A few days ago, I tweeted this:
This generated a good discussion in the thread with some great input.
VPs of Finance are a little bit of a counter-intuitive hire in early-stage startups. It’s pretty obvious to most founders why they need senior people in charge of engineering, product, sales and marketing. You need people to build, and you need people to sell.
But finance feels like a back-office role, a cost center. Sure, we’ll need one, but “later”. If we hired them now, what would they do all day? Would they have enough work? Can’t we just outsource the role for now? Shouldn’t we prioritize other roles, like Head of People or Head of Legal? Can we even afford one? Shouldn’t we hire one or two more engineers instead?
Yet, interestingly, I’ve never heard a startup CEO say after the fact that they regretted hiring a VP of Finance too early. But I’ve heard several CEOs say they wish they had hired one much earlier.
My point in this post is that founders should consider hiring a head of finance earlier than most would think.
VPs of finance are an essential part of a 4-legged chair that provides a very solid foundation for any startup: VP of Engineering, VP of Sales, VP of Marketing and VP of Finance. David Sacks had a great post recently showing how those four pillars should operate together in a SaaS startup (“The Cadence”). With some nuances, this general philosophy is broadly applicable across all types of startups, whether enterprise or consumer.
Some semantics: in this post, I’m using the term “VP of Finance” to mean a reasonably senior person that can head up the finance function in an early stage startup. Sometimes they’ll have a different title (like Director of Finance) or perhaps no title at all.
They generally won’t (and shouldn’t) have the “CFO” title. Most early-stage startups are not ready for a CFO. Chief Financial Officers, as the name indicates, are C-level folks. CFOs are pretty senior professionals who, in addition to mastering the technical aspects of the finance role, are very strategic in their approach, can manage larger teams and handle more complex transactions, from M&A to an IPO. Good CFOs are hard to find, expensive and generally don’t make sense to hire until the startup reaches the growth stage.
Let’s dig into a few details – provided in bullet point format for easy scanning.
What does a VP of Finance do, in an early stage startup?
- Accounting: manage a controller, work with outside accountants, work on audits, etc.)
- Financial planning and analysis (FP&A) – budgets, projections etc
- Pay bills, sends invoices, reimburse employee expenses
- Overall cash management (treasury)
- Partner with the CEO on investor relations – help prepare board decks, help with fundraising (process, due diligence, etc), update the VCs
- Venture debt and relationship with banks
- Partner with VP of sales: manage revenue, pays sales commissions etc.
- Help with options plans, 409(a)
- Risk control: D&O, insurance
- Put scalable systems in place (e.g. transition from Quickbooks to Netsuite)
- A big “catch all” category, depending on who else is on the team: some analytics (tracking KPIs and OKRs), some legal (contract review), some operations (vendor management, lease management etc.)
Why should you hire a VP of Finance early?
- Keep the house in order: financials and key metrics (churn etc) are accurate and available promptly
- Avoid disasters: I’ve seen companies go under because the CEO didn’t understand how their cash cycle evolved as the company grew, or simply didn’t realize a big expense was coming up when the company was already low on cash. The VP of Finance helps the CEO have an accurate picture of the cash situation and burn at all times, and helps build realistic projections (and reforecast as necessary)
- Run a tight ship: stuff and people get paid on time, KPIs are tracked
- Avoid accumulating “organizational debt”: any unaddressed deficiency around accounting, finance, processes, operations, etc accumulates and compounds over time, and becomes very painful to untangle down the road
- Provide leverage to the CEO (very important!): the VP of Finance does a million things that give time to the CEO to focus on running the business
- Partner with the CEO on strategy: while covering the tactical aspects of finance and operation makes a world of difference as it is, the best VPs of Finance engage with the CEO also at a strategic level, as they have a company-wide perspective
What does “early” mean? When should you hire a VP of Finance?
- Yes, it’s ok to start with an outsourced firm, “outsourced CFO”, or other individual service provider. You should do this at the very beginning, at the pre-seed and seed level
- But soon enough, you’ll experience the usual issues that one encounters with outsourced providers:
- They will do the job, but often just the job, typically the more accounting-focused part
- Even with plenty of good will, it’s hard to any third party to truly provide meaningful input, in large part because they don’t have enough inside, day-to-day knowledge of the company to be able to
- The quality of who does the work at the service provider may vary and change over time
- How early should you hire someone in-house? While hard to generalize, probably as soon as the company has some level of recurring revenue traction, typically shortly after the Series A – this is in contrast to what I see most companies do, which is hiring a VP Finance after their Series B, or sometimes even later.
