CFOs in startups: you need to OWN the cash problem

Last few weeks I was in the South of France waiting for my kit to arrive to the Port of Boston.  By chance I hooked with a good friend of mine who's enjoying a season off after selling the last company he was involved in (he's on his third exit, bless him).

We talked business for a bit and about his next role.  When I asked him whether he wanted to be CFO in a startup again, his response was blunt and immediate: "I was never a CFO, I was The Fixer.  Young companies don't need CFO's. they're just a VC's wet dream to allow them to sleep at night".

He hit it on the head: once a company has raised a decent amount of money (say for argument's sake $15M), investors may feel jittery and start fantasizing about a "really senior CFO" who can "take the company all the way" (meaning usually IPO or exit) but more importantly who can be a "good steward" of all the money they have put in.  Whether that is the right thing for the business is a different matter.  His point was simple and correct: "before you've got a really large company on your hands, you really don't need a CFO.  You just need a  good controller.  You need really serious scale before a "real" CFO makes any sense".

It made me thing of two related points that I do think matter, which is that you need to:

• Keep it light on top management: We need (talented) Indians and not just chiefs.  I have seen this a number of times: a tendency to grow the management team too fast, based on the notion that if the company is going to be ready for scale we need A+ heavyweights. The reality is often different, you take longer to grow then you anticipate or you get too many skilled managers ahead of your real needs, sometimes demotivating your young talent in the process or creating a "corporate" layer (argh).  After all if you hire managers, they manage.  Very often you can run a startup better with a very few execs and a lot of really talented young ones.  Alex and Doug at Zoopla grow the management team very slowly and it pays off.    The team at PriceMinister all grew into their management roles over time (all it takes is 10,000 hours of practice, right ?).
• Always keep your eye on cash (dynamically): Ken Morse, who was running until recently the MIT Entrepreneurship Center, used to put it simply: CIMITYM in other words "Cash Is More Important Than Your Mother".  I don't know whether it's his creation or an old saying, but the point is simple: you can run your business without your mum but not without her cash.  In startups the only real sin is running out of cash, and the cardinal sin is running out of cash UNEXPECTEDLY.  So whilst you may not need a CFO, you sure need someone who understands cash-flow and can give you the confidence to know when it's running out.  If it sounds obvious to you, think again.  Many entrepreneurs have not gone through the process of creating companies before and find rolling cash forecasts both mind-numbingly boring and actually hard to do.  But when your companies starts to scale non-linearly, and assuming the evolution of your working capital is somewhat hard to forecast, it can get dicey.  Get yourself a good Chief Cash Officer, to quote Fred Wilson.  [BTW as an aside if you go on Fred Wilson or Brad Feld's blog you will find that they have written about pretty much everything in the past (eg this), it's depressing.  Often I don't bother to check:-)  I guess I am just sampling]

In a nutshell:

• You probably don't need a senior CFO for quite a while
• If you need a business partner, find one but don't require him to be an accountant too
• What you do need a Chief Cash Officer, whatever he or she is called.  If you've run a retail business in the past on 2% margin, then do it yourself :-)
• Remember, no ones gives a s*** about your EBITDA and your reporting when you're a startup: you need accurate rolling cash forecasts

As an Entrepreneur, Cash is ALWAYS your problem.  Own it.

Comments

[Fred Destin]

John; maybe I was overly forceful in making the point but I still think it stands. I have witnessed first hand and second hand instances where CEOs and founders derive ill-judged comfort from the fact that their reporting looks professional and worthy of a public company, whilst not fundamentally understanding the cash dynamics of their business. In French, an author once said "being competent is being wrong according to the rules". Whilst I am a passionate advocate of strong governance, I think good reporting relies on the right KPI's and the right metrics, not necessarily compliance with the relevant IAS standards, at least in the early stages.

[Johnmccarthy]

"no ones gives a s*** about your EBITDA and your reporting when you're a startup"

I agree with most of what you wrote, but to be that flippant about proper financial statements and reporting sets a bad tone for corporate governance and encourages Cowboy like behavior. Most entrepreneurs I have dealt with need no encouragement to avoid proper financial reporting. The good VCs I have dealt with require it for both the disciplined mind set it encourages and fact that it allows for a common language (the language of business) to be used in discussing with investors and management such quaint issues like sales, revenue and profitability.

[Fred Destin]

@Herve: I agree with you on letting the CEO run with what he's best at, my point is that the one issue that always comes back to rest with him is whether his company is funded and his team has a paycheck, and that you can never outsource the ultimate responsibility to anyone

[herve]

Great Point. It reminds me a quote in Jessica Livingston's "Founders at Work" (page 330). Here it is : “Fundamentally, if you have a lemonade stand, you have to sell your lemonade for more than it costs you to make. That’s really all you need to know to run a company.” So I just wonder if this not true also for the CEO role. Don't you think that ideally the founder(s) should run the show, define the vision and he/they may need some grey hair people for operations but not that soon in the process...

[twitter.com/startupcfo]

Hey Fred, I have led finance for VC-backed startups for the last 11 years, and as I prepare to move to the investment side as well, I definitely have some thoughts on this.

It is true that a startup does not need a senior or "real" CFO until its big, but to me the ideal time to bring in a CFO is right before 1st institutional funding. BUT, that CFO should be part time. Having someone with startup, fundraising, governance and exit experience from the 1st time there is institutional money in can have a big impact on the founder. When the founder becomes a consumer of info vs a producer it changes his perspective.

Also, because I get involved with young startups I see the same issues come up often and able to help them make better choices, hires, etc.

Finally, while an entrepreneur should delegate cash responsibility, they should not abdicate it. I expect a good entrepreneur to always know burn and runway.

[Rory]

In my experience a real senior CFO will also look to implement reporting systems and process that is out of kilter with startup business requirements. Often the legal work also comes under the CFO and if they are from a large company you can quickly rack up pointlessly large bills on legal work with no real requirement for it. Key is cash collection and "just enough" reporting to stay on top of the business.