THE SMARTER FINANCE BLOG

Timing is everything when it comes to finance talent.

Nowadays, when startups raise money from VCs, especially in the early stages, line items in their financial projections do matter. For instance, in an era when all marketing tools give you freemiums or super low entry price points, and social media rules over mass media, your marketing budget can’t be what it was for startups a few years ago. Some VCs will go as far as saying you don’t need money to do good marketing until you grow the business on a dime. The same is true for finance. Why would you need a CFO when you can rent one? After financing is complete, what would a CFO do all day anyway?

Last week I was invited to do a talk at the inaugural Veterans Conference in San Francisco. When thinking how to make my talk useful and memorable to veteran founders and CEOs of early stage companies, I came up with the 2×2 matrix below (I’m an HBS graduate – we’re required to do a 2×2 matrix at least once a week for life!). Anyways, the chart provides a framework to help CEOs and founders distinguish between various finance and accounting roles, and to understand when and how to engage the right resource along their journey.

Framework for Finance Talent

The first thing to note are the axes. The progression to a full time CFO is natural as the level of help you need depends on the age of your startup. In an era when you can rent and not buy everything, finance talent is no exception. You need to strike a balance between looking at the past to ensure everything is in order (bookkeeping) and looking at the future to ensure you grow in the right direction (strategic finance).

The good news is that you can have your cake and eat it too!

Timing is everything

Here’s how it can play out. At the beginning, pre-seed and pre-revenue, you only need a bookkeeper. I recommend you to hire yourself as this guy – it will help you get a good handle on the levers that drive your business, and it will not take more than a couple of hours of your time every week. Then you start growing, the dogs eat the dog food so you raise a seed. At this point, your attention needs to focus on revenue and you need a professional bookkeeper. It is at this point that you also need to rent a CFO who can help you, giving you just a few hours per week, to lay the foundations of your business model so you can think about the future from a finance perspective (remember, bookkeepers are trained to look at the past).

Then comes the point when you will need more CFO cover. From Series A through D you will need to cover all bases. You need your bookkeeper. You also need more time from your on-demand CFO, who can help you with historical and pro forma financial statements, unit economics, raising capital and business modeling. Eventually you need to complete this team with a controller to build and improve processes and systems and ensure GAAP accounting), and maybe FP&A Analysts to support detailed and compressive operational metrics and dashboards and with corporate performance management tools.

Ideally, there comes a point in this journey, usually close to an IPO or an exit, when you stop renting your CFO and buy one. You should feel good – you’ve graduated to the next level and you need not only the full time of a CFO, but her undivided attention and a deep knowledge of what makes your company tick.

There’s a time for everything. Like in all graduations, you’ll have mixed feelings. You’re not a startup anymore.

Photo courtesy of Navy veteran, Silicon Valley entrepreneur and photographer Christopher Michel.

Renting a CFO can help you have a strategic partner to realize your vision (photo courtesy of Silicon Valley entrepreneur and photographer Christopher Michel).

Startups are hard.  Most fail.  Even ones with great ideas.  So, how do you maximize your odds of success?  Hire the best team you can afford.  Including a Strategic Chief Financial Officer with the skills, experience and vision to be your business partner and trusted advisor.  Muhammad Ali had Angelo Dundee.  King Henry VIII had Thomas Cromwell.  Luke Skywalker had Obi-Wan Kenobe.  Who’s got your back?  It could be your part-time CFO.

Can’t you get away with just an accountant?  In a word, “no”.  Accountants are important and help you figure out what’s happened in the past and report the same to your internal and external stakeholders.  But you are an early-stage company.  You need to drive the bus by looking ahead through the windshield, not behind in the rear-view mirror.  Smarter finance is forward looking – it helps you chart the best course.

Shouldn’t you be doing this yourself as the CEO?  Again, “no”.  Best case, you are actually capable of filling this role.  But this isn’t the best use of your precious time. You need to drive the company’s product and sales, build the team and be the company’s face to the outside world. Time spent in finance is time spent away from your highest and best purpose.  Worst case, you screw it up.

