Welcome to a BetaKit weekly series designed to help startups and entrepreneurs. Each week, investors tackle the tough questions facing founders today. Have a question you would like answered? Tweet them with the #askaninvestor hashtag, or email them here.
This week, BetaKit has a special submission from Sarah Marion, senior analyst at iNovia Capital. Marion explains how early-stage companies keep track of their finances, what to look for in a finance lead — and why she says “lead” and not VP. Impression Ventures’ Christian Lassonde adds his thoughts at the end.
When evaluating founder-market fit, VCs try to parse out what uniquely positions the management team to execute better than all existing (and inevitable copycat) competitors. Exceptional founding teams have a history of working together, rare domain insights, and complementary skill sets. As a consequence, few teams get funding without having a strong technical and sales lead.
Your bookkeeper, a junior employee, or your VC analyst can’t drive the conversation internally or at a board level.
Occasionally, founders will prioritize operating against KPIs on day one, but it’s far more common for a CEO to lean into a “chief evangelist” role. Think someone who loves initial sales but doesn’t obsess over maximizing upsells, or prefers crafting the company story and vision rather than digging into the KPIs and understanding key drivers of your customer acquisition cost (CAC) to lifetime value (LTV).
Conversely, it’s rare for a team to have a strategic finance lead early on, especially when the founders are recent graduates or working on their first startup.
At the seed stage, any conception of a financing role is often limited to monitoring cash flow and supporting fundraising (whether it’s building graphs for a pitch deck, preparing the data room for VCs, filing SR&ED claims, or monitoring payroll). Ultimate responsibility for these tasks are typically distributed across three different approaches:
1. A partnership between CEO and bookkeeper. The books are in order, and from a governance perspective, your bases are covered. But bookkeepers can’t set strategy, prioritize funding allocations between two competing projects, or attend board meetings.
2. Junior employee with a finance background. Maybe they have their CFA or CA, maybe they took a few finance courses in university. In this scenario, founders tap a high potential employee on the business side and add part-time finance tasks to their plate. The best case scenario is the employee grows into a Head of Finance role; the worst is that they’ve just replaced you as the bookkeeper’s internal point of contact.
3. Leaning on your investors. In theory, this seems like an ideal strategy when capital is tight and finance doesn’t seem like a large enough role to warrant a full-time hire. VCs understand finance inside-out, and have the benefit of seeing dozens of financial models and data rooms. The challenge here is that leaning on your investor’s analyst is a quick fix. VCs are not employees and they have many of the same limitations as the bookkeeper in the first approach – investors are there to guide and challenge, not to make decisions.
Raising a seed round is almost entirely predicated on the team and the end vision. While raising your series A, investors start to prioritize management growth and sophistication, early customer traction, and a product that customers love and actively (if not obsessively) engage with. After that round closes, there is a dramatic shift in expectations.
We’ve talked about the “oh shit” board meeting before – the first meeting post-funding when management drops the facade and candid conversations about missing projections dominate the board meeting. The same dynamic applies when you raise a series A without a strategic finance lead. Through some execution of the three approaches above, you’ve gotten your financial statements in order, modelled out your future growth, shown that you’re hitting (or exceeding) critical metrics, and walked investors through your use of funds. Investors want to see that you’re operationally minded, so they’ve likely had these diligence conversations with you as CEO, rather than vetted the originator of these numbers.
But these conversations don’t stop once you’ve closed the round – they actually increase. Are you a B2B SaaS company? Expect conversations around how you’re leveraging upsells to triple revenue this year. Building a hardware product? There’s no room for error in managing cash flows, and getting to a profitable product before runway expires will dominate the discussion. Growing a consumer marketplace? Expect conversations around marketing efficiency, return on advertising spend, and scaling customer acquisition channels.
In each instance, a good board will demand a coherent company-led vision that: 1) understands and examines relevant KPIs vs. highlighting vanity metrics, 2) quantifies your progress against your fundraising model and re-drafts as needed, and 3) debates and manages the trade-offs between different functional areas’ priorities and competing products or growth levers, all while continuing to evaluate financing through debt vs equity.
As a CEO, your priorities need to shift to company strategy and culture as the company scales and your time gets constrained. Your bookkeeper, a junior employee, or your VC analyst can’t drive the conversation internally or at a board level. The time to hire a strategic finance lead is now (if not three months ago).
Maybe you lucked out on that junior employee and they can scale into a full-time finance lead. If not, the same core rules of hiring apply as other functional areas and similarly senior roles:
- Identify your key targets well in advance.
- Look for someone who has run strategic finance at a similarly-sized organization (ie. scaling from $2 million to $10 million in revenue). For many employees, they have found their sweet spot and once they’ve taken a company to that upper bound, they look for another at the lower bound to join and repeat the cycle. Alternately, consider someone with an investment banking and startup background, proving they have financial muscle and are comfortable in small teams with ambiguous responsibilities. Or hire that VC analyst you were leaning on so heavily (or her counterpart from another VC or PE firm)!
- Prioritize someone who can challenge you as CEO, rather than someone who will follow your lead. To effectively deliver on that company-led vision outlined above, you need a true partner who can take ownership. You’re also looking for someone who can build processes where there were none, and is comfortable with legal documents, as your General Counsel hire is still a ways off.
- Finally, fire fast. As a last resort, bookkeepers and investors can fill the gap for a quarter if your new hire can’t jump beyond record keeping to strategic finance.
You’ve likely noticed I’m using “head” or “lead” rather than VP or CXO – this is intentional. Great strategic finance employees can level up with your company, but this won’t always be the case. Beyond the series B raise, you’ll want someone who can take a larger role managing the fundraising process. This is especially important as you approach exit – whether it be acquisition or IPO. Your company will require a fundamentally different finance skill set and downgrading an employee’s title is both hard to do without negative signalling effects and kills goodwill with someone who added enormous value early on.
Startups founders’ goals should be to build a company, not a funding round. You can raise a Series A without a strong finance lead, but you can’t effectively deploy that capital without one.
Christian’s take:
I have two comments to add to Sarah’s excellent breakdown of the need for a head of finance. You’ll be tempted, at some point, to get a part-time CFO. I’ve even seen it work out a number of times, so don’t dismiss it out of hand.
However, it does come with two significant risks. The first is that the part-time CFO isn’t fully invested in your business – after all, he or she is spending the bulk of their time elsewhere. That also makes it very hard to bring that person into pitches with you. VCs like to see teams pitching that nicely fit into the buckets they understand, and that the team members are all fully invested in making this company a success. Having someone with only one foot in at the pitch meeting doesn’t help you. Flip side – you’ll be at a disadvantage if the person who can best speak to the numbers isn’t there. Lose-Lose.
Second, what gets measured gets done. You want someone who is developing the KPIs for the company and building the model to understand your business inside and out. That’s not your bookkeeper (to Sarah’s point) and may also not be a part-time CFO. Unless your CEO is strong in this area already, look for someone full-time on the team to drive this process of developing the KPIs.
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