Mike Albang, CPA, CFA, VP Finance,
Costanoa Ventures

We invest in the very early stages of a company when most founders don’t prioritize a finance hire and precious cash is reserved (rightfully so) for engineers and product hires. As things progress, company resources are focused on sales, marketing and customer success to capitalize on early customer traction. Finance is not a high priority and often not deliberately planned.

But a haphazard approach to finance can lead to poorly constructed operating plans (i.e. running out of money too fast) or mismanaged financings that lead to Boards losing faith in the company’s strategy and team. It’s an enormous headache for the CEO in an area in which s/he typically doesn’t have a strong foundation. Without an understanding of the key business drivers impacting financial health, a company’s fundraising ability and valuation can be affected.

If you are an early-stage company, you must have a clear understanding of:

Leading metrics like bookings, contracted ARR & recognized ARRUnit economics like CAC:LTV and marketing/sales efficiencyCash burn and runway

When these essential financial metrics are miscalculated, the company’s ability to show growth and historical trends is impaired and founders and Boards lack the tools for strategic decision-making. Time at board meetings is spent on understanding how financial performance is calculated instead of interpreting their significance.

This is why a company should hire their first finance professional sooner rather than later. The ideal candidate is analytically-minded, has experience at the early stage (sector experience less vital), and most importantly is a multi-talented swiss-army knife who can do a little bit of everything. With luck, this person is invaluable to the effectiveness of the CEO, helps scale the company, and provides meaningful insight and analysis to the company.

At the early stages, this professional is doing different things and the mix of skills at work vary. Here’s what ideal tends to look like:Seed/Product-Market-Fit Stage:

At this stage, the most finance-savvy member of the founding team is responsible for the finance function. However, this team member might not have the requisite skills or their time is already at a premium in other aspects of the business. When the company has a small team and a manageable subset of customers, a combination of using an outsourced bookkeeping firm, and pairing them with a part-time CFO — usually a day a week — is the best mix.

Here’s why this is a smart way to go:1.Minimizes costs at a critical phase. Employing a CFO part-time allows oversight of the finance function but keeps costs low by placing the bulk of the finance time (more basic accounting) with an outsourced firm.
2.Leverages CFO resource to offload the founder/CEO. The part-time CFO only needs to focus on the most strategic finance and operations functions — managing vendor relationships, establishing policies and procedures, creating hiring plans for example — that are not typically tasked to an outsourced resource.
3.Leverage experience and best practices. Outsourced bookkeeping means institutional knowledge — of your company and of best accounting practices — and controls that might otherwise be impractical at your tiny company get put in place. Not only does this reduce risks and put in place more mature processes but you won’t have to worry about turnover.

Qualifying is simply the process of assessing the customers needs to determine the correct solution. If you ask enough questions, you will eventually get to the true answer of what the customer wants. Educating yourself is a key component in the qualifying process. Asking questions narrows down the customers needs but understanding how all of these products work separately and together is key. Even if you don’t sell these products, you need to understand how they work and don’t work together to better educate the customer. You can’t just tell the customer that the product isn’t good because the 100 reviews that they read online tell him otherwise.

Series A/Early Revenue Stage

This is the critical juncture when a company needs to seriously consider making their first core finance hire, certainly not any later than Series B. In a Series A financing, a company can raise on ideals of product market fit, early customer adoption and founding team because meaningful metrics are hard to calculate and less reliable in a company’s short lifespan. But once the company is trying to accelerate its growth, the expectation is a core understanding of these metrics is in place in order to recognize whether or not the operation of the business is successful.

Here’s why it’s essential at this stage:1.You’re scaling a business, not an idea/product. Series B funding is a bet on repeatability and scalability of the sales engine. Basic business metrics help prospective investors understand businesses’ prospects despite massive differences in go-to-market or product approaches.

2.You must have confidence in your numbers. Seasoned investors spend a lot of time evaluating your business model, sometimes even building their own with people who are business analysts. They will look hard at your numbers, and it is an indicator of how much faith they should have in your team and your business plan.

A great finance hire may evolve into the CFO and start building the team beneath. More likely, a CFO augments this hire, bringing executive leadership, management capability and a transactional skillset that is generally attained with years of relevant experience. When timed appropriately, the first finance hire can provide the biggest return on investment in the earliest stages of a company’s journey.