I have recently joined a team on a compliance consulting project for a growth-stage business, in process to expand internationally and also preparing a significant Series A funding. It was supposed to be a simple, straightforward small engagement, focused on the reviewing the database of 3rd party service providers and defining a due diligence approach, efficient in managing the risks and cost – effective. 3rd party risk in the client company has just been elevated to high priority level, as part of strengthening the core prior to the funding round scrutiny.
While discussing the approach, it came clear that the client was uninformed about the significance of the existing regulations and, by consequence, was rather unpleasantly surprised by the extent of work needed to perform the due diligence on all 3rd parties and by the associated accountability of the board.
As part of the business’ risk profile, reviewing the due diligence of 3rd party relationships would establish whether the business is assuming more risk than it can identify, monitor, manage and control. The board retains the accountability for the relationship with 3rd parties.
The due diligence on 3rd parties is common practice in global organizations where risk management is taken seriously, but since there is no minimum level of due diligence set by regulation, a fair share of companies take this work lightly, keeping the compliance at checklist level.
With the vast improvements in technology and communications, it is now possible for small to medium size businesses to operate beyond their geographical boundaries. From a business risk management, with international partners come a number of challenges.
For growth-stage businesses, the ‘know-your-customer’ intense process is one of many growing pains. These expanding operations are more vulnerable since they operate with less resources, less legal advice and have less power to impose rigorous due diligence on their new international partners . The growth-stage companies would not necessarily prioritize 3rd party vetting automation and audits. Often, the vetting would come after the fact, once the transaction took place and the risk control became ineffective.
Growing with 3rd parties is a two-edge sword. Employing agents and distributors reduces the initial investment needed to enter and test a new market. But relying on third parties also brings with it greater risks for bribery, money laundering and other improper conduct. The growth imperative often dominates in the strategy execution, and the 3rd party risks remain underestimated. So it happens that the due diligence processes are not put in until late, when external pressure intervenes, such as supply chain crisis, regulatory reviews or shareholders demands. At that stage, the efforts and cost implications are a very unpleasant surprise. Also, very likely that some risks cannot be mitigated anymore.
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Getting outside funding is a necessary step for many businesses, but lacks transparency and turns into a very frustrating process, especially for first time fundraisers. In the Investment Readiness coaching sessions, I hear often from founders `I should have known these before spending so much effort for no results’ , hence sharing here few of the most ignored advices, in my experience.
#1 Quality over quantity
In the previous post, I mentioned the basic starting point in the fundraising: the indirect research - understanding the preferences and the current portfolio of the investors targeted, learning from peer founders who got funded - . This comes up on my list as the #1 most ignored advice. It may be counter-intuitive, but more meetings does not equal more money. What is likely to bring more money is quality introductions to investors who are identified to be a fit. This comes from thorough investor research and segmentation and will lead to contact probably 20 investors, not 80. More effort in preparing and planning the fundraising approach will pay off in faster funding.
#2 Keep your pitch deck at max 10 slides
It is important to realize that investors reviewing pitch decks will have different expectations on how a deck should be presented. If you are in fundraisingmode, takea look at some of the top pitch decksthat have been successful in raising capital, in your industry.
One clear investor preference, is : Lead with the Investment thesis.
A most favoured sequence is: problem – solution – opportunity - competition - business model – team –financials. Deal terms disclosure in the deck is not a one-for-all approach. Instead, should be tailored to the investor requirements (circling back to the point #1 above).
A Docsend study indicates the Top 3 pages reviewed by investors are: Team, Financials, Competition. And yet, 1/3 of seed decks do not include competition information and only about ½ include financials.
#3 Articulate the opportunity and your competitive advantage
The same Docsend study states that ¼ of pitch decks are missing the opportunity sizing. Often, where the information is covered, we see tendencies to overblowing the target market size or just using generic numbers, not really focusing on the addressable market size.
Everyone has competition, the pitch deck needs to explain how is your business better. If partnerships and intellectual property are the arguments for competitive advantage, know that partnerships are relevant only if they actually impact directly your bottom line and that patent defensibility is very low, because it comes at very high cost, most likely unbearable for a start-up and unappealing to most investors. Defensibility is more in the market approach and not as much in the patent.
For my posts on how to navigate the funding maze, click here.
Lets connect and work together at The Social Partner and The Investment Clinic.
Few tips from our experience in working with entrepreneurs from around the world:
Learn from peers: look for founders and startups in your industry and geography who have got funded. Research or even better, ask them how they did it. Find out the investors names, their portfolio, their expectations. Ask the founders where they failed, learn from that.
Learn the terminology: Read a good number of how-to articles about getting funded, get comfortable with the investment process, the necessary hurdles, learn what is important for investors at different stages. Pinterest and youtube are also good sources for infographics, for a quick self-education.
