CFOs playing a bigger role in startups
CFOs and senior finance executives are taking on a greater role at startups and early-stage growth companies, according to new research.
A report from Financial Executives International’s Financial Executives Research Foundation and the consulting firm Protiviti found that CFOs and senior financial executives often play a key role in not only managing a startup company’s finances, but also in setting broader strategic goals and establishing and achieving both financial and nonfinancial milestones on the way to those goals.
“For a startup company the CFO is probably going to sit at the intersection of finance and strategy as well as, depending on the company, risk management and operations,” said FERF managing director of research Dave Pelland. “If you think about a startup venture, pretty much regardless of the industry, the CFO should be among the first three or four people hired. The founders will have the initial idea for the company, or the technology they’re trying to develop if it’s a tech startup. As they start to develop their product or service, and to attract outside investment and potentially revenue, a financial executive is going to be valuable in not only managing the finances, but also the company’s strategy and eventually its infrastructure as the company develops.”
As businesses grow, the need becomes more acute for both financial and strategic acumen. CFOs are helping companies raise funds, through venture capital, private investments and private equity investments.
“Even in larger companies you’re seeing the CFO play a much larger role beyond finance,” said Pelland. “That touches on strategy and operations. For a smaller organization, along with the strategic piece, the CFO is going to be more of a generalist in most cases than they would at a larger organization, so they could be overseeing strategy, sales, HR or other functions. Managing all of that successfully requires a slightly broader skill set than a strict focus on a finance role, because the company is building its business while also trying to attract outside investment. A successful financial executive at a startup company is going to play a role in going to the marketplace and attracting investments or supporting the founders as they attract investments, and also helping them evaluate potential investments.”
Establishing sound reporting systems and tools provides better reporting metrics and communication to investors. CFOs are also playing a major role in setting and monitoring company strategy, and balancing the company’s priorities between investing in growth, building market share and preserving capital for future opportunities.
“Say a venture capitalist offers you X number of dollars for X percent of the company,” said Pelland. “Is that a good deal? Is that not a good deal? Does that align with the company’s long-term strategy? Can the company afford to be patient as it develops a longer-term strategy? Those are the kind of questions or areas where a successful financial executive is going to help the founders balance the long-term goals of the company along with the short-term goals of preserving capital and attracting investment, as the company develops into a revenue stage, going out and attracting revenue, generating revenue and attracting customers.”
At some companies, the CFO may even get involved in overseeing the technology it uses.
“It really depends on the company, its industry as well as the specific skills sets of the founders and management teams,” said Pelland. “If you’ve got a couple of company leaders with a strong technology background, that may or may not be the area of emphasis of the financial executives. It’s tough to generalize because every company is going to be a little bit different in terms of how it approaches those types of nuances.”
Some CFOs prefer to play an entrepreneurial role, while others favor a more cautious approach. The concept of an outsourced CFO provides both companies and financial executives with some flexibility.
“If a CFO has a bit of an entrepreneurial instinct or is interested in playing in that arena, that’s certainly available for them,” said Pelland. “If a financial executive is a little bit more cautious about throwing all of their chips into one startup, a related opportunity that’s emerging is the idea of serving as an outsourced CFO on a part-time or contract basis. In a situation like that, they can help the company meet a short-term specific need such as another round of raising capital, or they can provide financial support or financial leadership to three or four companies on a part-time basis as those companies mature enough to require a full-time financial professional or CFO. That’s a way for CFOs to support an entrepreneurial venture and potentially not take on as much downside risk as if they were going full-time to a startup.”
CFOs can also use startups and early-stage companies as a way to broaden their skills on the way to a job at a major corporation.
“Another aspect is the balance of different roles that the CFO plays,” said Pelland. “That can be a compelling opportunity for people who either want to expand their skillsets, or if you’ve got a role at a smaller established company, and you’re looking to develop some operational experience with the hope of moving to a larger Fortune 1000 or Fortune 100 company, it could be an attractive opportunity on your career path to spend some time as a startup develops.”
CFOs can also shepherd startups and early-stage companies through the process of growing until they’re ready to go public as the economy continues to improve.
“Over the past couple of years venture capital has been relatively available, and over the last year to 18 months or so, the IPO market has been fairly quiet,” said Pelland. “But we’re starting to see some signs of that opening up, so with capital being available, and with the IPO market giving company founders potentially more flexibility in terms of their long-term strategy or their exit strategy for the company, that also provides a favorable environment for financial executives, as well as a need for their expertise in raising rounds of capital or helping company founders evaluate potential investment opportunities.”