But can you afford and attract a top-quality CFO?  Yes!  Because you don’t need this resource full-time and can pay only for what you need.  We live in an on-demand world.  Don’t buy servers – rent time from AWS.  Don’t buy a car – book an Uber.  Don’t buy a vacation home – go on Airbnb.  And don’t hire a full-time CFO (yet) – rent one from a reputable On-demand CFO firm.  You probably only need 0.5-2.0 days per week, can find A-list talent with expertise in your field and be up and running in days.  And when you’re ready to make a change, it’s simple to move on or upgrade to a full-time resource.

Here are 5 key things you get from a part-time Strategic CFO:

  1. Build and maintain your business and financial model. How will you monetize your idea?  How should you price and deliver the product or service?  How much cash is required to hit your next milestone?  When do you need to raise your next round?  What resources can you afford and when should you deploy them?  How do you know if it’s working and when/how to pivot when the market gives you feedback?  Your CFO helps you answer all these questions.
  1. Leverage your management team so you can punch above your weight. The CFO is a core member of your team even if they are not sitting in your office 50 hours per week.  They bring expertise, contacts and credibility to your company and can help you manage all the internal/administrative functions so your time can remain focused on building and growing the top line.  A proven CFO also gives board members, investors and other outside stakeholders confidence in you and the company.
  1. Be your strategic partner and key sounding board. CEO is a lonely job, even in the biggest companies.  The best CEOs have trusted strategic advisors that they can rely on to help them execute their plan and give them honest feedback.  This is hard in an early-stage company where you can’t really afford to build a large team of experienced talent.  And more times than not, the rest of your senior team is drinking from the same Kool-Aid jug that you are – that’s why they’re there.  Your investors and advisors can help play an important role here, but they have lots of other demands on their time and priorities.  Your CFO is dedicated to your success and can bring critical outside perspective.  Most likely, he or she has seen many of the issues you’re facing before – and can access the knowledge of the rest of their firm on your behalf.
  1. Increase your access to the capital you need. Cash is the lifeblood of your company.  Most likely you will want to tap external sources now or in the future.  This could be from equity, debt, strategic partnering, public offerings, M&A or some other source.  Your CFO can help guide you on how to approach these capital sources, how to craft the right story, answer their questions and due diligence requests, negotiate and close the right deal and maintain good relationships with these new partners post-closing.  He or she will also make sure you’re always ready to raise the next round – preferably before you need it.
  1. Immediate return on investment. Because you only pay for what you use, a part-time CFO can be surprisingly affordable.  And if they deliver on even a subset of what they have to offer, they should pay for themselves many times over in terms of both your bottom line and your probability of success.

Rent the CFO cover you need. No-brainer.

Are your sales people farmers or hunters (or maybe both)? Photo courtesy of Silicon Valley entrepreneur and photographer Christopher Michel.

A few weeks ago, our friends at Norwest Venture Partners (NVP) wrote an interesting article on how CFOs should approach sales compensation (Sales Compensation Leading Practices: Tips for Entrepreneurs Building Recurring Revenue Businesses, by Terri McFadden). We’ve seen how our portfolio companies share the pain of modeling for recurring revenue that Terri talks about when it comes to compensating their business development team. In her words, “recurring revenue can be a minefield for CFOs who are trying to figure out how to compensate their sales forces, she goes on to indicate that, “one false step can explode the ambitions of a company trying to establish itself in the market.”

You definitely don’t want to be DOA by not paying close attention to how to create a compensation plan that makes your SaaS recurring revenue business model one your team can sell effectively. We’ve come across clients who created a plan on the fly by relying on their accountants to model it, and undoing it is not fun. That’s why I found the NVP post quite useful to share and expand on in this article.

NVP wrote their article following a round table with two experts from Accenture – Kevin Dobbs, Everything-as-a-Service Practice Lead, and Mark Wachter, Managing Director of Sales Strategy. Below is what they learned.

  1. Align incentives and strategy in planning

Sounds straightforward, right? You would be surprised how many times this obvious action is ignored. I think the culprit is speed: your time as a CEO in a young company is spent on product and actual selling, so thinking strategically about compensation seems like a luxury you have no time for. Terri writes that “the complexity comes from defining your key success metrics, how they are tracked, setting goals, what success looks like and then how do you want to pay for these results.” This is exactly where you can use cover from a part-time CFO – all the points their article refers to are part of financial planning and support to tie your incentives and strategies to the fabric of your business model, and keep a close eye as they progress.