Learn the standards: Browse through the different models and applications, get up to speed with the tools used in the investors selection process, search for pitch decks from companies close to your industry. Do not copy, just make sure you cover the necessary content and demonstrate you bring a solid market approach.
Learn to present your team and your story. Early stage funding is more about the team capability and passion than about the product. Show grit, vision for growth and track record.
Lets connect to work together @ The Social Partner or @ The Investment Clinic.
Do you want to cut down on time to get funding?
I would start by saying that this article will not say anything new. The quantity of articles and free templates available for entrepreneurs to get ‘investment ready’ is overwhelming. And yet, surprisingly and sadly, so is the number of businesses which need funding but are unprepared to face investors.
With every business that I coach, I experience a growing attachment as we go through the preparation together. I have a lot of admiration, respect and empathy for the hard work and dedication of the entrepreneurs, for the pain, the resilience they demonstrate to get where they are. And from this deep connection comes my message to entrepreneurs who are raising capital for the first time, want to cut down on time to get funded and speed up their growth: Invest to get Invested !
I break it down in four:
Realise that getting funded is a process not a one-off action
As a rule of thumb, it takes between 6-9 months to complete a funding campaign. It is a gradual evolution, from internal alignment to intensive public presence, requiring different types of resources – some could be in-house, but some are better found externally. Finding the right balance between internal capabilities and experts’ services is key to move forward in the funding process. This is not a plea for working with experts (I am biased here, of course), it is a plea to recognize the own team strengths and plan to fill the gaps, timely.
Take time to prepare before approaching investors
Most entrepreneurs can eloquently speak about their product or service, the technical features and quality. There is predominantly less eloquence about the market position, the market entry or the market protection, the differentiation vs. competitors, etc. There is less convincing talk when it comes to product development strategy on long term, intellectual property, etc. Way too many are not prepared to defend their valuation estimate with a solid, professional financial plan.
Accept there are costs associated with a good preparation
Preparing a business for scrutiny requires resources and time. Preparing the business for investor scrutiny is an intensive process and goes in parallel with the product and the commercial development. Obviously, the preparation puts a serious strain on the internal team. Adding external help is a must – rarely a team covers all competences required. Free external help is limited to superficial support, some marketing, maybe a little back office work. Good, efficient external help comes at a cost and failing to recognise this reality is a cost in itself: the funding process gets longer, and the cash burn is higher.
Recognize that approaching investors is more of an art than a science
There is no single proven way to secure funding from investors. The preselection made by investors is an imperfect process. In hindsight, many businesses turn out to be selected or deselected based on false positive or false negative screens. One investor’ reason to reject is another investor’ reason to fund a business. That’s to say that, in this imperfect process, where rules are sometimes unclear or unexplained, the entrepreneurs need to master the combination of the right introduction, smart supporting information, sharp insights in the investor preferences, sector and geography funding benchmarks, current information about the investors in funding mode, their past investments and track record … and more. A good strategy, serious research and segmentation work are required to define the optimal approach for, say, the top 5 target investors.
Invest to get invested! - simply a reminder for entrepreneurs to reflect on which help is best to engage to navigate the investor landscape, which is anything but transparent.
Lets connect to work here at The Social Partner or at The Investment Clinic.
Founders and hiring executives, do you know where your business stands in hiring efficiency? You probably sense the recruitment process is costly but do you actually know how much it costs? And, more importantly, do you know where you should focus to avoid even more cost caused by mis-hires?
Currently in a hiring project, my thoughts were prompted by a recent Credit Suisse study (*) estimating 50% of Swiss SMEs report recruitment difficulties, particularly in technical expertise, management and project management skills. The study says about 90,000 SMEs are acutely affected by the shortage of skilled labor while digitalization and aging megatrends will intensify the labor market constraints in the near future.
Zooming into my current project, in a small SME, under 10 employees, hiring a commercial executive required so far about 30 hours of 2 senior executives and about the same of an associate. That’s roughly more than one week away from customers, a distraction that we can hardly afford. And we are in the middle of the process – still interviewing. And, according to the study, the worse is yet to come.
The SME world is very much a DIY world, because the alternatives are perceived expensive. To validate the perception, I tried first to get a correct view of all costs and understand how others are doing.
A global benchmarking study (**) found out it takes more than 100 candidates in engineering, design and product management to make 1 hire. Filling the top of the recruitment funnel for this group is longer and more expensive – it takes more screens, more interviews – than for other roles. And this benchmark does not consider the ‘hidden’ part of the full recruitment cycle. Most of the companies do not track costs which occur before the job postings are published. A number of activities are fragmented among different people in the company and as such remain under the radar screen, although in aggregate they come to represent a significant proportion of the ‘disgraced’ overheads cost. I am thinking here at employer branding, cross-functional administrative hiring planning and approval process, writing the job description, deciding the sourcing strategy and process (partners, referrals, job boards posting, etc.). Once all these are done, begins the screening and tracking of applications, interviewing, reference checking and so on until an offer is made.
