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How Compliance Can Help Companies Raise More Equity Funding

Group of colleagues discussing how compliance can help companies raise more equity funding

One of the challenges companies face as they grow and scale is determining the right tasks to focus on at the right time. We find that companies at each funding stage often share a common goal for financing:

  • Series A: Product development and corporate growth
  • Series B: Expanding the business into new markets and making strategic hires
  • Series C: Developing new products or acquiring other companies

With this in mind, it’s easy to see that trying to decide when to invest in new hires and when to invest in new product or service lines aligns with specific rounds of funding. But what about security and privacy?

In this blog, we’ll explore why investing in compliance and security at the Series B funding round sets your organization up for future success.

Privacy Missteps Can Prove Disastrous

Investing in compliance and security can appear costly, but it’s important to counterbalance the cost with risk, or what could happen if proper procedures and protections are not in place. Recovering from data breaches ― which can cause operational downtime, financial loss, and reputational damage ― is a costly process in itself. Companies that fall victim to data loss incidents are required to uncover the root cause, notify impacted parties, and attempt to recover data (if that’s even possible).

Privacy missteps can also lead to regulatory violations. Highly publicized ransomware attacks have made both consumers and authorities aware of the ways in which personal information can be exploited. As a result, there is growing demand for robust privacy and data security laws. More than 100 countries already have such regulations in place, and data privacy played a key part in President Biden’s executive order on “Improving the Nation’s Cybersecurity.”

Though there are a slew of requirements that could play a role in privacy and data security laws, the overarching goal is to give individuals more control over their personally identifiable data, introduce defenses, and restore confidence in digital systems. 

As we move forward, fines for non-compliance are likely to become substantial. In fact, under GDPR, fines for non-compliance can amount to 20 million euros or 4% of annual worldwide turnover, whichever is greater.

When is the Best Stage to Invest?

It’s important to have a robust privacy and security stance at every stage of the business lifecycle, but budget constraints sometimes make it impossible to properly invest in the early stages of building a startup.

For this reason, we believe the “sweet spot” for investing in privacy and security is when companies hit Series B funding, or an equivalent stage of bootstrapped revenue / growth or private equity (PE) investment.

At this stage, the business often has a sufficient level of growth and operational maturity to invest in these services, and adding compliance and security measures will position the company for further growth and expansion. After all, companies exploring Series B funding are typically earning a profit and are valued at more than $10 million. To maintain existing business and encourage continued growth, organizations need to illustrate to their customers that they are investing in the creation and maintenance of a strong cybersecurity and compliance posture.

Where Tech and IT SaaS Companies Should Focus

Privacy and compliance can be overwhelming, but it’s helpful to consider that each type of audit, attestation, or scan is useful for growing companies for different reasons or situations. Let’s take a look at a few examples.

If you’re interested in implementing best practices and proving your cybersecurity posture to potential customers and investors:

A good start is a SOC 2 audit or implementing the frameworks outlined by International Organization for Standardization (ISO), such as ISO 27001. These both require an independent verification that your security processes meet specific guidelines.

Worth noting is that there are a few key differences between ISO 27001 and SOC 2. ISO 27001 requires that an organization implements a specific framework for an Information Security Management System (ISMS), while SOC 2 is more flexible and only stipulates that auditors evaluate the design and effectiveness of controls that organizations implement for each criterion in the framework (Security, Availability, Confidentiality, Processing Integrity, Privacy).

That said, SOC 2 is a great place to start. Not only is a SOC 2 attestation well-reputed in the U.S., but it is also becoming increasingly accepted abroad, and offers organizations a reputational boost, and easier compliance with additional regulations.

Prior to beginning a SOC 2 assessment for the first time many organizations begin with a SOC 2 Readiness Assessment. This assessment can identify if your organization’s security posture has deficiencies, and can indicate the modifications or qualifications you need to implement in order to achieve SOC 2 attestation.

If you’re operating in a specific industry or want to expand your customer base in a specific industry:

Focus on industry-specific certifications. For instance, lots of healthcare and financial services companies received Series B financing over the past year. These companies should look into specific industry-based compliance needs, like HIPAA or HITRUST for healthcare.

And organizations that wish to handle customers’ credit card information should obtain PCI DSS compliance attestation. There are also a variety of federal assessments for organizations that are considering contracts with the Federal government such as FedRAMP.

If you’re looking to expand your base of European customers:

Focus on your privacy posture and obtain a GDPR gap assessment. A gap assessment will reveal any areas that will affect your organization’s compliance with GDPR so you can take steps to mitigate and remediate them.

If you’re interested in protecting your organization from breaches:

Focus on cybersecurity services, like penetration testing, vulnerability scans, and a Ransomware Preparedness Assessment. Penetration testing is an especially valuable step as it can identify any vulnerabilities in servers, workstations, networks, or applications, while also assessing the human layer.

Making Security and Compliance a Priority

Building a strong privacy and compliance posture is a key activity for mid-stage, Series B companies. If you’re looking to build the systems you need to grow and expand, A-LIGN has the expertise to help you uncover your areas of greatest need and prioritize the right audits, attestations, scans, or other steps.

A-LIGN provides a wide array of cybersecurity compliance services, offering a single-provider approach. Working with small businesses to global enterprises, A‑LIGN’s experts coupled with our proprietary compliance management platform, A‑SCEND, are transforming the compliance experience.