The pros & cons of working with professional investors
By: Odysseas Papadimitriou
The continuing maturation of start-ups founded during the Great Recession-era entrepreneurship boom has kept venture capitalists quite busy thus far in 2013. All together, 577 early-stage companies have received nearly $2 billion in first-time financing from venture capital firms through the first two quarters of the year, according to a joint study from PricewaterhouseCoopers and the National Venture Capital Association.
But despite this flurry of venture capital activity and the impressive amounts of money that entrepreneurs stand to glean from professional investors, one has to wonder if more advantageous funding sources are available. Professional investors aren’t philanthropists, after all. Major strings are attached to their open checkbooks, and doing the best thing for your business necessitates carefully evaluating the overall price tag in light of your company’s financial situation, industrial environment, and growth needs.
With that in mind, we’ll explore the pros and cons of working with professional investors below, leveraging insights from leading entrepreneurship experts in the process and ultimately providing a bottom-line recommendation for when it is and is not wise to swim with these sharks of the start-up world.
While venture capital is “closely tied to the mythos of the entrepreneur,” Douglas Clark, CEO of the project portfolio management company Métier, told CardHub in a recent interview, “statistically, from any one entrepreneur’s reality, VC has a negligible role.”
Why? Well, the vast majority of VC money and attention is focused on a very small number of companies that have ideas with truly significant profit potential. “Who is the most worthy to create the next Excalibur app for glory and a G4?” Clark asks. Even if your company is the answer, “The VC and the fund investors are the winners,” he says. “Every once in a while, they take Arthur with them, but they control the sword.”
This analogy cuts to the quick of the professional investor-entrepreneur dynamic. Professional investors throw money and ideas around, amassing investment stakes like lottery tickets, hoping to cash in on a big payday. However, accepting their money necessitates following their rules, and that can require big-time sacrifices in terms of control, focus, and ultimate profitability.
The biggest disadvantages of dealing with professional investors can therefore be boiled down to the following:
- Diminished Managerial Control: Not only can professional investors serve as an impediment to day-to-day efficiency, diverting your attention from company operations to investor management, but they’re also known to follow their own formulas for success, leverage their own industry contacts, and operate on their own timelines. Such factors can be beneficial in certain situations, but they’re also a recipe for disaster if you’re an independent-minded owner with a particular strategic vision. That’s one reason why “few founders survive at the top of VC-funded growth firms,” according to Dr. Todd Watkins, director of the Entrepreneurship and Microfinance programs at Lehigh University.
- Long-Term Cost: Venture capital is widely considered to be the most expensive type of funding available to entrepreneurs, and not just because it requires ceding managerial control. It also necessitates sacrificing a certain cut of all future profits, which can easily wind up dwarfing the funds reaped in the short-term if your company proves as successful as you and the professional investors in question believe it ultimately can be. The question you therefore have to ask yourself is whether venture capital is truly a prerequisite for success or a luxury that you needn’t attempt to afford.
“Unfortunately, I think too many founders raise too much money without realizing the implications it will have down the road,” says Hemang Gadhia, CEO of Condaptive, Inc. “The amount you raise can create unnecessary limitations on outcomes and I don’t think founders realize that. True story — my startup Condaptive turned down both seed and A rounds. We wound up selling the company for about $35MM. If we had taken money both of those rounds, we’d have to have sold for more than double that amount to put the same money in the founders’ pockets.”
Despite the clear downsides to accepting professional investments in your start-up, there is undoubtedly a reason why entrepreneurship and the world of venture capital are so closely linked. In short, venture capitalists can provide:
- The Money Needed to Compete: In certain industries, the monetary barriers to entry are extremely high, and without the necessary financial backing, even the most sophisticated companies are doomed from the start. In other cases, promising companies have stalled due to a lack of liquidity. The money that professional investors are able to provide can therefore serve as the oil needed for your company’s engine to operate smoothly.
“We ended up raising money because it is incredibly difficult to scale aggressively without the necessary resources,” says Eric Malawer, CEO of DeepMile Networks. “It also proves difficult to think long term/strategically about the business when you have short term financial pressures. We also saw competitors with clearly inferior products beating us because we just couldn’t match their speed to market and PR/marketing/sales efforts.”
- Valuable Connections & Experience: Networking is obviously essential to business success, particularly in the world of entrepreneurship where potential strategic partners and buyers are at a premium. Well, professional investors basically network for a living and can therefore help connect you with the personnel necessary to maximize your company’s profit potential and ensure that you are getting a piece of the biggest pie possible.
At the end of the day, the decision of whether or not to work with professional investors boils down to pure need. If you can’t succeed without the deep pockets of venture capitalists, then you have no choice but to sacrifice control as well as a portion of your ultimate payday. If you believe that it’s possible to grow your business without the help of professional investors, don’t climb into bed with them for publicity, status, or because you think the opportunity might not re-present itself in the future. The stakes and the overall price tag are just too high.
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.