The era of cheap money is over. Rising interest rates, the cost-of-living crisis, and the economic impact of the war in Ukraine mean raising equity is becoming more challenging.
High-growth loss-making companies need to change their fundraising strategies away from growth-at-all-costs approaches to building efficiencies directly within their finance workflows and processes.
CFOs applying this method will likely boost investors’ confidence and access future funding rounds at favorable valuations by cutting wastage spending and creating more sustainable business models.
The Era of Growth at All Costs Is Over
In February, Meta CEO Mark Zuckerberg announced we are in a “year of efficiency.” Meta, one of the world’s biggest companies, alongside other tech giants, including Alphabet and Amazon, recently announced mass layoffs.
This marks a significant turning point where large and high-growth businesses are introducing efficiencies in place of a pure focus on growth metrics such as recurring revenues and active customers.
A recent report from EY showed that US VC-backed companies raised $37 billion in Q3 2022, down 37% from Q2 2022. This suggests investors have less of an appetite for VC, potentially due to economic uncertainty and an alternative range of safer investment options due to rising interest rates.
In response, privately backed businesses should refocus and find a pathway to profitability.
How to Demonstrate Efficiency
Efficiency can be applied in several different ways. These include doing more with less, whether referring to headcount or general company resources, and stepping up productivity levels by increasing output and higher quality operations.
Investing in IT—specifically automation technology—has been shown to effectively reduce costs, streamline processes, and help create additional organizational efficiencies.
For example, implementing software tools designed to automate process-led accounting and finance workflows will exceed the human capabilities of individuals completing them manually. In 2023 it doesn’t make sense for finance team members to manually key in invoice data, which is expensive, slow, and inefficient.
Another benefit of using technology to complete rudimentary tasks is that staff members are now free to spend their time on more rewarding and higher-value tasks.
Access Close to Real-Time Data and Better Management Information
Another benefit of enhancing efficiencies via automated technology tools is access to close to real-time data.
This results in CFOs accessing timelier and higher-quality management information. The gold standard is implementing business dashboards with live data on KPIs, pulling in up-to-date and accurate information through a blended output of ERP and CRM tools.
KPIs should reflect the new economic reality and focus on measuring customer churn and lifetime value instead of growth-at-all-costs metrics like monthly recurring revenues.
These data points allow CFOs to finetune their businesses to improve performance. This is useful for future investors and provides a base for accurate forward-looking models for incorporating into pitch decks.
Cut Costs
Cutting costs to minimize losses or increase profits makes your company more efficient and more attractive to investors. Additionally, if you’ve invested in new automation-powered software tools, you may be able to cut your headcount across several functions throughout your organization.
Another area to cut is expensive marketing campaigns that don’t show a positive ROI. Whereas a growth-at-all-costs approach doesn’t need to justify a short payback period, you’ll likely need to reduce customer acquisition costs to bring numbers down.
It would help if you also tasked an individual to work with department heads to eyeball every line item in the P&L to look for immediate cost savings. An obvious category is SAAS subscription costs. On average, companies globally have over 100 subscriptions, and it’s possible that many aren’t being actively renewed but are still charged monthly.
Extend Your Runway
As the great VC Paul Graham once said, “If you can just avoid dying, you get rich.”
Running the finance function of a high-growth company is hard work, and you’ll likely have many other competitors snapping at your heels if you are in an attractive market. There are only ever a handful of winners in a crowded market, and while it may sound obvious, the best way to survive is to not run out of cash.
Until recently, the well-trodden path of privately backed businesses was to raise new equity finance every 12-18 months and to increase the valuation at each funding round. However, the unpredictable economic environment, coupled with the declining appetite of investors, means that a new approach is now needed.
Extending your runway to the next round (i.e., reducing your burn rate to ensure your business still exists for the next two to three years) will put you in a stronger negotiating position alongside the possibility of the markets changing again so that you access funding at a favorable valuation.
Take a More Strategic Approach
to Technology Adoption
