When Should Startups Hire a CFO?
Many founders and CEOs of startups don’t spend a lot of time thinking about CFOs. When it comes to finance for a startup, founders focus on more pressing needs: What’s my burn rate? How long is my runway? How does our annual recurring revenue (ARR) look? How much more money do we need?
As an entrepreneur who has sold two companies over the past decade, I can speak from experience that it isn’t until a startup reaches some success — systematic product launches, lucrative partnerships, international expansion and reliable revenue growth — until they inevitably begin to ask The CFO Question.
Do the Old Rules Still Apply?
So when is the right time to bring on a CFO? Until recently, this was a relatively easy question to answer. Hiring a CFO doesn’t make much sense for most startups until they achieve “meaningful revenue”; annual revenues hit about $100 million or more; until the founders and board started planning seriously for an IPO; or other significant liquidity event. The old rules suggest it wasn’t the right time until you were 12 to 18 months away from an expected IPO roadshow, that you started looking for a finance chief.
But the old rules for when to hire a CFO don’t apply like they used to. One reason is that the job of the CFO and finance organization has changed. If you haven’t noticed, it is much more difficult in today’s climate. It seems like everyday we’re reading about CFOs getting fired or removed from their positions; case in point Walgreens and the City of Detroit. Reliant on traditional methods, the “bean counters” of the company are struggling to adapt into today’s world.
Nowadays, businesses are looking for their finance departments to do more than track and report results, close the books every quarter, and establish guardrails for spending. Today’s finance executives are expected to recognize that planning involves data, decisions and people – not just spreadsheets and budget mandates. They’re now expected to work across the organization to model the business for growth, develop potential responses to likely scenarios (good and bad), align new initiatives with monetization, and deploy resources and investments where they’d drive new revenue. As an example, look no further than Twitter CFO Anthony Noto, who took the helm over this past Summer but is now announcing strategic product news for the burgeoning company.
The CFO’s role is changing because modern companies like Twitter are competing in an increasingly data-driven, real-time environment. This imposes new pressures on finance to be more collaborative, to move its core financial planning and analysis (FP&A) process beyond the rarefied, highly trained domain of finance – which I call The Office of the Few – and bring it to the front-line managers whose activities and decisions directly impact revenues and expenses. That calls for much more than counting beans or simply new technology. It requires a change in process.
New Rules for a New World
These shifts suggest a change in hiring strategies for companies looking to bring on a finance guru. When it comes to hiring a CFO, don’t wait too long – and don’t hire too high.
Don’t wait too long. If you’ve held off on hiring that finance guru until the moment you have an IPO or other milestone in your sights, you’ve waited too long. You’ve missed at least a year’s worth of strategic planning that likely will benefit your business for years to come. You’ve missed crucial months that could have been spent identifying where you should place your biggest bets, your most valuable resources, and your most significant investments. You’ve let decisive opportunities pass by to structure your organization so it can scale as you bring on new customers, partners, business units and distribution channels. Wait too long, and you’ll make your new CFO’s job even harder once he or she comes on board.
Don’t hire too high. Startups too often set a trap for themselves by thinking only a CFO-level individual has what it takes to create a well-run finance organization. (They’re also not anxious to pay CFO salaries, which averaged over $200,000 in 2013.) But these days, you can bring strong finance talent aboard – a controller, perhaps, vice president or even director of finance – to lay the important groundwork needed to establish a high-performance environment. You need someone who understands the very unique relationship between data, decisions and people.
Even a mid-level finance pro can move an organization’s planning, budgeting and forecasting processes beyond Excel spreadsheets so managers have the data and analytics needed to understand those “what-if” scenarios and utilize predictive analytics and forecasting – the kinds of things that historically were stuck in The Office of the Few. Armed with the right technology, the right person can help shepherd their organization through the process of integrating data from internal sources like Salesforce.com, NetSuite or Marketo with external customer sentiment information from Facebook or LinkedIn, and even pull in supply-chain updates or weather forecasts to get a real-time picture of the factors that really drive the business.
Every day, I see companies achieve this without an IPO (or CFO) in sight. They trust in the person who understands the connectivity of data and individuals — someone who aims to make everyone in the organization play a little Moneyball. And when it finally comes time to bring on that CFO, you can bet he or she will have plenty of thanks for the team who enabled them to inherit a finely tuned machine, not the spreadsheet-driven mess they’re used to seeing, and that likely factored into their decision to leave their previous company and join your startup.