When Seeking Venture Capital, Information Is Money

The prevailing opinion is that now is not an opportune time to solicit venture capital funds or private equity investment. The fundamental objective of a venture capital fund is to make quality investments that will yield a good return.

The accurate and clear presentation of financial information is a vital part of that process. Also extremely helpful is for business-owners and their CPA or other advisors to put themselves in the place of the prospective investor. Wherever information is not direct and forthcoming, it strains credibility and quickly diminishes the presentation’s value.

There are several ways venture capital investors can be convinced and even impressed by a presentation and its presenter. First, the presenter must demonstrate complete familiarity with the business and be able to answer any and all questions about the scope of the operation. Venture capitalists recognize that a business owner’s CPA or other financial advisor may understand the finances of the business better than the owner does.

Red flags include proper data on the quality and verification of receivables. The presenter should demonstrate disclosure by setting aside proper reserves up front, and drop any receivables that are probably uncollectible despite the possibly disadvantageous appearance of such information. Although most small business owners use cash-basis accounting, most investors want to see accrual-based financial statements that demonstrate the integrity of the inventory and receivables.

While the presentation does not need to include audited financial statements, proof of regular, consistent reviews can instill confidence. In addition, tax returns for at least the most recent several years should be readily provided.

Often a conflict unfolds at this stage as a business owner meddles with the process and does not leave it to the CPA or other advisor to present the best possible picture of the enterprise. The business owner may be too eager or ambitious about making certain value judgments that are subjective and subject to distortion; the CPA or other advisor may feel pressure about following the client’s directions. In the long run, it is better for the accountant to be proactive in managing the client’s expectations about the presentation format, including the prospects for obtaining investment funding.

For example, in some areas a company can look like a large diamond with a flaw. After the business plan has been submitted and made the “first cut,” the CPA should be prepared to offer the aforementioned comprehensive definition of the inventory and its quality. Failing to have this data could keep the proposal from proceeding to the next level.

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