In the weeks leading up to the current funding winter, the startup ecosystem was troubled by many issues, such as layoffs, lengthier funding rounds and risk aversion among investors.

Thus far, criticism has largely focussed on startup founders and their unsustainable business models, prioritising rapid growth over profitability, and incurring high cash burn.

While there is merit in that argument, we all agree that the current climate for venture-backed fundraising seems muted. Many VC firms around the region are adopting a wait-and-see mentality as exit via the public markets becomes less viable.

The result? Startups are facing challenges in getting fresh funding; many are close to the end of the runway. This means that we can expect a pick up of mergers and acquisitions (M&A) activities as startup founders will look to exit when there is a lack of cash flow.

Who do you go to in such a scenario?

Usually, people will opt for investment banks, but have you ever wondered why? These organisations are usually hired as financial advisors to large corporates or institutions to execute M&A.

After all, they bring a set of highly specialised skill sets ranging from deal negotiation to investor relations to corporate finance expertise to get the deal done. Therefore, they are valuable advisors as M&A transactions are major events in any corporation and issues close to the startup founder’s mind.

On the other hand, we recommend CFO consultants as they position themselves as in-house corporate development functions within an organisation. These consultants either provide functional support to the CFO or act as the interim CFO to the organisation if there is a lack of one. In the context of an M&A transaction, they share the same objective, have similar expertise, and are equally vested in the firm’s success.

Also Read: The secret sauce of de-risking early-stage venture capital

With similar profiles, the next question would be: what should a CEO think about before engaging with these advisors?

Fee structure incentives

First, a CEO must understand that a large portion of an investment bank’s fee structure is contingent-based. This means that these fees are only earned upon successful deal completion.

As a result, an investment bank is motivated to do all it can to close the transaction. This structure tends to encourage the investment bank’s full commitment to seal the deal.

However, on the downside, an investment bank might be biased toward providing advice leading to deal closure and hesitate to call out points that would stall the deal. This translates to the relationship tending to be transactional, as they will immediately move from one deal to the next.

Conversely, a CFO consultant is compensated on a retainer basis. This could be a fixed fee that is decided upfront or based on the amount of time spent on the project. Without the need for the deal to be completed, a CFO consultant can provide a more objective view of things and is unafraid of pulling the brakes on a potentially sour transaction.

Furthermore, this allows the CFO consultant to be brought in at a much earlier stage of the process (i.e. two-three years prior) to properly plan for the exit ahead.

Depth of relationship with the client

To a large degree, an investment bank is akin to a special forces team. Whenever an emergency happens, they are called upon to solve the problem before moving on to the next one. Thus, the investment bank only appears whenever a major corporate event happens and leaves once the deal is done.

On the other hand, a CFO consultant partners with the client along the journey. They are constantly in contact with the client, whether in the midst of a crisis or on a day-to-day basis, providing advice along the way. This allows the CFO consultant to build an appreciation of the business and a deeper relationship with the key stakeholders in the organisation.

Level of understanding of the business

The strength of an investment bank lies in its expertise in running the M&A transaction process. Oftentimes, they require a high-level, strategic understanding of the business and financials before executing the deal. Therefore, they might not fully appreciate the business and only prioritise the items that directly lead to deal completion.

Also Read: Why venture capital is going big with cloud mining

For CFO consultants working with the client in the long haul, they have a complete context of the development of the business over time and have closer contact with the staff on the ground. This translates to a more comprehensive view of the business and the intricacies underlying them.

A suite of services

The range of services an investment bank provides will depend on the size of the firm. A full-suite bank can provide a wider range of services, such as corporate banking, treasury, or structured finance services. A boutique investment bank, however, can only provide financial advisory services. All these are targeted towards serving the financing needs of an organisation and supplementary advice on it.

CFO consultants’ value proposition lies in their skill set in the finance function. They are well-versed in any expertise that a typical finance team requires, such as accounting, due diligence and automation technology. Therefore, CFO consultants are more positioned towards getting the finance function to a standard rather than simply serving an organisation’s financing needs.

Ultimately, an investment bank and a CFO consultant are not mutually exclusive. Each serves different purposes, and the CEO should consider their options by comparing the organisation’s needs with the intended strategic objective.

It is often overlooked that CFO consultants provide personalised services and strategies to organisations compared to investment banks. Hence, it is important for startup founders to understand that CFO consultants are more suited as long-term partners to the management. At the same time, an investment bank is better called upon whenever the need arises.

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