Why CFO is essential for Startups?

Startup entrepreneurship is not a business for the faint-hearted. It is a roller-coaster ride of triumphs and disappointments. All this is navigated in an atmosphere of being absolutely boot strapped to being flushed with funds to managing cash flow till the next infusion.

The founders are dependent on attracting sizeable funding for the success and realisation of their dream. Even the bootstrapped entrepreneurs look for funding within the first 3 years of operations to really create market leadership that can be protected.

No wonder 90% of startup fail within the first four years of establishment. Founders need to be on their best to navigate this scenario which is further complicated by dynamic taxation, legal and regulatory environment.

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Only about one in 100 start-ups are invited to a conversation with a meaningful VC. This is dependent on a product offering that is on an ascendency, the marketing and public relations being visible and the market opportunity being large enough. A study of 885 institutional VCs at 681 firms by the National Bureau of Economic Research found VCs start with a pipeline of hundreds of potential opportunities and narrow those down to make a very small number of investments.

Eventual funding with good valuation from these conversations is based on past performance, future projections, VC’s impression of founders’ capability to meet the management challenges in a scaled business, and the VC ability to guide and open doors. VC also have a keen eye for the other senior members of management team and specially on the person managing the financial affairs.

An experienced finance professional who has been part of the core team for a longer tenure gives more confidence to investors – which is important for valuation. It is here that a talented CFO (chief financial officer) with multi-disciplinary experience becomes critical for the start-up.

Siba Panda (Founder & CEO), Faustus Advisory

When not guided by a good CFO the past performance numbers can suffer the weight of oversights and short-sighted decisions. A talented CFO will ensure that the founders run a well-oiled set-up with absolute control. Some of the issues that require the guidance of as CFO (and the CA is not enough) are:

  • Controlling of bad debts and outstanding debts
  • Contracts that are litigation free
  • Unit margins that are VC attractive
  • Management of suppliers and vendors
  • Buy vs lease decisions
  • Compliance with taxation rules
  • Director compensation and reporting
  • Well-structured employee and labour agreements for win-win
  • Ensuring employee stock-options that attract best talent at low equity cost
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Future projections need an understanding of core business on par with the founders and expert ability of leveraging financial planning tools which a good CFO will have. Future projections are critical in deciding the final valuation as they directly determine the money infused in this round and even future rounds of VC funding.

The Founders management ability in the face of scaled up business after funding is also reflected in how the cash flows has been managed in the past and projected for the future. How the past agreements have been structured, the tax compliance the litigations that could have been avoided, the decision-making process for taking business calls all feed into this evaluation. This is essential for determining that the founders will remain in the driving seat even after funding and a competent CFO is essential for this.

Post funding the role of CFO is further expanded as the VC expects financial reporting to be in line with their best practices. If the startup is not able to quickly adopt, due to not having a trusted CFO, then the VC suggests their recommended CFO. Such a CFO is likely to be more committed to the VC than the founders. Also, the CFOs remuneration may be very hand will become difficult to manage when stretching the funding before the nest infusion.

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Post funding period also requires careful monitoring of costs and RoI to keep them in line with the board’s expectation. The startup will have a serious commitment to the board for the first time as the VC is on it. They will require all statements to be backed with complete data and will also expect projections and explanations on any deviation. A good CFO ensures that the founders make reasonable commitments and are able to meet all commitments without having to take the eyes of the growth objectives.

It is thus cost practical for startups to onboard a CFO right from inception even though the cost to company seems high in the early stage. The CFO also frees the founder to focus on business growth rather than managing financial and contractual headaches. One way to keep the CFO cost low is to outsource the CFO thus getting the best of both worlds.

This article is authored by Siba Panda (Founder & CEO), Faustus Advisory.

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About Tanusha Verma

  • Uttarakhand
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