The Value of FP&A for Investor-Backed Companies

By: Jarred Liscio, Senior Associate

Our previous articles have explored the advantages of implementing the financial planning and analysis (FP&A) function in various business contexts, including family-owned businesses. Now, we’ll share the unique benefits that FP&A brings to investor-backed companies, a term we use here to refer to venture capital or private equity investments. 

While investor-backed is a somewhat broad term, we are referring to either venture capital or private equity investments in this context. Typically, either venture capital or private equity firms will look to invest in a significant share of a company’s equity with the hopes of selling their stake for a profit, usually five to ten years later. Venture capital firms typically invest in early-stage startup companies, whereas private equity firms often focus on more mature targets for their portfolio. 

There has been an increasing trend of investor-backed companies utilizing FP&A, as there are numerous benefits for investors and businesses in which they take a stake. Three specific examples are: 

• Effectively liaise between the investors and management
• Create meaningful and strategic budgets and targets  
• Maximize return on investment

While private equity or venture capital companies often own a significant or even majority stake in a company, they usually are relatively ‘hands-off’ when it comes to managing the day-to-day operations of their portfolio companies, especially since their portfolio can contain up to dozens of businesses. However, they still maintain a keen interest in the performance of their investments. This is where the collaborative nature of FP&A comes into play. A crucial skill for an FP&A team is financial storytelling, or the ability to take financial and operational data and present it in such a way as to highlight the key points that are most important for the audience. With a skilled FP&A team, management can work with them to ensure the right message is being communicated to their investors. This collaborative approach ensures that all stakeholders are involved and integral to the process, fostering a sense of shared responsibility and success. 

Secondly, preparing an annual budget or operating plan is a routine and strategic component of success. It allows management to set clear goals for the future so they can work towards achieving them. And within the context of investor-backed companies, this strategic importance is amplified. Most of the time, investors require their portfolio companies to submit an annual plan. Private equity/venture capital firms need to see growth throughout their investment, so having a yearly budget allows them to map out how they manage their portfolio. For startup companies, anticipating and managing their cash burn is a crucial metric to measure. There will often also be strategic initiatives such as capital investment, mergers & acquisitions (“M&A”), and additional rounds of funding as part of that roadmap, and a skilled team of financial professionals will be able to quantify these significant moves and convey them from management to the investors. This strategic planning process is an essential tool for success, emphasizing the urgency and importance of annual planning in investor-backed companies. 

Third, a skilled FP&A team is a crucial ingredient in having measures in place to help a business maximize profitability and, in the case of a venture capital or private equity company, maximize its ROI or return on investment. As previously mentioned, the investment horizon for these firms is usually between five and ten years. So, as a result, the margin for error is minimal, and often, they cannot afford to make a costly mistake. However, an FP&A team will provide management with a suite of data-driven insights that will allow them to make the most informed decisions, mitigate risk, and identify opportunities as much as possible. This robust approach to providing forward-looking insights is a key reason why, especially in the post-COVID world where many business factors have been fluctuating, there has been an increase in FP&A being utilized by investor-backed companies. 

The above lists and explains three key advantages of FP&A as it applies to investor-backed companies, but there are many more about which we could write. A skilled team of financial professionals will work to communicate effectively between management and investors as they work towards the same goal: ensuring optimal performance in all areas of the enterprise in both the short and long term.

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