What are the top considerations for companies seeking funding during a recession? Veteran finance professional Tony Tiscornia shares his perspective.
Tiscornia is CFO of San Mateo, California-based Coupa and one of the driving forces of Coupa Ventures, Coupa’s investment arm for early and growth stage companies. He spoke with StrategicCFO360 about his actionable advice for companies looking to raise capital during a market downturn, why sustained profitability didn’t used to matter—but does today—and how to find opportunity in challenging times.
How has the fundraising process changed over the past few years compared to the 2010s?
The days of bullish VCs investing in buzzy startups expecting a quick exit and easy profits are over. Harsh macroeconomic conditions, which we are experiencing today, have hammered public company valuations, resulting in a more cautious investment environment. Investors care about controls, and smart startups are taking advantage of this time to get their financial controls in order. This will help them prove revenue growth and profitability, which are the top KPIs investors care about today, much more than they did 10 years ago.
In a period of economic uncertainty, how can companies stay competitive and attractive to VCs?
The drivers of VC funding have fundamentally changed. Later-stage deals are few and far between and any company looking to raise will have its financial models critiqued with greater scrutiny. Investors have a higher level of focus on operations and business metrics, including profitability and payback period, than we’ve seen previously. A company’s ability to generate profit is incredibly important because the market is very punitive to companies that fail to show consistent profitability, whether in terms of their EBITDA or cash flow margins.
Showing profitability will also help prove how the product or service is poised to win against the competition in its total addressable market. Demonstrating profitability requires CFOs and finance teams get their company’s spending under control, to ensure every spend decision is as calculated and efficient as possible.
Startups also need to show they will use their cash wisely. We’ve seen too many high-growth companies put into the unfortunate position when they burned capital and grew too quickly, having to resort to layoffs because they’re strapped for cash.
How can startups emerge through a recession in a stronger position?
It’s easy for high-growth startups to automatically switch to cutting costs, and explore how they can do so. While this may provide short-term functional savings, it often comes at a long-term cost to the wider business. It’s not always about spending less, it’s often about spending smarter.
Startups need to focus on their core competencies and invest in those competencies, but with discipline. This means having a deep understanding of what those core competencies are and how economic uncertainty—whether recession or otherwise—impacts them specifically.
For example, understanding what the cost to serve is, associated revenue flows, and the impact to both short and long-term profitability. Then, they’ll be in the best position to uncover their business’ unique opportunity among the uncertainty. Target scenario planning and risk management will help teams understand, manage potential outcomes, and decide the best course of action their business is uniquely poised for.
As part of Coupa Ventures, what startup markets are you currently investing in? What market trends do you see that will continue to show potential and grow over the next 18 months?
As a pioneer of the business spend management software category, we see it as our responsibility to foster, grow and invest in companies that are paving the way for back-office digital transformation. This spans across supply chain, procurement, finance, IT and sustainability focus areas. Coupa was the first comprehensive BSM platform to come to market, and it’s been amazing to see new startups emerge that are just as committed to solving business spend challenges as we are.
Digital transformation is a trend that shows no signs of slowing and one the back-office is well poised to benefit from. The back-office is all too often plagued by legacy tech and manual processes that contribute to burnout, provide limited control and are unable to scale as companies grow. Despite today’s economic uncertainty, Gartner found that 78 percent of CFOs plan to increase digital transformation investments in 2023. Downturn or not, CFOs recognize the importance of digital investments to drive company growth. There’s almost always a smarter, better, faster way to run the back office and I look forward to seeing the space continue to evolve.