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Whither The CFO
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
May 12th, 2000

By Brent Holliday

Whither The CFO

“He's a restless young romantic

Wants to run the big machine…

He's old enough to know what's right

But young enough not to choose it” – Rush, New World Man

We always talk about management being the key to any firm’s success.  In the technology world, the brain trust of a company in its early stages (after the angel or seed round of money) is made up of the CEO, the CTO and the CFO.  We all know what the CEO does.  We have a pretty good idea about what the CTO does.  But what does the CFO do? And why are they so important?

Let’s flip this around.  What does a technology company need to grow fast?  Really fast.  1) A unique idea for a product or service that has a real value proposition  2) The technical knowledge to build it fast and best 3) The marketing and business development savvy to rise above the noise and find the customer 4) An experienced board which adds powerful extensions to the company’s network of contacts 5)Money. Capital. Cash. Flagoon. Coin. Skinny Lizzy and the Dead Prime Ministers.

Unfortunately for the start-up, you can be almost there on any of the other criteria for growing fast, but you can’t fall short when it comes to money.  That’s the job of the CFO.  Find the money for growth.  Fuel the rocket.

Before we get into the job description of a CFO for a tech company, let’s talk fund raising for a minute.  Do you know what kinds of money there are available to you as a start-up?  Here’s a short list: equity, debt, grants, tax refunds and receipts.  Think about all of the ways that cash can come into your company.  You can sell shares (equity), get a loan (debt), write a compelling government application (there’s a great “how to” on the Cinar web site) (grants), get tax credits for research (tax refunds) or, hold onto your hats for this one, you can get money from a customer (receipts).

We all know by now that equity is the only meaningful source for rapidly growing early stage companies because banks don’t lend enough money, government grants and tax credits aren’t enough and you don’t have enough customers to support the big idea.  So what kinds of equity are there?  Well, here’s another short list: public, private and sweat.  Public equity is uniquely available in BC to start-ups through VCPs or mining companies.  Private equity comes from any source that is not public: limited partnerships, individuals, corporations, venture capitalists and others.  Sweat equity comes from shares for services provided.  Founders usually pour sweat equity into companies, but outside directors and, increasingly, service providers take equity in lieu of cash these days.  Bartering for sweat equity might help in the earliest stages, but soon it becomes too expensive to mess with.

With me so far?  Here’s where the eyes glaze over… and why you need a CFO.  Any idea on the possible permutations and combinations of equity instruments that might be used to finance your company?  Here’s a list: common shares, preferred shares, convertible preferred shares, participating preferred shares, warrants, subordinated debt, debentures and lots more.  Have you heard of registration rights, co-sale rights, drag along and tag along provisions, piggyback agreements, anti-dilution clauses or investor rights?

It’s not as easy as saying, “Hey, you give me $5 million and I’ll write you a share certificate for 30% of the company.”  There will be a book (s) of legal agreements for every round of getting money.  These books are roughly the size of the White Pages.  These books will have titles like Amended and Restated Shareholder’s Agreement, Subscription Agreement and Warrant Agreement.  This process will cost you an arm and two legs in legal fees.  It’s a cost of doing business and it’s why you need a CFO that knows there way around this stuff.  Bad stuff happens when the company does not know what its doing, or worse, their legal team has not done it before.  The CFO drives the entire process and manages the lawyers, while driving the best deal for the company and its shareholders.

What should the resume of a CFO candidate have on it?  There are divergent opinions about this. And the qualifications can vary depending on the type of technology company and the stage that it is at when the CFO joins. Some insist over everything else, that a CFO must be a Chartered Accountant (CA).  Well, maybe.  I think that the priority is experience in raising capital.  If the candidate is not a CA, but has raised many millions of dollars in VC then I would rank them higher in most cases.  A CA will be a whiz at financial statement preparation for what has already happened and what might happen (pro forma statements).  They will also talk the language of the auditors better.  And, frankly, they are better trained for fiscal management within the company’s operations.  But all of this means diddly if you can’t raise the money in the first place.

Every company needs a competent bean counter.  A green eye-shade wearing, money counting manager is essential to any size company’s business.  But this does not need to be, nor should it be, the CFO.  The term  “controller” is the more common job categorization for this barrel o’ laughs. 

The CFO must be a deal maker.  They need to know how to close a financial deal. That means that they know how to drive the process and herd the cats into the best possible deal for the company.  Too many companies that I have seen at the early stages and later have had deals go sideways because the management, without a CFO or with an inexperienced one, does not know how investors do deals.  They structure it wrong or they just don’t stay on top of the parties involved and push them to make a deal.

