One of the main reasons why many startups fail to survive is due to financial management, specifically cash flow management. Startups, by nature, tend to need initial investment to be able to invest in product development and later in commercial and marketing strategy. In recent years, the role of the CFO has become much more strategic, and increasingly, both investors and entrepreneurs value this figure as fundamental for the positive evolution of the company.
A startup requires efficiency and creativity to make decisions. To this end, the flexibility and adaptability of the company’s needs to each phase in which it finds itself will be a turning point. This argument applies to many areas of the Startup: from its development or product department, to its marketing strategy, relationship with customers or suppliers and of course to the Financial Department. Startups that require external capital from funding rounds must objectively determine the Key Performance Indicators (“KPIs”) that best represent the business model and promote traction and growth. As an example, companies that develop and market Software as a Service (“SaaS”) one of the main metrics they monitor is Monthly Recurrent Revenue (“MRR”).
The evolution of the CFO
1. The founder CFO
Thus, in the initial stages of a startup, the person who performs the functions of Chief Financial Officer (“CFO”) is usually one of the founding members, since there are usually no resources available to hire a team. If the founding team does not have advanced financial knowledge, they should learn as much as they can while seeking guidance from people with specific experience in startups and in their sector. In the initial phases, the founders will be responsible for raising capital in the investment rounds, so it is key to acquire a certain degree of financial knowledge of what investors expect both in the first round and in the medium term.
2. CFO as a Service, the outsourced financial management
When the Family, Friends and Fools (“FFF”) is over, the entry of professional or semi-professionalized Business Angels requires a greater degree of financial knowledge along with an increase in the frequency of reporting KPIs and other financial information of the business. This demand and specialization increases as the Startup achieves new milestones, both due to the growth of the business itself or the entry of professional investors such as Venture Capital (“VC”). In this sense, when it makes the most sense to have external professionals specialized in Financial Management is between the time the company begins to gain traction and even reaches a volume of business that justifies having its own high-performance team.
Having a CFO Service greatly favours financial communication between the entrepreneur and investors. They request monthly, quarterly and annual reports while requesting annual audits or specific requests for information. Being prepared every time a stakeholder requires a piece of financial information is much more efficient for the entrepreneurial team and gives confidence to the customer, investor, bank or other. But the most important thing is that the entrepreneurial team has the relevant information at all times to be able to analyse it and make the best possible decisions.
3. Building the Finance Department
As the company grows, new needs also appear in the Financial Department. Depending on the sector in which the company operates, these needs may come sooner or later and the need for the internalization of functions may vary. Therefore, depending on the needs and available resources, it may be decided to hire a CFO, a Controller, managed personnel or several of them and in different orders. Having external professionals during this phase gives entrepreneurs flexibility and allows them to continue supporting in non-internalized areas.
In conclusion, the financial needs that must be solved in a Startup are very different depending on the moment of the Startup. While in the early stages, founders must assume the role to be economically efficient, as investors or new stakeholders enter, hiring an external CFO service can make a lot of sense and if the company reaches a certain size or volume of investment, the internalization of key figures we think is recommended.
If you are an entrepreneur or businessman and you have financial needs that require a high degree of specialization, at Tegan Corporate we can help you, do not hesitate to contact us.
