The (almost) most important job in the company
The role of the CFO has probably never been more vital, should you hire one?
Startups are scared. Investors are scared. The recent wave of bankruptcies and gross mismanagement as the tide of free money goes out has exposed all sorts of corporate shenanigans. I re-watched the Theranos series over the last few weeks and read pages of analysis on FTX, Barings Bank, Enron and other scandals. There are many mistakes that investors had made when investing with these “entrepreneurs”, but one common thread is the lack of financial accountability. There were simply no checks and balances, just blind faith.
It is no surprise that VCs and startups are now wondering if they should now hire a CFO in all their companies.
The answer is no but maybe. It really depends on what you need and where the company is in their life cycle.
Having strong financial controls is table stakes if a company has raised anything more than a seed round. From there, what a company layers on is needs-based.
Roles of the finance department
As a company matures, its needs evolve from just needing the very right of the table to adding more of the roles to the left. It is often very hard to find one person that can handle all the roles, so it is crucial to hire people that can be excellent at the role that you need them for and then either upskill or add more people later.
Financial Controller
Companies will usually be hiring CPAs or people that have grown up in an accounting firm for the right-hand side. But this department can be a crucial ally to the CEO or future CFO with the right leader. Finding or upgrading the talent there to a Chief Accounting Officer (CAO) can be a great win. This person can either then be upgraded to a CFO at a later date or work hand-in-glove with one when they are hired. This also opens your funnel, as your future CFO can be one without a hardcore accounting background.
FP&A
FP&A for complex businesses (multi-country, multi-product or cash flow sensitive companies) is a crucial department. Here you can potentially get away with junior bankers under more experienced senior staff to pick up the modelling and financial analysis. But having at least one person whose sole role it is to pick up this function will be very helpful as you get past the A round into B and later. One thing to encourage here and in the previous accounting role is automation. The use of software can sometimes be pushed back on by the employees but putting in place automation now will save a LOT of time in later stages.
Fundraising / IR
Once a company needs to raise $100mln or more, then they should start thinking about having someone directly in a fundraising / IR role. Fundraising can be very time-consuming. The entire process of fundraising, from due diligence to closing for a large round (especially if PE firms are involved), can be a 6-month process. In today’s environment, it will take longer not only because of the amount of choice that investors have but also more scrutiny of numbers given the recent frauds. By hiring an experienced fundraiser/Head of IR, the CEO can also take a lot of pressure off themselves. If the person understands the business well and can answer questions (or find the answers), then the CEO / CFO only need to be wheeled closer to when term sheets are about to be issued. The gatekeeper role can be crucial, especially in a fast-growing company.
These hires can come from a banking (either investment banking or research) background.
It is normal for companies to actually use this role as a springboard to think about hiring a senior CFO with these core capabilities that can then also manage the other finance teams. If you have already built solid controller and FP&A teams then it will make the new CFO’s life much easier to come in and focus on the fundraising and IR side. If these teams don’t exist, then there will be so much time spent building that org (that is, if they even have the skillset to build it) that they will naturally neglect the fundraising duties.
Ideally, look to hire this role a year before you raise this round. Given the lack of talent in most markets, notice periods and then the time it takes to understand most businesses, it will be one year before that person is 100% productive.
Asset Allocator
The asset allocator role works with the CEO and other leaders to understand the business. They will then work strategically with the CEO to allocate capital to maximise shareholder returns. This role is something that requires a lot of trust from the CEO and needs someone that understands the business deeply. Not a role that is typically filled by a new person right away. Here the right is earned, not given.
Conclusion
The CFO role is a crucial role in the c-suite. Apart from the CTO role, it is one of the few that is usually hired for and not naturally part of the founding team. The CFO can be an ally to the c-suite as well as the board and can make sure that scandals and mismanagement is kept in check. But don’t hire too early for this role until you know what you really want.