Is the CFO a venture strategist?
With venture capital becoming the new norm, it is imperative for the CFO to ensure that the venture capital needs of the organization are met. We are new to the concept of venture capital and it perplexes us with regards to terms like post-money valuation and pre-money valuation and it may have a single most important function in the overall valuation and the strategic outlook of the company.
The context of this paper is set in very turbulent times and we have witnessed the boom in the venture capital market in the last 2008 after the financial crisis. The rise of the e-commerce player flipchart has been attributed to the boom that India saw post the financial crisis (First post, November 30, 2014) in which it categorically stated the need for the emergence of startups that are venture-funded to bolster the development of a developing economy like India. It was a win situation in India as the jobs were created and this, in turn, resulted in the overall effect on the gross domestic profit of the country. The side effect of such an economic boom was the increase in jobs and the increase in jobs that would require semi-skilled labor including the delivery executives and the migrant laborers who were allured by the high-paying environment that the venture capital-funded startups offered. This was an offer that anyone could not refuse. The government introduced the DPITT norms published in 2014 which allowed the players to secure the products from anywhere in the world and thus this resulted in the CEO reporting to the CFO to ensure that every unit that ships out of the warehouse or the aggregator resulted in a deeply discounted price. The onus lies on the CFO to ensure that every product that was listed in the websites was diligently managed and to alter the prices during lean times and to increase the prices during the period of high demand. To be able to do this it is very important for the CFO to understand the unit economics of every product that is being sent out and this was the primary driving force for the CFOs to have conversations with potential investors who were pouring millions of dollars to meet the customer demands. The line was very clear, the Indian customer purely relied on discounts and if the discount strategy had to be played it was important to have a large war chest to fund the discounts. It is a different story that the discounts may not last forever but the discount strategy had to be in place to attract customers. It is also to be noted that the customers in India were used to buying from the local shop where the touch and feel was an important factor in deciding the particular purchase. Now the companies were placing on the customer the factor that they need not touch and feel the product and the commerce companies will do the rest for you. This included significant investment in the customer experience and hence the development of an application that will cater to the customer needs and a ‘try it on’ mechanism which is the closest the online portals could afford to give the customer experience. But all this was not enough. According to the statistics published by Coral Ouellette on January 3, 2020
This poses a new problem to the CFO as the CFO has to not only manage the customer psychology but also devise ways to retain the customer. There are many ways that this could be achieved. While the primary penetration point may be the discounting strategy, it is important to engage with the customer to understand what the customer wants and to tailor the products and services around the customer. This poses a very unique challenge as the CFO has to resort to big data to predict the normal course of actions that may be expected in a large group of the customer and to make the products and services being made online or at the doorstep according to their needs. All of these activities only add to the overall cost of servicing the customer and hence the customer acquisition cost and the customer maintenance cost also remain higher
One of the means to mitigate this is to make a predictive analysis of what the customer demand can be and how the company’s inventory can service the need in an effective manner. The classic example of this situation is the forex dealer who is a CFO who might be managing large amounts of foreign inflow. While the rates that would have been locked by the dealer may have been at lower rates but the rates at which the dealer is making the sale are at a higher rate. This is purely by anticipating the demand and ensuring the supply is available to meet the demand. In the venture capital world, we hear of a particular terminology called the cash days. Cash days are noting but the extent to which the business can survive without an additional infusion of cash with its current cash reserves and the current sales that it had recorded. The cash days is a very important metric as it very simply and in very unequivocal terms breaks down the extent to which the business can survive. In these situations like these that the CFO should have a solid blueprint with regard to the financial outlook o the company and estimate what are the total days that the company can survive the onslaught of any crisis the crisis need not be the COVID-19 disastrous crisis and it could be as simple as stagnation of order and the company heavily discounting the products in order to get the market economics right. In the pursuit of the market share the company loses focus on unit economics and hence this paper is proposed that the finances of the company including the building, the financial models, and presentation to the prospective shareholders should be the forte of the CFO. It Is very important to empower the CFO to make the strategic calls that may be necessary to make the company afloat and to ensure the continuity of the business. With the increased allocation of work to the CFO who is the master in investor relations, it can be clearly exhibited that the company can tide over the current crisis and the more empowerment the more the company can reap the benefits of not managing the right shareholders but also on-boarding he right set of shareholders.
Author: Srikant Parthasarathy, Student of LIGS University, under doctoral supervision of Dr. Minh Nguyen.