Funding for startups is on fire. But sometimes to get that funding, particularly after the seed round, startups need to have their financial house in order.
In the early stages, leaders are usually laser-focused on three key areas: developing their product or service, getting sales and generating cash flow. They can’t afford to invest in the wrong areas, including the wrong people and positions. Most don’t see hiring a CFO as a burning need yet, since an experienced CFO can command a big salary.
Fractional CFOs are the answer for a growing number of small companies. By bringing on a part-time CFO, a startup can get the benefits of having a veteran finance leader they likely couldn’t afford or even attract at such an early stage.
Typically, a business will bring on a fractional CFO for a limited time frame, often to help it mature its finance operations and secure its next round of funding. After that point, the company might hire an in-house CFO and accounting team.
Fractional CFOs are a short-term bridge, and they generally aren’t angling for a full-time job.
Now that so many companies have adjusted to working remotely, some are keeping fractional CFOs on longer. For example, one of our customers, Countsy, provides outsourced CFOs and entire accounting and HR departments for startups and growing companies in the technology and life-science industries. Its business is booming right now.
Whether a fractional CFO is hired for the short term or for an extended stay, companies are seeing that bringing in this expertise early on can truly change their trajectory.
Working with businesses in a variety of industries, I see those that bring in a fractional CFO benefit in three key ways:
1. Expertise and connections
It often makes sense for ambitious companies to look for outside expertise to get their finances in order while they focus on building products and ramping up sales. Most fractional CFOs have served as a company CFO in the past, and many have a background in private equity or venture capital and have steered startups to successful exits.
That experience and perspective enables these executives to provide board-level strategic guidance and business connections that can be crucial to a young business. While some fractional CFOs are sometimes granted a board seat, many are compensated with salary and/or equity. A company could get that board-level insight without having to give up a board seat that VCs might require in the future.
Fractional CFOs are a short-term bridge, and they generally aren’t angling for a full-time job. They often want to work themselves out of the job by achieving a certain level of growth or helping the company raise the next round of capital, and then move on. They may also work for multiple companies, which is less risky than committing to a single startup full time.
2. Planning for growth
Fractional CFOs can help founders and CEOs take a step back and rethink strategies that are no longer serving the business. That perspective can help companies that are struggling to get to the next stage of growth.
Besides fresh eyes, fractional CFOs may be able to offer different packaging approaches. As an example, putting in place a different subscription model after a funding round can help ensure continued and potentially even accelerated growth. In the early growth phase, a company may choose to compensate all revenue, but as it matures, it could consider focusing specifically on accelerators just for recurring revenue.
3. Building credibility with investors
Even if your company only has five people today, if the business plan says that it’s going to be 50 people in a year or two, it needs to have the right infrastructure with the right finance leadership from the beginning.
Too often, CEOs and founders with big ambitions think all they need is a bookkeeper, which is a lot less expensive than a CFO. What they actually need is a true accounting function as well as systems that provide a level of reporting that help investors truly understand the business.
Simple accounting systems may not be auditable, and most investors want a true accounting system with an expert running it before they invest in a company. They expect accrual accounting; they want to see how deferred revenue is handled and whether equity is properly accounted for and that the cost of goods is in the right place.
They want the startup they’re investing in to show them solid information about margins and the cost of sales, marketing and R&D.
A company that has raised money will need to produce GAAP financials and be on a financial system that makes those results trustworthy and auditable. Selecting a finance system is a key strategic decision, and startups will often bring in a fractional CFO to help them choose and implement one.
Countsy, for example, puts its fractional CFO clients on Oracle NetSuite, which can provide the insight that company leaders and investors need, as well as scale with the business.
Most seasoned CFOs are likely experienced at bringing in new systems. They may have knowledge of multiple platforms and can help the company examine the pros and cons of each as it pertains to the business.
With no sign that the flow of capital will ease in the near future, bringing in a fractional CFO could be a well-timed strategic move for startups with ambitious growth plans.