function often doesn’t get as much love as it deserves in any startup, as the company tries to stay afloat while attracting new customers and investors. This can be a major mistake.

Paying the bills on time and employing one office manager who handles basic bookkeeping is necessary—but not enough. Startups still need savvy CFO skills, even if that’s on a very part-time basis at first, to think through a smart strategic plan, go after sound funding and plot milestones to get to the desired exit. These are strategic decisions, not bookkeeping basics. A company with just a bookkeeper is way behind and moving down a slippery slope.

CFOs and finance leaders model the burn rate and breakeven point, and they bless the sales forecast. Startups need someone who can go beyond the basic transactions and recordkeeping to actually design the financial strategy. Is it time to pivot? It’s better to have a well-formed plan than some reactive disappointments.

2. Overlooking the mantra that “cash is king”

Great cash management is critical in any startup. Everyone has heard this but not everyone quite believes it until they see firsthand what happens when more money is going out than coming in. Startups need to forecast all cash in and out, and manage spikes and dips. That information can change how your company manages business activity. And it means working with the person handling receivables so that collections don’t get out of control. Also make account reconciliations a regular part of doing business—especially bank recons—so you know how much cash you really have.

So we have another mantra worth memorizing: don’t think that P&L equals cash flow. No, no, no. Yes, you need to know your earnings and you need to know what you’re spending, but that’s only part of the story of how your business is doing. You need to track closely what’s going on with your cash balance and what’s moving it up or down.

3. Ignoring compliance

Ignorance is not an excuse that regulators will swallow. The risks are too high to be in denial. You need to get it done. Government intervention and auditor interference can make life downright unbearable if you don’t. And growth could stall as senior leaders get pulled off their day-to-day work to deal with pressing inquiries. In addition to the high stress involved, audits are disruptive to the business, and troublesome findings can result in penalties and interest charges. And there’s also the possibility of losing the ability to conduct business.

Private companies have a less weighty compliance load than public companies, but the list is still mighty long, between tax returns, labor laws, federal and state regulations, secretary of state filings, and so on. Lean on compliance experts who can help the company stay up-to-date so you can focus on your core job—growing the business.

4. Not planning for the future

It’s important to have a solid business plan. Projections are based on real, solid assumptions, not a finger in the wind. They will guide the company going forward while also ensuring that smart practices become a part of doing business. Smart moves include forming some good habits from day one. After all, make a mess in the early days and you’ll be mopping it up for years to come.

Do it right while you can—keep the books clean from the start, and you’ll see the benefits over time (lenders, for one, need to make sense of your finances or they’ll move on to the next business). Being GAAP compliant as much as possible will similarly help you in the long run. The same goes for compensation decisions you make today—If you’re doling out stock or options, invest in a 409A valuation once a year and anytime a major event occurs (such as a significant financing deal). This will help you stay out of trouble with the IRS and ensure that you properly account for stock comp.

The point here is to think about long-term efficiencies rather than just focusing on the short term. An exit strategy might sound like some far-off dream, but it should always be present when decisions get made. When the time comes to go IPO or to make the company look attractive for an acquirer, the work involved is huge—it can be even more enormous and make any deal shaky if lots of mistakes were made along the way. Set your financial processes in place to scale. Think of the long term.

5. Pretending but not really carrying out policies and procedures

Sometimes startups get sloppy about this. Accountants by nature, we’re sticklers for processes and procedures, but we also know these don’t come naturally to everyone. When your business is streamlined and humming along, extra work can be avoided and expenses kept in check. This happens when people know what is expected of them (policies, please!), the company keeps good records as a matter of course, and everyone knows that certain behaviors will not be tolerated.

Policies and procedures do not slow a business down—they actually keep it moving. Keep strong records now—make it a habit—and you’re setting up the company for efficiency.

Companies tend to be fairly simple at the start stage. As the complexities grow, the mistakes that are made in the early days will start to appear. The cracks can soon be crevasses. Trusted advisors who have the financial wisdom and high-level perspective can steer the ship well and head off mistakes before they happen.

RoseRyan guru Michelle Hall loves to help startups with getting their finances in order, meeting their compliance requirements, budgeting and forecasting, and more. Earlier in her career, she held roles at Netflix, Mercury Interactive, American Express and other firms.

Tracey Hashiguchi heads up RoseRyan’s small business team, a dedicated group of consultants helping companies launch and grow. She develops RoseRyan’s strategy, programs and consulting team for helping startups get to the next level. Before joining RoseRyan, Tracey worked at Deloitte.

Chris Kondo is a small business consultant helping companies make strategic decisions to manage their growth and run their accounting and finance functions. His consulting work at RoseRyan has put him in the finance teams at Roku, GenturaDx, Versatis and Lytro. He previously was vice president of finance at Azanda Networks, corporate controller at Chips & Technologies and director of business development at Intel.

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