Jason M. Lemkin recently posted a tweetstorm about his observation that most startups are bad at finance. As you’d expect from Jason, he didn’t try to sugarcoat things:
In a funny coincidence, one of our portfolio CEOs wrote me an email with the subject “Should we be hiring a CFO?” just one or two days before Jason unleashed his tweetstorm. It seems like while there’s been a lot of discussion in the SaaS community about the right time to bring on a VP of Sales or VP of Marketing (with the best advice coming from Jason himself¹), the finance department hasn’t attracted as much attention yet. Therefore, I thought it might be helpful for other founders if I publish my email reply to the CEO here:
A couple of thoughts:
1) I think a good CFO will:
– take everything in regards to bookkeeping, accounting, and tax off your shoulders
– be able to take further operational duties off your shoulders
– help you with financial modeling and budgeting (i.e. he/she will create the model/plan based on your input, adjust/fine-tune it based on your input, and will be able to create monthly actuals vs. budget and a rolling forecast).
2) I think a great CFO will, in addition to that:
– be a true “business partner“ (like a co-founder with the finance hat) who can act as a sparring partner for all kinds of business decisions, e.g. when it comes to assessing a partnering opportunity
– be focused on driving revenue, so he/she will help us generate more revenue e.g. by working on pricing
– ask the right „strategic“ questions (for example, I would expect him/her to independently challenge you in regards to the profitability of different customer segments)
– improve cash management (e.g. in regards to payment terms, accounts receivables, FX,…)
– fully own financial modeling/budgeting (obviously with input and guidance from you and others)
– own the data room for the next financing round and play an important role in the fundraising process
– have experience with M&A and various financing instruments
3) I think with the exception of M&A experience, all of these are skills/assets which, at XXXX’s stage, we should have in the not too distant future. When we’re at $5–10M in ARR or so, a great CFO might almost pay for him/herself by helping us tweak and optimize the business (in addition to freeing up your time).
Happy to talk to the candidate(s)!
I’m also adding Ola in case she has any additional input.
Let me also add what Ola, our Operating Partner, had to add:
I second everything Christoph mentioned. From my own experience of joining the finance department of a startup in year 10 with ca. EUR 500M in group revenue with 10+ subsidiaries where everything was still based mainly on Excel and a basic accounting software with huge amounts of manual work, where it was almost impossible to implement any technical project like ERP or CRM and tax audits were dragging out for ages and proved to be very challenging, I believe it is almost never too soon to hire a senior finance person to set the scene for scaling in a professional way (and saving FTEs due to automation and smart set-up).
Not sure what your subsidiary structure etc. is but an experienced finance person can play a vital role in internationalisation as well. Contract reviews with big clients, compliance matters, any type of changes of law, tax audits, dealing with advisors, etc. are usually also things such a person could take care of instead of the founders.
I would be very happy to interview XXXXX as well (and to drill him a bit on the technical, hardcore finance stuff) if you think this would help to make up your mind (have done it for several of our portfolio companies before).
In this case, our recommendation was pretty clear, but the company is close to $5 million in ARR and can afford a great finance leader. What about SaaS startups that are at a much earlier stage and haven’t raised a few million dollars yet? If there’s a trade-off between hiring a CFO and, say, a marketing leader or 1–2 developers, most founders will understandably go for the latter. So, when is the right time to hire a CFO? There is no one-size-fits-all answer to the question, as the right timing depends on a couple of factors, including how much capital you’ve raised, how fast you’re growing, and if one of the founders has prior experience with or a talent for financials. Let’s take a closer look at how the “finance department” of a typical SaaS company might develop over time.
Aaron Patzer, the founder of Mint, once said: “When valuing a startup, add $500k for every engineer, and subtract $250k for every MBA”. While I don’t agree with this sentiment in general (and I don’t know if Aaron was serious), it’s true that in the very beginning you need people who can build stuff, i.e. mostly engineers and designers. Almost everything else can wait until you’re closer to launch. Before you start to commercialize your product, your company’s finances are usually very simple and can be handled by one of the founders, with accounting and payroll typically being outsourced to one or more external service providers.²
~ $1 million ARR
You’re live, you have the first paying customers, you may have raised a small seed round already, and slowly but surely, you’re generating more and more revenue. It begins to feel like you’re on to something, and you’re starting to think about raising more money to accelerate product development and customer acquisition. At this stage, the workload, as well as the complexity, with respect to the company’s finances increases quickly. Some time around the $0.5–1.5 million ARR stage you’ll want to hire a finance person who can take everything in regards to accounting off your shoulders and who will help you with financial planning and budgeting as well as your accounts receivables.
That person will also help you get better at tracking your business performance over time and will professionalize your finance tools and processes, which will become increasingly important as you move to the next stage. The finance person that you’ll hire at this stage is not going to be an experienced VP Finance or CFO, though, so expect that although he or she will be able to help you with e.g. financial planning and an investor presentation, you’ll play the key role in putting together the plan that you’re going to present to prospective Series A investors.³
~ $3–5 million ARR
As you’re approaching $3–5 million in ARR, it’s time to bring in an experienced finance person — unless the one you’ve hired at around $1M in ARR is learning so fast that he or she can be that person. With a few million dollars in ARR, improvements to how you manage working capital, credit controls, payments, various currencies, etc. will start to have a bigger impact because you’re starting to deal with larger amounts of money. At the same time, controlling expenses will become much more complicated, especially if you’re doubling your team size year-over-year; you might open a second or third office in another location and might have a subsidiary in another country, which means you may have to deal with topics like payroll and employee benefits in other countries and transfer pricing between your company and its subsidiary; and you’ll have to deal with ESOP pricing, auditors, and much more.
At this stage, you will hugely benefit from somebody who can do most of the things I’ve mentioned under “a great CFO will…” in my email above. That doesn’t mean that your finance leader must have been a CFO before or that you should give him or her the CFO title — making him or her a Director or VP might work, too. In fact, if you hire someone who has been a CFO already you’ll have to make sure that he or she doesn’t expect a job that is primarily about managing people. Your finance department will still be quite small at this stage — probably 2–4 people, so you need someone who isn’t too senior for hands-on work.
One more point: A few of our portfolio companies have hired a seasoned part-time CFO at a few million dollars in ARR, which allowed them to punch above their weight in terms of experience of the candidate and to delay the hiring of a full-time CFO (or VP Finance) until around $10 million in ARR. This can work, but the caveat is that with a part-time CFO you will most likely not get what I described as a “true business partner” in my email above — a “late co-founder” who is extremely strong commercially, acts almost like a founder, and, as one of our portfolio CEOs put it, is “an additional trusted voice that knows which questions to ask that we may not have thought of”.
$20–25M+ ARR and beyond
The finance leader who you’ve hired at around $3–5 million ARR will hopefully be the right finance leader to get you to around $20–25 million in ARR but that doesn’t mean that he or she has the experience and skills to be your CFO as you grow to $100 million in ARR and potentially become a public company. During that part of the journey, you’ll want a finance superstar with lots of experience in M&A deals, equity and debt financings, and maybe even taking companies public. I’ll stop here, though, because if you’re reading this, chances are that there’s nothing you care less about right now than whether your $20–25M ARR CFO will scale all the way up to $100M. 😉 As with all manager that you hire, optimize for the next 2–3 years. If he or she continues to be the right person for the job beyond that, you’re lucky. But if you optimize for it at the get-go, there’s a high chance that you’ll hire the wrong person. There may not be 48 different types of CFOs — but there are certainly a few!