The reason most startups go out of business is they run out of money. The CEO bears the responsibility for raising money, managing those assets and growing the business into profitability and ultimate sustainability.
But the CEO shouldn’t bear this load alone. To help defray that critical responsibility, the CEO ought to have a consigliere, an advisor who helps plan, allocate resources, and illuminate the trade-offs between decisions. That consigliere is the head of finance and the most under-appreciated startup team member.
In my experience, there is a remarkable difference in the management discipline and organization between companies who have built a finance team and those who haven’t.
Typically, I recommend hiring a head of finance right after the Series A or when the team reaches about 10 to 15 people. At that point, the company undergoes an increase in financial complexity having to deal with 409A valuations, auditing, producing financial statements for investors, real estate decisions and so on.
In addition to tactical help, the head of finance is responsible for expressing the long-term vision of the company in numbers, which is as important in the early stages of the business as during the roadshow for your IPO. A startup’s financial statements are the most succinct expression of the company’s intentions and goals and strategy.
Like a battlefield map, financial statements lay out a strategy for a company. They detail the requirements necessary to ensure the business succeeds including the revenue model, the sales cycle, hiring plan, cash burn, and all of the assumptions underpinning the strategy.
Best of all, financial analysis clearly expresses the trade-offs made by different prioritizations. Scenario planning becomes concrete: if we hire two more salespeople, we can’t afford to hire two more engineers which would delay the product by three months but increase revenue in the short term and potentially put us in a better position to raise a follow on financing. Which is the right decision?
Those kinds of strategic questions arise often for startups particularly those undergoing fast growth or operating in competitive markets. In these situations having strong head of finance can be the difference between success or failure. Financial planning is all about ensuring the company has all the resources it needs to accomplish its goals and that’s priority number one for every startup.
06 June 2013