  1. Compensate salespeople according to whether they are “hunters” or “farmers.”

For most SaaS companies, hunters are their sales people and farmers are their customer success people. Even if they start out the same, eventually, you need to separate these two groups in your financials and then operationally. How can a part-time CFO help you here? Hunters and farmers need completely different incentives. Hunters go for the big fish; farmers nurture that catch and make sure they reproduce (think renewals). A CFO can help you model compensation to reward both groups differently, according to their incentives, and evolve that model over time as your business grows and your customer success people become more specialized. In practice, the process of designing incentives for different sales behaviors is one of trial and error, so that it can be evolved as these roles change. At certain stages in your trajectory, hunters farm and farmers hunt, and you have to track and evolve incentives around this dynamic with cover from a seasoned CFO that can see the world from the eyes of your sales team.

  1. Establish quotas correctly

You don’t need to go to a round table to know that. However, our experience helping CEOs with strategic finance actually coincides with what the Accenture experts told NVP: “When it comes to setting quotas, most organizations don’t set sales quotas correctly.” Correctly is the key term here. All companies set sales quotas, but setting them in a way that works – and keeps working over time – is actually tricky. Low base/high commission? The reverse? On total ARR? New ARR? What level of quota?  When to change them? Well thought-out quotas reflect key elements of actual performance such as the length of your sales cycle, how much control do your reps have on the sale, whether you price low to go in, the importance of renewals, etc. To add complexity to this, all these elements evolve over time, so they need to be fine-tuned to keep sales quotas effective at driving sales. A part-time CFO with experience working with sales teams can ensure you keep your eye on the ball regarding setting up and fine-tuning sales quotas for your team.

Thinking strategically regarding your sales machine from day one will result in more confident growth and will attract the best people to your team. Terri at NVP puts it well when she writes that, “If you want your own recurring revenue business to drive a smooth path to success, you must set up a sales and commission plan that works in synchromesh with your strategy and goals.” I would only add that a CEO and a VP of Sales can do it with less pain and more effectiveness with the help of a CFO who thinks about the long-term implications of sales compensation and helps them model incentives, compensation and quotas to grow with confidence.

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The CEO & Co-founder of Front wrote about her experience raising their Series A.  It contains several insights such as:

  • VCs will never stop asking questions so you’ll have to know when to stop answering.
  • The metrics you mention will become the metrics you’re evaluated by.
  • A more condensed process minimizes the distraction from running the business.  (This is another variable to add when considering who to raise from; in addition to valuation, investment size & terms).
  • Due Diligence will be “ten times” worse than settling the deal
The entire post is worth a read. Here she is.

 

We’ve been closely following the emerging trends in the SaaS business model. Several of our customers businesses revolve around it and, as most other tech models, it is going through a transformative change. One of the most insightful articles we’ve read lately about this transformation  comes from Techcrunch. On November 13, our good friend and business school classmate, Sequoia partner Aaref Hilaly wrote a story smartly titled “Why the next great SaaS company will look nothing like Salesforce.” In it, Aaref points out that the newest crop of SaaS models turns the notion that to be sticky, a SaaS model has to become the “System of Record” (SoR) which used to be “the single source of truth, for customers’ most valuable information, such as customer records or employee data” like Salesforce. He adds that the emerging opportunity for SaaS is to become “Systems of Engagement” (SoE), meaning apps that employees actually use to get their work done” like Slack,  one of the most “sticky” business applications, now the most valuable private cloud company according to Forbes.

Check it out here. Aaref’s article is quite interesting and goes deep regarding how this new business model for SaaS not only makes sense, it solves the real problem of “creating systems of engagement that get users and revenue, by leveraging data in the systems of record.”

This Thanksgiving week, Series A startups can be thankful for your funding, but realize that the B Round is now the tougher round and the time to start preparing is now.  This presentation by Jed Katz (https://www.linkedin.com/in/jedkatz), who is the managing director at Javelin Venture Partners (https://javelinvp.com) explains how to do that. Jed posits that your next round of financing is much closer than you think, which catches some Founders by surprise. To prepare, he gives tips on setting 12-month goals, making cash last, managing & leveraging your Board, creating separate roadmaps for Sales & Engineering, and using the right metrics. Note how creating a brand serves recruits and investors in addition to customers. We especially like his final “words of wisdom,” that, unlike the perfunctory summary in some presentations, are useful and action-oriented.

These are valuable tips from a VC pro who’s seen everything. Check them out.