With this is mind, I am offering for comments a 3-by-3 hiring KPI dashboard that an SME can track to monitor the full recruitment cost. Knowing where it stands helps the management to make the right decision in timing, type of hiring and sourcing strategy.
1. Time ‘decision to posting’ and ‘decision to hire’
2. Number of job description reviews
3. Number of sourcing channels
1. Conversion rate ‘screens to interviews’
2. Number of interviewers/candidate
3. Number of candidates interviewed/offer
After recruitment: (3 - 6 months integration feedback)
1. New hire
2. Hiring manager & team
3. Job design impact
Would love to have your thoughts on building a simple, cost effective SME hiring model.
(*) Success Factors for Swiss SMEs 2017, Credit Suisse, August 2017
(**)Inside the Recruiting Funnel, Lever, 2017
ide the Recruiting Funnel:
Every organization needs to build financial sustainability - the ongoing ability to generate enough resources from a diverse income base, thoroughly efficient spend and adequate controls. Financial sustainability comes from the financial autonomy given by multiple and diverse sources of income, ‘no-strings attached’ funding supporting independent vision, values, strategy and decision-making.
In the nonprofit sector, the funding base diversification includes establishing business ventures, such as commercial activities and partnerships, licensing agreements. The income generated through business ventures is unrestricted revenue, the much needed type of income fueling the organizational sustainability dimensions (people and competences, infrastructure, processes).
Establishing a nonprofit business venture can benefit from adopting the Lean startup principles. In essence, the lean startup methodology helps maximize the value created and minimize waste at lowest possible cost. The concepts of minimize waste, fail fast and improve are common denominators for both startups and nonprofits. Both types of organizations suffer the scarcity of resources with passion for their mission, both focus on growth and impact, each can learn a thing or two from the other.
Having worked with both, some words of caution in lean startup adoption seem appropriate.
Perceptions of failure
Lean principles operate under different set of perceptions in the startups and nonprofit worlds.
In the startups world, the philosophy is high risk - high reward and “failing forward” or “fail and move-on” is merely a personal failure, positively recognized as promoting innovation and growth. Failure is a badge of honor.
In the nonprofit sector, failure is negatively perceived because it has high stakes: multiple stakeholders bear the consequences (beneficiaries, communities, donors, partners, sponsors). They see the failure through the lenses of unrealized social benefits.
Lean startup adoption requires good understanding and buy-in among stakeholders.
Nonprofits business ventures are ... businesses
Lean startup impacts all aspects of the business venture management and require:
Think culture before strategy
The “soft” stuff is the “hard” stuff… With all the financial reports and market positioning in place, the hard stuff remains the culture: leaders must foster the lean startup culture, explain the Build-Measure-Learn approach, grow competencies, processes and systems that leverage the value of this approach to work. Lean startup adoption means change and change happens when leaders are role modeling, where they explain well the direction and the approach, when the lean skills are developed and where the performance management is an active reinforcing mechanism.
Focus on building the culture must precede the investment in lean business venture.
Ultimately, the nonprofit business venture objective is to provide resources which lead to benefits sustainability, i.e. the benefits delivered by the nonprofit must continue to be received by communities and individuals, independent of the nonprofit programme continues. If done well, with strategic clarity, operational discipline, and open stakeholders engagement, the lean startup principles can deliver real value and ensure the scarce nonprofit resources are used effectively to deliver sustainable benefits.
Internal controls, policies and procedures should be periodically reviewed to ensure they are up to date and are functioning as intended. However there are few underlying conditions, which lead to some of the problems often found in non-profits such as excessive fundraising expenses, executive salaries, high overhead or downright fraud. Limited resources, tight operating budgets, disengaged boards, weak fiscal controls, high personnel turnover, loose roles and responsibilities and lack of timely information are creating financial and operational constraints that can be lingering for a long time until the problem is really identified.
The financial reports, even when regularly and comprehensively done, are not necessarily self-explanatory. Nonprofit accounting rules for restricted funds add significant complexity. Red flags such as absent segregation of duties, missing bank /cash reconciliation, single signatures over disbursements without oversight, lack of management control are not visible in the financial reports as such.
The financial integrity of the nonprofits Starts at mission, values and objectives, Needs the right tone at the top board policies reflecting appropriate duty of care and Works when the appropriate procedures and systems provide for clear roles and responsibilities, including adequate segregation of duties and compensation aligned to motivation.
Experienced finance professionals know that
Yellow flags are on the income statement, Red flags are on the balance sheet.
Every nonprofit board would benefit for maintaining and reviewing the flags checklist on a regular basis.