The experience of having bought or sold companies is invaluable.  Along the way to success, you may buy or merge with other companies or you may be eaten.  A CFO that has travelled those roads before will help extract the best deal for the company.  Even more, the CFO can be part of the strategic team that looks for proper prey as part of a “roll up” strategy.  This is an active role in the company’s future and not a behind-the-scenes type of role.  Any CFO worth their salt has great contacts in the legal, accounting and investment communities to help with any deal they are doing.

Finally, a CFO should have experience in public companies if at all possible.  Eventually, we all want to be public.  A CFO that knows how to handle investment banks and their analysts will help immensely.  The experience of going public on a big exchange is one that teaches a lot of stamina and perseverance.

There, that’s easy.  You just have to have tons of experience in all stages of financing and growing a technology company in bull markets as well as turbulent ones and have fantastic contacts throughout the investment industry.  And be a CA if you can.  Piece of cake.

You can see why it is so important to have a CFO almost from the beginning.  Some technology start-ups rent a CFO in the beginning or outsource the deal making to a third party.  I’m not a big fan of that although I know it works for some.  Can you imagine renting a CEO?  Or a CTO?  A CFO is just as important to a company’s growth.  I think that a seasoned CFO that has a huge stake in the company will always drive a better deal for the shareholders.

Unfortunately for all of us, there is a real shortage of CFOs right now.  Greenstone has four of our early stage companies currently searching for CFOs and three more that we are looking intently at that need CFOs.  Where are they?  They are hiding in Big 5 accounting firms or law firms that have done tons of corporate finance work for private and public companies.  They are in corporate finance departments of investment banks.  They are controllers of technology companies ready to take the step up.  All of these places have potential CFOs that have at least part of the experience that I identified as being necessary.  Some of the killer CFOs have moved on to bigger and better things.  Mossadiq Umedaly, former CFO of Ballard is now CEO of Xantrex, rolling up three companies already.  Greg Maffei, former CFO of Microsoft, is now the CEO of 360 Networks in Vancouver.  Some of the killer CFOs are still around and need to mentor a few up-an-comers.  John Sullivan at PMC-Sierra, Vince Mifsud at Pivotal, Tom Kordyback at Creo and other heavyweights are people locally to learn from.  Anyone out there in the media community want to try and profile these guys?  Raise their image a bit?  Maybe a CFO calendar for charity that could replace the fireman one that the women drool over?

Don’t take the CFO role lightly in your company.  It could cost you the capital that you need to succeed.

Random Thoughts –

-  Well, they did it.  Or at least, they announced it.  With great fanfare and way to much cheesiness, my favourite punching bag, Book4Golf.com launched their tee-time reservation site.  They had the Canadian Everest climber book some golf times in North America wirelessly from base camp in Nepal as their official launch.  I mean how dumb can they get.  No course in North America allows crampons.  Soft spikes only. Sheesh.  These guys never learn. {Thanks to David Ing for that note}

- Sierra Wireless withstood the storm and launched on the NASDAQ this week.  Congrats on getting off the farmer’s market (TSE) and into the big time.  Which allows me to segue into the NASDAQ North announcement.  Other than a political coup for the Parti Separatistois, I am still a little unclear on what this exchange will do, exactly.  Maybe my friend Mike Volker can shed some light next week in his column.

- I was at the Canadian IT forum in Toronto last week.  Thirty-nine companies from Canada took part in Mary McDonald and Peter Standeven’s well run event.  It is getting bigger and better every time out.  The quality of the presenting companies was much higher and the Vancouver companies presented well there.  Stratford Technologies, Altus Solutions, eMarq and Synchropoint Wireless carried the BC flag at the eastern dominated event.  I managed to get some ink in an Ottawa Citizen article describing the event (http://www.ottawacitizen.com/business/000508/4062520.html). We are still at the stage in Canada where appearing at one of these events is not a sign of weakness.  In the US, many of these investment events have lost their allure because VCs figure that only the companies that couldn’t raise money in a first go around will show up.  Kind of like an ugly contest instead of a beauty contest.  I don’t think that this will happen for a while here.  We are too geographically spread out to know what is going on in other centres.  The next one will be in the fall in Vancouver.  Make sure you are ready.

What Do You Think? Talk Back To Brent Holliday

Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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