What is the most common reason start-ups die? They run out of cash.
In a steady, predictable business, it may seem like a simple thing to create a financial plan and stick to it. But start-ups are neither steady nor predictable. They operate in a constant state of flux. The last thing you want as a CEO is to look up after a busy quarter and find out you can't make payroll.
If you run things too close to the edge, you'll never make it. That's where a stellar Chief Financial Officer comes in. They should be able to see into the future to know when you need to raise another round of venture or growth capital, and how much you'll need to get to the next level.
My CFO has been a major source of leverage for me, and he has brought a ton of value to the company. In just three years since we began shipping product, we reached $100 million in revenue, and we're just getting started.
Before you hire your first CFO, here are a few things to keep in mind:
The relationship between a CEO and CFO has to be based on mutual trust. No one inside your company sees more than your CFO. They know who is paid what, how much capital is going toward a new bet and how your last project performed. Not only do you need to believe in the competence and intelligence of your CFO, but you also need to be sure they are high-integrity individuals who will put the needs of the business above everything else. You need to know that everything you tell them will stay in confidence and that they don't harbor any secret agendas.
Money is the First Thing -- But It Isn't Everything
The number one job of a CFO is to make sure there's money in the bank. But start-up CFOs do much, much more. When our CFO joined, he took over management of finance, IT, HR and legal. That meant I had fewer direct reports to manage, which allowed me to direct all my attention to the big picture. You don't realize how much time you waste reviewing contracts with lawyers until you don't have to do it anymore. When you're staring down competitors, imagining new products and plotting your go-to-market strategy, do you really want to worry about whether the wireless is up?
Getting to Yes
At a startup, you're always trying to do more with less. Because of that, you might imagine that the CFO's job is to say "no" all day. I've found the opposite to be true. The ideal CFO is someone who can find ways to say "yes" to new opportunities. If they can't make a specific plan or timeline work, they can help you devise alternative approaches that will get you the same result. The CEO's job is to be visionary and aggressive; the CFO makes sure the path to achieve those goals is realistic.
One Foot on the Brake and One on the Gas
The CEO and the CFO should jointly decide how fast to grow, when and how. It should be a calculus of risk vs. reward, but it should also consider specifics: When should we expand internationally, and what kind of return can we expect from which markets? When can we hire more engineers to build a new product? If we want to spend $10 million on a new marketing campaign, what can we expect in terms of sales? How much do we want to invest in a new venture, and at what point will we know when it's time to either pull back or double down? A top CFO will model all the possible outcomes so you can make the best decision.
When is the Right Time to Hire a CFO?
As GGV Capital's Jeff Richards, one of my board members, once told me: "I've never had a successful entrepreneur tell me they hired their CFO too early." In my experience, the ideal time to hire an experienced CFO is as soon as you bring in revenue. Don't wait until you think you're ready to prepare for an IPO. The opportunity cost of waiting that long is much, much higher than the cost of your CFO's compensation. By missing out on all the strategic company-building advice a CFO can bring, you're leaving money on the table. If you're a first-time CEO, hire an experienced CFO. Ideally, they will have worked at large companies as well as start-ups, taken a company public and handled acquisitions from both sides of the table.
Your CFO is a critical member of your management team. If you hire the right person and build a trusted relationship, they will be your greatest asset and ally.