FINANCE GUIDE

How the role of a startup CFO changes at different startup lifecycle stages

June 09, 2020

In the long run, CFOs will be responsible for analysis, strategy, and sound financial advice. The ideal CFO is one that can accurately gauge the company’s needs and best interests, and provide the guidance and digital tools it needs to succeed for years to come.

In the global startup scene, Southeast Asia may be the new kid on the block, but it’s maturing rapidly. Older startups in the region are now exploring exit deals, while home-grown unicorns, such as SEA Group and Go-Jek, are snapping up smaller companies. The region saw a record high of 332 investment deals in the first half of 2019, marked by both mega-deals and increased diversification, according to Cento Ventures. Meanwhile, INSEAD and Golden Gate Ventures predict that Southeast Asia will see at least 700 exits from 2023 to 2025.

As startups in Southeast Asia grow and mature, so will their need for financial expertise. That’s why there’s no rigid CFO job description nowadays. Those who hold a CFO or equivalent role in a startup will need to add flexibility to their toolkit if they wish to successfully steer a company through its growing pains. After all, a startup asking for seed funding will have vastly different requirements from one that’s ready for an IPO.

The financial hierarchy of needs

Companies’ changing requirements at different lifecycle stages are reflected in the financial hierarchy of needs:

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Think of this pyramid like Maslow’s hierarchy of needs. The more ‘actualized’ people become, the more complex their needs get. The most complex needs are found at the top of the pyramid, which fewer people reach.

In the financial hierarchy of needs, the stages evolve from a transactional level to one that’s strategic and long term. As a startup grows and matures, it rises through the pyramid.

Transacting (Pre-launch or seed)

In a startup’s infancy, it tends to focus on signing deals, acquiring customers, and buying and selling goods or services. At this point, an external or part-time bookkeeper or accountant typically fills the role of a financial officer. That’s because only basic tasks, such as making and receiving payments, are required.

Record Keeping (Seed - Series A)

At this stage, a startup begins focusing more on getting its books in order. Someone needs to keep track of the cash that comes in and flows out of the company, how it all balances out at the end of the month, and how much is left on hand. Aside from that, someone needs to create, send, and manage invoices, conduct payroll, and reconcile transactions with the company’s bank or credit card activity.

This person doesn’t have to be a CFO, though. As with the Transacting stage, many startups outsource the record-keeping task to an external bookkeeper or accountant. Others hire one accountant and support that person’s job with bookkeeping software. In many cases, the use of a tool like SaaS expense management or automated spending cards is sufficient for the near future.

Trusted Reporting (pre-series A and beyond)

This is where things begin to get trickier and startups tend to begin hunting for a full-fledged CFO. At this point, startups will be taking a step back to avoid missing the forest for the trees—that is, to understand the company’s financial health and economic position based on factors other than their cash on hand.

For instance, a startup needs financial staff who can perform accrual accounting, which measures the company’s performance based on matching revenue and expenses as they take place, instead of when cash comes in. This is important for companies who sell goods or services on credit, as their cash on hand doesn’t reflect their current and projected revenue. Along with depreciation schedules of fixed assets, accrual accounting helps CEOs and founders make sound business decisions and improve the accuracy of financial forecasts.

All these financial activities and statements need to be accurately recorded to avoid mistakes and penalties during tax season. A CFO can oversee tax reporting, making sure that the business complies with taxation law and accounting standards.

Also at the Trusted Reporting stage, the business will have grown, both in scale and complexity, to the point that it can no longer efficiently manage its accounting processes without the aid of an automated tool.

While a company can simply choose any cloud-based software that automates accounting and bookkeeping processes, it pays to have a CFO directing this digitalization effort. A CFO will not only weigh in on the software that best meets the startup’s current and future needs, but will also direct its implementation. They will be in charge of identifying the specific processes that need to be digitalized soonest. They will also identify the training the accounting staff needs so they develop the digital skills they need to glean insights from automated generated reports.

The CFO will also have the foresight to enforce software controls early on. These include data quality standards and specific cybersecurity measures.

Financial Planning

As a startup emerges from ‘survival mode’ and gains a foothold in the market, it needs to look forward to the future and set realistic targets. To do so, it has to take stock of its current market position, analyze opportunities and threats, and create realistic rolling forecasts.

And, as unromantic as it may sound to the ears of a founder, the startup needs to set performance targets that will help increase and sustain profitability, as well as allow it to provide sufficient returns to investors in the long run.

