WHEN YOUR STARTUP NEEDS A CFO: BEFORE THE BREAKING POINT
When should a startup hire a CFO? Many experts respond with a revenue-based rule of thumb – you will hear, “When you reach $10 million”…or “$100 million”…or even “$300 million!” With recommendations spanning such a wide range, it’s time this rule of thumb was put out of its misery.
The truth is this: The question is being considered from the wrong angle. It’s generally not a matter of size. Even a red-hot company like grocery delivery tech startup Instacart, which in just three years has raised $275 million and has a current valuation of $2 billion, only recently brought on its first CFO!
Amplion Clinical Communication’s Chief Strategy Officer Jeff Gould, who has been a venture capital investor and senior executive in over twenty private companies, remarks, “Companies need a small amount of true CFO input very early in their lives, but should not pay for a full-time CFO until they need one.” Hiring a fractional CFO can sometimes bring the experience, perspective and objectivity to lead the company through its initial growing pains.
Often, however, companies rely too heavily on half measures for much too long. The need to bring on board a qualified, full-time CFO reaches a breaking point as strategy gets misaligned and the money runs out. One startup Jeff funded “quickly ran through the first $2 million of investment with no visibility to their [investors].” Before providing additional capital, Jeff ensured they hire a financially savvy CFO who steadied the ship, ultimately yielding a $1.4 billion sale.
The CFO metamorphosis
What once operated like a lone shark is now a giant octopus with a tentacle in every critical department, from marketing, sales, business development to production, Human Resources and IT. The finance team of yesteryear has morphed into a forward-looking strategic function with the CFO as its leader, responsible for building crucial internal and external relationships. Rather than just imparting knowledge, today’s CFO imparts know-how, empowering departments to utilize the right data and technologies for everything from business processes to human resource management.
In short, the CFO must not only ensure financial reporting synchronicity and integrity, but optimize operational efficiencies and strategic alignment, and communicate throughout the organization.
Most important for startups is the role an experienced CFO plays in grasping the company’s vision, selling the story to lenders and investors, and planning a process toward IPO or acquisition that will beat the odds, which are statistically challenging. Underlying success in this role is having the financial acumen and talent for valuations and financial performance/cash flow modeling, plus a “rolodex” that opens the right doors.
How to know when the time is right for your startup
Questions to ask yourself:
1. Are we in a highly dynamic industry?
The rapid pace at which you must broach new markets and forge new partnerships may necessitate an earlier onboarding of a CFO who knows your industry and has been down the startup road.
2. How much are we spending on outside consulting?
Has your finance function begun to look like a patchwork quilt, with the use of part time or outside experts to handle reporting, tax preparation, annual valuations becoming too expensive and time-consuming to coordinate?
3. Can we afford a CFO yet?
While CFO compensation varies as a result of numerous factors from industry to geographic size, start-ups can be competitive by providing a reasonable base salary augmented by an aggressive bonus incentive and equity participation, which will enable them to land a CFO who has successfully taken companies down the path you are traveling.
4. Can our VP Finance wear the CFO hat?
If the VP Finance (or Controller) is sophisticated and ambitious, companies in the early stages of growth can often function well by offering them opportunities to cut their teeth in a more strategic role. They may lack IPO or M&A experience, but they know the company better than an outsider.
5. Have we established a 12-18 month horizon for going public?
Once on the runway, those months pass quickly, and you need that CFO on board early enough to manage and align the entire process. One of our clients, a growing biotech company, had a rich pipeline but no FDA approved products. Even without a product in the marketplace, they hired a seasoned CFO with prior public company experience and strong ties to capital markets , who guided the firm to an early and very successful IPO.
6. Do we need to bring in investment capital in the near future?
Another trigger for hiring a CFO is the second round of financing, where three to six months will be spent meeting and selling the story to potential investors.
7. Finally, a litmus test that may beat all the others: Is the CEO devoting too much time to overseeing the finance function time that should be spent optimizing revenue generation?
Put another way: Does the absence of this key CEO-CFO partnership threaten the company’s growth trajectory? If the answer is yes, then it is time.
In the end, it is a mixture of goals, industry dynamics, timeline – and always a dash of intuition – that determine when it is right to take that leap.