• Strategy
January 31, 2024
Product-market fit has been established; outside investor interest confirms the company’s initial successes and signals the market’s belief that, with capital, there is a sizable market into which the company can grow. The founder is convinced that this is the time to raise capital, which for the first time will establish the need to satisfy the expectations of external participants in the business.
This inflection — I visualize it as the moment when a startup’s “professionalization curve” starts getting much steeper — is precisely when I’ve taken the CFO seat at multiple tech startups in the last decade. In this seat, I’ve learned that getting the “who, what, and when” of the CFO role right requires balancing the perspectives and needs of founders with those of investors; the right CFO melds these two “teams” into one.
Let’s take a look at how each side views the role of the new CFO and where those views provide the right CFO with the opportunity to be a strategic catalyst to growth.
Operating on the ground, founders are likely to see the CFO role through the lens of their accounting function. The CFO is an evolutionary step in a journey that started with a kitchen-table version of Quickbooks, then moved to the use of bookkeepers (whether full-time, part-time, or outsourced) and perhaps then a controller as the business gained traction and invoices, payroll, and payables multiplied.
While it is accurate to see the CFO role as a critical progression in accounting evolution, it’s important to see this as an evolution of capability, not capacity. That is, it’s less about the organization’s ability to process a growing volume of financial transactions (this is where a controller can excel), and more about the ability to utilize those transactions to generate timely and actionable financial metrics and reports.
The companies I’ve joined at this stage tend to view accounting as an end, not a means. The objective is to generate an accurate recording of all financial transactions to facilitate tax filings and a year-end report. These accounting results are not core to the business and there is no external demand — say from lenders or investors — for anything more. Consequently, there tends to be little need for consistency and timeliness in accounting.
In each case, my CEOs have sought a more data-informed approach to running the business. That has made my first order of business transitioning the accounting function to be able to generate accurate and timely financial reports. In this context, yesterday’s simple deficiencies have an outsized impact. Simple examples that every growth-stage CFO has worked through include: booking expenses inconsistently across periods (making it impossible to evaluate monthly trends); failing to code expenses to departments (which makes it impossible to generate critical metrics such as customer acquisition cost and payback period); using incorrect general ledger accounts, or creating superfluous new accounts (which undermines financial reporting consistency and integrity); and so on. Addressing these weaknesses is essential to running a data-informed business and to delivering timely financial reports to external parties such as shareholders, banks and auditors.
The CFO drives this accounting transition through a combination of experience (knowing what to focus on) and leadership of the accounting team. As is typical, in each of my CFO roles, I joined an organization with existing accounting personnel, who were both excited to be reporting to a dedicated finance professional (vs competing for CEO mindshare) and concerned about change, which made change management a critical aspect of my leadership of the team. In all situations, the demand was for dynamic leadership; in no case would it have worked for me to sit on top of the accounting organization as a passive consumer of the accounting product.
One of my favorite tactics in this regard is to continually challenge the team to answer the question: “What’s going to break next?” When the goal is to grow the business by 50% or more each year, today’s systems and processes are never enough. On this front, my teams have never let me down, consistently proposing process improvements (and sometimes system investments) that have enabled rapid business growth with only moderate team expansion. In more than one of my companies, we more than doubled the revenue of the business without increasing the overall size of my team.
While investors do not take issue with the idea that the accounting function needs to evolve, capital-raising founders quickly learn that investors envision a much broader finance landscape. For investors, the accounting transition described above is table stakes; they expect the CFO to be a strategic partner to the founder.
Make no mistake: The founder is still The Man or The Woman. The CFO should not be a threat to the primacy of the founder’s business acumen or market vision, but should function in a complementary manner, bringing different skills, perspectives and management style. Ideally, the CFO’s focus on the details (re)liberates the founder/CEO to think big, provide vision, define the mission and create culture; the CFO’s command of data and metrics creates a sounding board (sometimes reinforcing, sometimes challenging) for the founder’s intuition; and their prior CFO experiences enable them to “see around the corner” and provide increased visibility to first-time founders.
For example, in several B2B software businesses, I have experienced a corporate inertia (stemming naturally from the early, scrappy days) related to selling concurrently to SMBs (small) and enterprises (large). Each of these businesses faced the same challenges as they began to formalize and accelerate their go-to-market approach, bumping into the incompatibility of high volume / low price and low volume / high price approaches. Critically, these incompatibilities impact every aspect of the organization — from product development to sales to customer success — and risk creating serious organizational misalignment. This is not to say that there is one single right approach, but hands-on experience navigating this dynamic is an enormous benefit to a leadership team setting the stage to scale their business.
Investors also view the CFO as the executive team member whose way of thinking is most closely aligned with their worldview. This is in part due to a shared financial background and language, but is also because the CFO’s mandate is to have a comprehensive, data-driven view of what is best for the business, not what is best for a single department or initiative. This unique position creates (for me) one of the most enjoyable aspects of the CFO role: driving alignment of investors (board of directors) and the company’s leadership team. This role as a bridge and translator is how I got nicknamed “The Bucket Guy” in one of my CFO roles — a reference to my attempts to explain — via poorly drawn illustrations — how equity value in a SaaS business is a function of how much annual recurring revenue (ARR) pours into the company’s bucket and how much leaks out the bottom due to churn and downsells.
Rallying the troops around equity value helps sharpen a leadership team’s focus on not just growth, but efficient growth. Investors rely on the CFO to understand unit economics and when to press (or not press) on the gas. Once sound unit economics are established, investors expect the CFO to implement and track the business’s key metrics, such as payback period and net revenue retention for a software business, against industry benchmarks, ideally on a real-time dashboard.
Finally, investors rely on CFOs to quarterback strategic and financial transactions that lie outside the day-to-day operations of the business. These transactions include capital raises (debt or equity) to fund accelerating growth or entry into new market segments, acquisitions of complementary businesses or competitors, and eventually the sale of their interest in the business to another financial investor or a strategic acquirer, which, in turn, creates work streams for maintaining relationships with financial investors and monitoring the industry landscape.
Understanding the fit and interplay of these two views is the first step to engaging the right CFO, regardless of timing. When timing coincides with actionable investor interest, the conversation typically centers on hiring a full-time CFO often via an executive recruiter.
Increasingly, founders who appreciate (perhaps as second- or third-time founders) this comprehensive view of the CFO tend to seek the advice — if not the full-time services — of a CFO prior to taking on outside investment. That has led to a surge in demand for strategic finance consultants and fractional CFOs. While there is no clear definition between these two approaches, the consultative approach can be broader and more tailored (for example, focusing on mentoring a VP of Finance who has not yet been in the CFO seat), whereas fractional CFO can in some cases be a glorified controller. Regardless of the chosen approach, it is important to ensure strong alignment between the company and advisor.
Growth-focused companies should pursue a relationship with someone who has delivered results in their environment (vs a corporate divisional CFO, for example) and whose career encompasses more than accounting. Additionally, it is important to engage with someone who has the right industry experience, e.g., software, or professional services. This breadth in capabilities and depth in a business model is essential to delivering on the strategic imperatives outlined above.
Done right, this approach positions early stage companies to power up the professionalization curve and become true growth stage companies.