Such a task is best performed by a seasoned finance expert who understands the startup founder’s vision, as well as the strengths and weaknesses of the company and its products or services.

Why shouldn’t the CEO and/or founder take the helm in setting these targets? It’s certainly tempting for them to do so, as entrepreneurs are emotionally invested in the businesses they’ve built. But that’s exactly why a third person—one with a leadership role but with less emotional attachment than a founder would have—needs to come in during the analysis, forecasting, and target-setting stage.

For instance, a CFO may find that the financial and market situation requires the company to pivot from its original proposition. This is not easy for any founder to hear. Or a CEO may identify markets for expansion, and require the CFO’s help to assess how much money it will need to do so.

The opposite may also be true. Christine Park, CFO of social media startup Strava, says CFOs may need to advocate for a slow and steady pace, contrary to the “growth at all costs” mindset.

That’s why CEOs and CFOs need to build a relationship of mutual trust if they are to succeed in the Financial Planning stage and move on to the next phase of growth. This also allows CEOs and founders to focus on what they do best—leading the team, steering the company towards its vision, implementing and evaluating the startup’s overall strategy, making sure their products or services continue to satisfy customers, and networking.

Strategic Partnering

Startups dream of reaching this stage, but few do so. And those who do make it to this point without a CFO find that the best time to hire one was ‘yesterday’. It’s extremely difficult to succeed at the Strategic Planning stage without an in-house financial expert and leader.

At this point, a company will typically have completed a series B fundraise, which is known as the ‘valley of death’ (an analysis of over 35,000 startups shows that it has become more and more difficult to raise funds beyond this round). It may also be eyeing an exit strategy—be it an IPO or merger and acquisition (M&A)—in the near to medium term.

With every late-stage fundraise and exit talk comes a nitpicking of the company’s financial records and performance. You’ve got to have your house in order to convince investors to pour more money into the business or to buy it.

These talks require negotiating with investors, investment bankers, and other CFOs, so it pays to have someone with a financial leadership role to help steer the conversation. After all, when reviewing a fundraising pitch, investors tend to spend the most time on financial data, according to research by DocSend.

The benefits of having a CFO also become clear during late fundraising and exit stages, where investors perform more meticulous due diligence. If a startup’s financial records and strategy aren’t in order, M&A advisory firms will have to do more work to prepare the company for an exit. This translates to a longer (and possibly more painful) exit process, as well as higher M&A advisory fees.

On the other hand, the company may be looking to buy other startups instead. A CFO will analyze whether or not they can afford to make such an investment, how much it will yield, and when they should expect to reap ROI.

Whether or not the company is being acquired or is the one making an investment, this will be an emotionally charged time for any founder. It thus pays to have a CFO’s support and objectivity, while knowing he is committed to the company’s vision.

The ever-evolving role of a CFO

It’s clear that as a startup grows and matures, the CFO job description evolves as well. However, just because hiring a CFO makes more sense at later stages of the financial hierarchy of needs, it doesn’t mean a startup should delay doing so for as long as it can. Having a CFO or senior-level finance expert step in sooner allows a company to keep accurate records and improve its forecasts and targets earlier in the game.

A competent CFO can also prevent mismanagement by leaders who lack financial discipline, as well as provide a much-needed balance of power. Without this balance, a startup may go bust—think, for example, of the sad saga of Honestbee, a well-loved grocery startup in Southeast Asia.

The CFO can also safeguard the integrity of a company's accounting processes, which is one major factor Singapore-based investors consider when gauging a company's investment worth.

In some cases, an accountant who joined the startup early becomes promoted to the role of CFO as the company matures. That makes sense, because this person’s role evolves with the startup’s growth. As a result, the startup will gain a CFO who understands the challenges it underwent and overcame in the early days, the changes it has made, and the weaknesses in the company and the business.

In a report based on interviews with more than a dozen seasoned CFOs, KPMG concluded: “Ultimately, the goal is to gain control over the key operational processes and create alignment with the key performance metrics.” The researchers also noted that no two companies are the same, which means each CFO and startup will need to determine their own road map to achieve their vision.

In the long run, CFOs will be responsible for analysis, strategy, and sound financial advice. The ideal CFO is one that can accurately gauge the company’s needs and best interests, and provide the guidance and digital tools it needs to succeed for years to come.

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