As start-ups grow, so do their requirements for financial maturity. In the early stages, financial responsibilities are generally handled directly by the founders themselves, potentially with a financial controller or accountant.
However, when a start-up scales, the finance function becomes more complex and an increasingly essential strategic tool for growth. It stops becoming about reporting on the past and about predicting the future.
The KPMG Private Enterprise Venture Pulse report revealed that following years of record growth, VC activity in Australia dropped 55 per cent to US$176.9 billion in the first half of 2023 compared to the same period in 2022. Investors are demanding that founders intimately understand their business, which means being across the numbers and what these indicate about the company’s health.
When should the role of the CFO evolve?
Timing is everything, and the same applies to CFOs. Hire a strategic CFO too early, and you’ll burn cash as these roles are notoriously expensive and challenging to get right. Hire too late, and you risk flying blind on your growth trajectory or delaying the capital raise process.
There are two significant triggers that can necessitate a shift in financial skillset:
Increasing sophistication on the cap table: in the beginning, start-ups often rely on friends and family funding or angel investors who may not delve deeply into financial intricacies. As the business gains traction, sophisticated investors demand a comprehensive understanding of the start-up’s financial health and growth prospects.
Growing complexity of the business: the second trigger is the natural growth and complexity of the business itself. As start-ups expand their operations, enter new markets or develop new products, their financial needs diversify. It’s no longer enough to focus solely on bookkeeping and basic accounting. Questions about cash flow management, financial modelling, and long-term financial strategy come to the forefront.
Three considerations when hiring a strategic CFO
1. Outsource the strategic CFO role to begin with…
Hiring a full-time CFO, especially one with the right experience and background, can often be costly and time-consuming. At the same time, most start-ups may not need a strategic CFO on a full-time basis – you might need the advice for a few hours a month, or at specific periods of the business, such as leading up to a capital raise or a significant change event. In these instances, outsourcing can be a cost-effective and flexible solution to plug the skills gap without the need for a long-term commitment.
2. …but don’t outsource forever
As you scale your business, investors expect founders to have key skills in-house and in the management team, particularly when it comes to mission-critical roles like finance, product, and operations.
While outsourcing can be an ideal solution in the growth phase, it’s not a permanent one. You should be leveraging an outsourced expert to upskill your in-house team or working with a CFO advisory team to plug knowledge gaps within your existing outfit.
3. Look for a CFO that adds accountability to innovation
There’s a common misconception that founders and CFOs are in a constant battle in how the company fuels its numerous growth initiatives. However, the role of a strategic CFO isn’t to say no – it’s to educate key stakeholders of the trade-offs between allocating limited resources to specific growth initiatives. Start-ups need to make carefully thought-out bets, and bring accountability to those bets with financial modelling, cost-benefit analyses and regular reviews.
As a start-up evolves, the finance function should evolve alongside it – shifting beyond the role of reporting and more towards a strategic enabler of growth and success. Outsourcing the role of the CFO to an experienced advisor provides breathing room as a company scales up its product, processes and operations, without compromising performance or profitability.
By Fabio Carnevali, Head of Sales at KPMG High Growth Ventures,
This article was first published by Inside Small Business