There are myriad reasons startups can benefit from bringing a chief financial officer into their business. But finding the right fit is easier said than done
When lining up talent for their c-suite, it’s likely most startups will first focus on roles like CEO and CTO. But the larger the business grows and the more capital and cash flow come to dominate every decision it makes, bringing on board a chief financial officer (CFO) becomes ever more vital.
Perhaps one of the first factors that motivates a startup to seek out a CFO is that it has identified a gap in the strengths of its c-suite. “If you look across the founders team, what skills do they have and what are they missing?” asks Peter Bialo, CFO at DocPlanner, the healthcare marketplace. While many entrepreneurs might have the expertise needed to put a minimum viable product together or begin to grow their customer base, if they don’t know a P&L from a balance sheet, they’re quickly going to want to bring on someone who does. “If the company’s founder is highly analytical and has financial experience, you may not need a CFO at the beginning,” Bialo says. “But if you’re a technical or a sales person, you might quickly find you’re lacking that sort of legal, administrative, financial and analytical experience.”
Entrepreneurs may also be tempted to bring on a CFO when the company reaches a certain level of complexity. “The larger you are, the more you use mergers and acquisitions (M&A) and the more funding and investors you have, the more you have the need for a CFO,” says Bialo. And that need to bring on more financial firepower only becomes more pronounced as startups begin to operate across international borders or create new distinct legal entities. “This introduces a whole bunch of complexity: you have a second business, a second currency,” he says. “There are a whole load of administrative, banking, tax and legal issues involved with that.”
Fortunately, even when faced by complicated corporate structures, CFOs can introduce a great deal of clarity into a business’s financial processes. “They’re coming on board as a finance beacon,” says Lauren Druce, partner at Cedar, the specialist finance and procurement recruiters. “They can establish what the risks and threats to your business are and identify what the potential strengths can be.” As they’re able to give startups direct insight into their financials, a CFO can help entrepreneurs more effectively react to rapidly changing markets and hopefully avoid any unpleasant shocks. “What they’re looking to do is unearth different trends and structures,” she says. “It’s about introducing processes to make sure there are as few hidden surprises as possible.”
Given the insight they have into the business, one of the key roles a CFO can play is acting as a sounding board, helping to probe the company’s objectives and make sure that they are achievable. “A good CFO should act as a sanity check,” says Lee Clarke, CEO of Bink, the card-linked loyalty app. While it’s the CEO’s job to shoot for the moon, it’s the responsibility of the CFO to make certain that the whole thing doesn’t come crashing down in flames. By monitoring how the startup’s strategy measures up against the day-to-day realities of its business, a CFO can play a pivotal role in ensuring it is achieving its goals. “Being a CFO is about more than just the numbers,” Clarke says. “It’s about having an understanding of the market and where the business is going.”
Evidently a CFO can prove invaluable for a growing business. But once a startup has established that it’s time to bring one on, it faces another challenge: identifying the right individual to entrust with its finances. In Bialo’s eyes, the best talent to pursue depends very much on the nature of the business in question. “If it’s just a simple operation with one market and one product, it might just need an accountant type,” he says. Conversely, if entrepreneurs are operating in a very capital-hungry vertical or are likely to be racing quickly from seed to series C, experience in handling investors is a must. “You might want to have somebody who’s a bit more focused on the investment side, someone who’s actually done financing and has some relationships in the VC scene,” says Bialo.
As this suggests, experience is vital when identifying the right CFO for your business, particularly if they’re being brought into a fast-paced entrepreneurial environment. “If you’re talking about a startup, you can get a lot of value from somebody who’s come from that sort of background,” says Druce. While CFOs with experience of handling the finances of large corporates might be useful down the line, in the early days startups are more likely to benefit from people who are used to working at the coalface and building processes from the ground up. “They’re going to have to roll up their sleeves and be very comfortable immersing themselves in the detail and the data,” she says. “What you don’t want is somebody so used to being high up in an ivory tower that they can’t bring themselves back down to do the day-to-day, hands-on stuff.”
And while it might be tempting to focus on someone who has direct experience of your given vertical, going on the hunt for someone that has a familiarity with fintech or that knows the ins and outs of IoT, it’s important to remember that much of a CFO’s day-to-day work will be interdisciplinary. “In my experience, the CFO gets downloaded with a lot of the stuff that falls between the cracks in other functions,” says Bialo. “We do a bit of HR, a lot of legal, tax, financing, M&A: it’s quite a broad skill set.” Finding someone who ticks all of these boxes can be a tall order and, in light of this, Bialo recommends finding a generalist rather than a specialist. “First and foremost, you should go with someone who can learn quickly and is open to picking up a lot of different topics,” he says.
Bringing the right CFO on board can evidently be transformative for a startup but is the only option to hire someone full-time? “If you’re going to be a much smaller organisation and your plan is to just scale to five or ten people then I don’t see any harm at all in bringing someone in part time because they won’t be as important in shaping the business,” Clarke says. However, if an entrepreneur has grand plans for their startup, it will be vital to introduce robust financial processes that can scale with the business and have someone on hand to oversee them. “Then the CFO is instrumental in ensuring that the structure of the business is set up correctly and the foundations are properly laid out,” he says. “That means you need someone who will fill that role full time and grow with the business.”