I meet founders often only after they have completed their first VC funding round and are tapping into the organisational challenges of scaling their company. There are two key questions whose impact on overall growth and success is often underestimated: How should the business manage its financial operations? How much of the financial processes will soon become business critical and should be built inside the company?
At the time of OpenOcean’s initial investment during the pre-A or A round, none of our portfolio companies had an in-house CFO. It subsequently became clear to almost all of them that scaling the company required the skills and knowledge that only an experienced financial professional would have. The foundation for growth starts with recruiting the right person.
Typically, in the early phase, start-ups get an external accounting firm to manage their bookkeeping and other mandatory financial processes, and the CEO makes the key financial decisions together with the board. The first milestones of an early-stage company can easily be realised without an in-house finance person. Occasionally, companies choose to hire a part-time finance resource or an external consultant, who typically acts as a part-time CFO. However, as the company expands, the rapidly growing pile of financial tasks will quite quickly require a full-time finance resource, who can ensure the financial processes will scale appropriately with the company.
Initially, when the focus is on product development and initial customer acquisition many start-up founders are reluctant to hire a seasoned CFO. However, recruiting someone with insufficient experience really underestimates the skill set required by a CFO of a business with a farsighted growth plan, as it focuses too much on current needs. “A seasoned CFO can often pay their yearly salary back within the first few weeks, just by finding some low-hanging fruit that could easily profit the company financially. For example, a large VAT deduction may be completely missed without a CFO,” pointed out Henna Mäkinen, who was the CFO at Wolt before joining Supermetrics.
Essential skill set
A CFO is often a generalist, but for an early-stage start-up, the scope of their responsibilities is even wider. “At first, a lot is done by the CFO hands on, as there are no team members to delegate the work to. A start-up CFO has to be able to do a little bit of everything in a very concrete way: from bookkeeping to management accounting, treasury, taxation and even legal matters to some extent,” explained Henna Mäkinen.
Often, it’s the CFO who cooperates with the external legal advisors. They can be knee-deep in the legal side of the business as well, especially during financing rounds. Most importantly, a good start-up CFO must understand the numbers and be able to demonstrate what’s behind them by providing insights into the company’s business, as you cannot expect that an external accountant will fully understand your operations. Therefore, it’s useful for a start-up CFO to have a background in financial controlling and legal matters.
According to both of our interviewees, a good start-up CFO doesn’t have to be too tech-savvy, but a basic knowledge of the company’s products is always beneficial. Moreover, some understanding of data analytics is often a huge advantage. “Usually, it’s not like in a big corporation, where you can get whatever insights you need by pressing a button,” Henna Mäkinen noted.
Start-up and CFO: Evolving together
As the company grows, the finance team has to expand beyond the CFO to address the new needs and to focus the available resources. For a start-up CFO, this means that their role evolves at the same pace as the company. They have to switch from hands-on work, such as invoice approvals and tax reporting, to strategic planning and becoming a team leader. “The transition doesn’t happen in one day. Gradually, more and more time has to be spent on leading the team and managing the business,” Antti Kekkonen added. It’s clear that the CFO role becomes a lot more than just managing the financial operations. For example, the CFO has a key role when it comes to any transactions, including possible strategic acquisitions, both on the buy- and sell sides.
Arguably, the most critical task of a start-up CFO is to support the decision-making process for the vast spectrum of business decisions by providing financial information. Antti Kekkonen believes that: “There needs to be a good dynamic between the CFO and the founders. Moreover, the CFO often adds some realism to the optimistic business plans.” Regarding strategic thinking, the CFO has to understand the current business plan and translate it so that it addresses the organisational requirements. If a company is scaling from $1M to $10M annual revenue, what kind of team, processes and tools are needed to support the growth? At the same time, the CFO must track the progress in relation to the growth plan and must be able to spot and tackle problems as they emerge.
Prioritising the scarce resources
While every growing company benefits from building its own finance function, not all finance tasks need to be done in-house. According to Antti Kekkonen, there may be tasks where the know-how is not critical to the company and other tasks that are done only sporadically. The business should consider whether these tasks could be done by an external resource more efficiently and more quickly.
For legal matters, however, a full-time legal resource may become necessary at some point. An example is B2B sales, since customer contract negotiations may require a considerable amount of business knowledge. On the other hand, it is likely to be more cost-effective to outsource many other legal jobs, for example, the legal work needed during the financing rounds.
Prioritisation is one of the greatest challenges that start-up CFOs have to face. When a CFO joins a new early-stage company, there may be possible development projects everywhere. “After outsourcing the less business-critical tasks, it may get more difficult to see how the internal resources should be utilised. They are best placed where they can add the biggest value to the business and where the growth opportunities lie. When there are a lot of these opportunities, that’s usually when you have to start building the finance team,” noted Henna Mäkinen. An experienced CFO will know what the most business-critical processes are and how they should be developed.
After the company has scaled to 10x revenues, at the latest, the hard work of an experienced CFO will start to show. At this point, the internal and external reporting, forecasting, invoicing and many other aspects of the finance function will be at a level such that not doing them correctly could severely hinder the growth of the company. At the same time, a strong financial and control function will be a key part of establishing trust between the company and its key stakeholders. The earlier the work is started, the better the foundation will be for the company to build on.
When should a start-up hire a CFO? What kind of background and experience should they have? When do you think is the right time for you to scale the financial processes of your company?