What I love about my job is getting to see teams of super-early-stage companies develop ideas that have potential to make an impact on the market while being raw. I love the enthusiasm, the boundless energy and the sense of possibility that comes from having an idea that hasn’t yet been beat up in the marketplace of competing ideas, customer contracts, VC skepticism, jaded journalists or fickle consumers who are on to the The New, New Thing.
If I could bottle this moment and spend all my time here I would be in heaven. But alas I must scale with businesses and make money. And so must you.
Growing a startup is such a tricky balance between staying cost-focussed & scrappy versus being impractical with how you spend your time. Clearly the founders and senior executives of a company are the most valuable resources and their time should be maximised on the most valuable tasks. Yet after a seed round of $2 Mn many are still doing Quickbooks entries, booking hotels & airplane tickets, negotiating offices leases and digging through employment benefits, legal contracts and such.
For a well-funded seed company, I have recommended hiring a great office manager that doubles as an administrative assistant. This is all about “leverage” which is the key to success. I can’t tell you how many people have thanked me for this advice and say their productivity increased exponentially.
For a well-funded A or B round company I have written about “levelling up,” which entails many things but in summary I tell people to “act your stage.” At some point, a shitty office becomes more of a nuisance than a badge of honour. There comes an inflection point where establishing processes is more important than being scrappy. You transition from “startup” to real business and it turns out that having an entire team be efficient is more important than that a CEO’s boundless energy that comes with a destructive nature of constantly changing direction.
One area I always recommend is bring on an operationally-focussed CFO. It has transformed some of our businesses in ways that would not have been achievable without it. I’d like to give you some actual examples and also talk about the role they play.
I watched Ophir Tanz achieve much in his early days at the Founder & CEO at GumGum, which has now become quite a large business. I think Ophir would agree that the business was transformed after we brought on board Phil Schraeder at the CFO (and later promoted to COO). It freed up Ophir to grow out our sales organisation, to work more closely with agencies, to innovate on product and to raise capital. At board meetings Ophir could focus on strategic questions because he knew that Phil could answer to every number in our board pack. And board confidence matters in growing companies. The rapid growth of GumGum was a result of a focussed CEO able to build his organisation in the security that the detailed operations and financials were managed by a trusted and incredibly competent partner.
What role do CFO’s play and why is it important?
Budgeting And Planning
Great startups have budgets. They plan out their next 12 months activities and measure progress against plans. The plans are continually updated and so, too, should the budgets. I can’t tell you how many early-stage teams I’ve seen be “surprised” by how quickly they started running out of cash and then are in a panicked fundraising mess. It literally can put you out of business. This happens because many CEOs are passionate, market-driven people who are constantly trying to launch new products, win contracts, get press, hire staff and woo VCs. The daily grind of keeping track of minutiae on the budget seems a distraction and the CEO is already putting in crazy hours.
A great finance leader is on top of his or her numbers with such precision that the CEO doesn’t have to constantly worry about it. He can focus your energy on what he’s good at. A great finance leader isn’t just budgeting — he or she is a consummate planner and won’t take shit from you about why you need to avoid hiring more staff until you close new contracts or raise money. They are a sparring partner for the CEO, which is why boards love them so much. They can help you understand gross margins and how to avoid signing bad deals. They can help you with pricing your products. They help you … run your business.
Cash Management
Another thing many entrepreneurs fuck up? Timing of cash payments. It turns out that financial reporting (GAAP) doesn’t take into account the only thing that matters to startup survival — cashflow. So if you are signing deals that you’ll get paid in 60 days (with 10% bad debt) and you pay 100% of your vendors in 15–30 days you may find yourself out over your skis. A great CFO can help you negotiate venture debt to extend your runway or cover these working capital timing issues.
A great CFO will make sure you’re accurately measuring your CAC (along with a great marketer, of course) and your LTV. As we know your LTV must exceed your CAC but what if your LTV is only theoretical? What if you are measuring CAC wrongly and you’re really not acquiring customers cost effectively? I know this sounds obvious but both CAC and LTV are much trickier than you think (I’ll cover in a separate post one day).
Also, LTV/CAC ratios are total bullshit if you don’t have enough capital to fully realise your “lifetime” value. So what often matters more is your “payback period” in which you’ll recover your marketing costs. If you have access to tonnes of capital it might not matter that payback on your marketing spend is in 9 months. But if you don’t have enough capital then I’d rather turndown some more expensive customers to acquire in favor of a 3-month payback.
A great CFO will help you plan that.
Board Preparation
Board meetings. Oh, board meetings. I tell people all the time. Nothing great should be decided at a board meeting that hasn’t been well lobbied in advance. I know you want to live in a world in which you can just present your great ideas to a board, you’ll have great value-added discussions and the right answer will emerge. That’s fantasy. The real world doesn’t work that way.
In the real world you build board decks with financial information, administrative information and key strategic topics you’re trying to flesh out and decisions you’re trying to make or seeking approval on. I’ve written extensively on how to get the most out of your board.
