The DNA of the CFO
Just finished reading an interesting study published by Ernst & Young, The DNA of the CFO, which led me to reflect on the role of the CFO in startups.
I am a HUGE fan of the role of the CFO. In my mind, the CFO is the next most important role after the CEO. In fact, I see the CFO as the “yin” to the CEO’s “yang.” This yin-yang combination can play itself out in different ways, depending on the skill sets of the CEO:
- For a CEO strong in sales and marketing who is driven to push top line growth, I would want to have a CFO who can use the operating metrics of the distribution model to temper the CEO’s top line drive. The role of the CFO in that case would be to keep the sales and marketing side of the house as capital-efficient as the business needs it to be.
- For a CEO who is product-oriented, and not operationally or process-centric, I would want a CFO who plays the role of the COO; a CFO who can take care of building and scaling the operational processes and infrastructure within the company while the CEO is focusing on product or market development.
- For a CEO who is not into details or is not analytically focused, I would want the CFO to assume the role of operational co-pilot. The CFO would engage the functional senior management teams to pull together the right set of functional metrics/analysis that provide the right insights to annual and quarterly planning processes.
- For an inexperienced CEO, I would want to have a CFO who brings extensive operating experience — again, to be the CEO’s co-pilot.
In my five years at OpenView Venture Partners, working with our expansion stage portfolio companies, I have seen many examples of the heavy price that can be paid for not having the right talent in the Finance function:
- An inexperienced Finance Director provides sets of financials that don’t always tie. In those financials, the numbers that were being reported as one year new customer bookings turn out to be multi-year bookings. This revelation meant that the company had been over-hiring in sales using the wrong assumptions on overall distribution model economics.
- An inexperienced Finance Director does not implement the appropriate procedures for closing and recognizing a sale. Sales team reports bookings that are not validated with signed contracts by the customer. Subsequently, over $1M in bookings are written off as non-renewable. These bookings were a significant driver to hiring decisions which ended up burning lots of cash.
- An inexperienced CEO does not understand the financials and economics of the business. Decisions made in accelerated growth of the company resulted in high cash burn. Key issue is the impact of opportunistically closing professional services heavy sales, where the gross margin on that revenue was resulting in cash burn. Basically, the CEO (and the board) could not really tell what was driving the cash burn.
The list goes on and on. What I advise our CEOs is the following:
- Invest in a senior Finance resource early (CFO or VP of Finance). Look for someone who has experience in building companies from your current size to 3x that size. Don’t let the cost of this resource stop you from hiring the best talent you can recruit. It will pay for itself many times over.
- Recruit a credible audit firm and go through an audit (but not before you hire the CFO/VP that can prepare you for an audit.) An audit is the best way to ensure that you have your house in order.
- Use the partner at the Audit firm as your financial adviser (to augment your CFO/VP). There’s lots that the Audit firm partner can do to help you and your CFO/VP focus on, when it comes to the right next steps in evolving your finance function. Also invite him to your board meetings as an observer.
- Do the same with a legal firm. Hire a credible legal firm and have it do a legal audit on your company. This audit invariably uncovers issues with your current corporate structure, option plan, contracts and other such matters. Make the legal firm partner an adviser to you, and ask him to help you identify the next steps in your evolution. Also, invite him to your board meetings as an observer.
- Get an independent board member that plays the role of the board-level CFO. This would be a former CFO who has taken more than one company public and has experience sitting on boards. This board member would be responsible for providing your CFO with the necessary air-cover. And he would be responsible for setting up more formal audit and compensation committees.
For more on the role of the CFO, and how to recruit and manage one, you should read a bunch of Cynthia Mignogna’s blog. Here’s a couple to get you started:
It’s not an easy decision, but most important ones in life aren’t.
We hope this framework makes planning during this uncertain time feel less like summoning a crystal ball and more like navigating with a map.
In this environment, it doesn’t matter if you’re the CEO of a startup or a well-established company—you’re going to have to make some difficult choices that will probably keep you up at night.