The reality of the role of virtual CFOs in IPOs

By in Business Trends, Opinion

As activity within the Initial Public Offering (IPO) market in Australia continues to push along with vigour, more companies are contemplating the role of a Chief Financial Officer (CFO) for the first time.

For many smaller emerging companies planning to embark on a listing, or in the midst of it, a virtual CFO is a more realistic choice.

Understanding the role of a virtual CFO, and therefore the attributes required in such an appointment, is a crucial initial step in successfully navigating the complex and challenging float process.

State of the market

Australia’s IPO market is attracting solid levels of activity, yet the majority of IPOs in Australia are at comparatively early stages relative to those overseas and are often at pre-commercialisation, or just at the point of commencing commercialisation.

From our observations and analysis, the market is holding an overall positive view on new ASX-listed entrants, the new technologies or products they seek to commercialise and their ability to disrupt existing and established players.

In the first half of 2017 alone, 55 companies listed on the ASX with a combined market capitalisation of $3.41 billion. Just under half of these newly listed companies beat their IPO price by June 30 with five achieving more than a 100% return.

The momentum has been maintained in the second half of the year with industry sectors including medicinal cannabis, software-as-a-service, share-economy technology, waste technologies, medical devices, aged care and vertically integrated sales to Asia among the most buoyant.

Junior explorers continue to flock to the ASX and have always been a staple of the country’s micro-mid-cap environment. Over in the battery space, cobalt has nudged out lithium in the popularity stakes while biotechnology IPO activity has dried up with some companies in this sector looking instead to the United States for funding injections.

Role of the CFO

Unlike at the top end of town, for the majority of smaller IPOs in Australia the role of a CFO is generally limited.

The bootstrapping of these earlier stage companies means they often cannot afford a CFO while they are still pre-IPO.

Instead, these cash-sensitive companies typically choose to proceed with a combination of their own internal book-keeping coupled with virtual CFO services typically engaged through an accounting firm.

Other roles normally considered within the mandate of a CFO such as budgeting, forecasting, prospectus preparation and contract negotiation are often delegated to corporate advisors, lawyers and other professionals.

While the CFO’s formal role usually starts post-float, a company may still be wary about locking in long-term contracts with a CFO until it has further commercialised or developed its products and therefore secured sustainable income or capital raising streams.

Key attributes of a virtual CFO

An effective virtual CFO must be skilled, experienced, accessible and connected.

A virtual CFO must be able to effectively manage a share register. Given that much of an early stage company’s expenses are in ‘sweat capital’, a robust register is needed to keep track of share capital dilution particularly in the pre-IPO stage before it is subsequently outsourced to a professional share registry services provider during the IPO process.

Equally important is an advanced understanding of, and ability to, account for bespoke equity compensation methods covering a range of financial instruments such as options and performance shares which are commercially relevant and tax efficient.

However, above all the virtual CFO must have strong networks and connections. This is important not only for creating introductions into capital raising avenues at a time when cash is tight but also for when engaging with other providers such as lawyers, corporate advisers and auditors who can add real value.

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