Here’s the dilemma. The last thing a startup company should want is the CEO (or heads of sales, marketing, product) sinking three days every month into preparing board packs. What I used to do is pencil out my plans for the board deck and strategy topics and my CFO would then pull together the slides and analysis. Once I saw the working draft I could give her input into what I wanted changed. I wasn’t “uninvolved” but I had “CFO leverage” so I could get my daily job done.
Our packs were out on time (72 hours before the board meeting). The full financial details and metrics were in the deck. So my time was freed up to call board members in advance and walk them through our metrics and understand any concerns.
HR & Legal
Every hire you make takes time to negotiate the contract — even when you have standards. Most entrepreneurs would like to stick their heads in the sand or would rather hear fingernails on chalkboards (there still are chalkboards, aren’t there?) than to have to deal with employee contracts, healthcare benefit options, vacation policies, health-and-safety regulations and so forth.
Yet being a buttoned up company requires all this.
There are a million HR issues to manage. It turns out that employee reviews matter. Stock option top-ups after a few years are vital retention mechanisms. People care about salary increases and benchmarking to market and even if you can’t pay market you sure as hell better know what “market” is.
Didn’t have employees sign non-solicitation agreements? Shame on you. Have an employee trying to push you to do a 1099 vs. a W2 … is that good or bad? Do you really want to spend your time on that?
Who is leading your patent filing program? Who is dealing with trademarks? Inbound cease-and-desist orders? Legal threats from other IP holders? On and on and on.
If this doesn’t resonate with you, you’re not a startup CEO. The HR & legal work alone in a startup is overwhelming.
Hire a great CFO. Please.
We brought on board David Lapter at MakeSpace. The founder, Sam Rosen, asked me if I thought it was too early for such an experienced and accomplished CFO. I told Sam that it would pay dividends in spades because Sam could focus on innovation and not put as much personal time into process & planning. David deals with driver contracts and policies and if you see what’s going on with the 1099 debates at Uber & Lyft you’ll know how critical being on top of this issue is. David set up company-wide employee policies, helped negotiate office leases, established our long-term accounting system, implemented RJ Metrics and so forth.
Sam thanks me on a regular basis for pushing him to do this early. It is one of the primary reasons Sam was able to accomplish so much in 2014 because he could focus his time on what really mattered.
Establishing Metrics & Monitoring Success (Or Failures)
Now we’re getting to a topic that CFOs will love. Measuring business performance and creating metrics is their bread-and-butter versus the must-do tasks of financial reporting, audits, payroll, taxes or HR policies. I have literally seen our companies transformed by CFOs creating metrics and reporting packs that help us better track the performance of the business.
We brought in Cynthia Stephens to head up finance at Invoca. Suddenly our board reporting has an insightful set of metrics that helps us figure out how to best allocate resources and plan for our future. We are growing faster than at any time in the company’s history (which is a testament to sales, market, product, engineering and of course the founder & ceo!) but … that still leads to complications about how fast to hire, how to allocate resources across departments, determining which contracts are profitable and which deals we should avoid.
Having an amazing and operationally focused CFO has freed up the rest of the team to achieve even more while giving the board much more confidence in our strategic direction.
Leading Process Implementation
And finally, there is process. Most founders hate it which is why they’re founders and not great employees.
Yet every company changes from being a place where tacit knowledge and raw work ethic drives success to a place where being organised and disciplined matters more. When you on board 20 sales reps in one year you can’t expect that they all know your product or the likely customer “objections” as well as you do.
At DataSift we have grown the business substantively for 13 straight quarters and despite recent press I can confirm that the core business is still growing very quickly — just with more powerful partners than we had in the past. The main reason for our growth has been the incredible product vision from our founder, Nick Halstead and from one of the best sales leaders I’ve ever worked for in Pier Barattolo.
But.
I promise you if there was no glue between sales, marketing, product and engineering we would have had greatly limited our growth curve. We hired Steve Pease to run finance and then eventually he took over all operations and it has transformed how we operate. He is the reason that all of these functions fire on all cylinders and he’s the connector on resolving inevitable resource allocations issues as they pop up. He chairs executive calls so that Nick can stay focussed on running the company. He prepares board meetings, negotiates important contracts with partners and keeps the 4 VCs on the board in sync.
In short — he’s the glue that binds the business. And maybe that’s the best way about thinking about great operationally-focused CFOs. The glue that binds businesses.
Summary
I have seen many companies who without a great CFO have squandered opportunities despite creating a great product or service. I have seen businesses run out of money and either shut down or fire CEOs over a lack of financial controls or planning. I have witnessed companies get sued on stupid issues as a result of not being buttoned up. And I have seen inefficient early-stage CEOs staying up late working through QuickBooks entries and not realising their true potential.
I can think of no role that provides leaders with more leverage than an operationally focussed CFO that allows the CEO to reach his or her full potential.
[This post by Mark Suster first appeared here and has been reproduced with permission.]