How do you go about building an early stage startup finance team?
- Many recommend that the first hire in a finance team should be a controller, because you can’t build a finance function if you don’t have a strong accounting basis.
- I generally agree with this, but a) it’s difficult for a CEO who doesn’t have a finance background to hire and manage a controller and b) the finance role that provides most leverage to a CEO is the FP&A part (meaning doing the financial models, tracking metrics etc).
- I’ve seen situations where the first hire was an FP&A person and the accounting part was outsourced. Not orthodox, but I’ve seen it work for a bit
- Budget permitting, my preferred configuration is to hire a VP of Finance with an FP&A background, and have that person recruit and manage a controller. You can go pretty far with a finance team of two.
What’s the right background for a VP of Finance?
- The orthodox answer is someone who grew up through the ranks of controllers, ideally a CPA with an audit background – basically someone with a very deep mastery of all nuances of accounting
- However, ideally you want someone who can partner with the CEO and provide some immediate value on the budgeting and forecasting front, and over time can scale to provide strategic value to the CEO and board. My experience is that the folks that tend to be best on the strategic front come more often from an FP&A background, more than accounting
- From that perspective, a great candidate for a fast-growing Series A startup would be someone who was a finance analyst at a larger company early in their career, and then worked at one or two comparable startups in the past, rising to become a manager or VP
- An ideal candidate is someone with the potential to graduate to be promoted from VP of Finance to CFO.
- What about investment bankers? That question comes up often as there’s a steady stream of very smart folks coming from top banks, interested in the startup world, and looking at finance as a natural transition point. Are they good candidates? It’s a nuanced topic, and depends on individual circumstances. I’ll just say that it’s a much less natural transition than one would assume. Yes investment banking builds a deep understanding of a company’s financials, but the context and the skillset are pretty different. When one of the companies I work with is recruiting a VP of Finance and considers candidates with an investment banking background, I typically recommend that they focus on folks have spent at least a couple of years in a startup after leaving the bank.
8 thoughts on “VP of Finance: The Non-Obvious Hire”
Couldn’t agree more with the need for finance function early. But think you should consider a part-time CFO vs a full-time VP/Director. You get a more senior person for less money and greater flexibility. Win-win-win.
Thanks Mike – when would you suggest a startup transitions from part-time CFO to full time VP/Director? At what level of revenue?
Hard to say based on revenue as every company is different depending on industry/business model. We usually go from Seed to Series C or from 5 employees to 50-100. Our firm is a little different than the typical outsourced CFO firm. Our CFOs are strategic/forward-facing. MBAs from places like Harvard, Stanford and Wharton with 20-30 years experience as CFO but also CEO, COO, VC, etc. We act as full-on members of the senior management team and can ramp up or down as needed. The firm also offers bookkeeping/accounting, tax and Controller but we consider that a totally different business unit.
There is definitely huge value, but material challenges of not having a full-time person. I have been “Virtual CFO-ing” for years, and have found that while i am able to provide services, feedback, insights and skills to the financial challenges of my clients, its best if I don’t “own” anything as its really hard to be in the foxhole with a startup when shit comes up and they need you immediately.
You also need to consider that I am running a business as well, and am also managing multiple clients with conflicting priorities, and a need to continuously drive my sales pipeline by doing new business development and sales constantly. My brain is always in a thousand places at once.
IMO, the projects that always work out the best are those that are specific in their scope and tasks, like a financial model, building an accounting system, setting up reporting, preparing board decks and helping with diligence.
The ones that often struggle are those that require me to become part of the team’s cadence and have operational oversight of areas of the company. If you need those services, you probably need a full time person.
Valuable insight and advice. The value of clean and timely data is higher than many realize and the cost of “organizational debt” can be even higher.
Some start-ups prefer to address these needs through the operations perspective or stick to their accountant – it is also a question of what they can offer to SVP Finance in terms of opportunity and how much risk is involved. This role could be value add even for Seed plus but I am skeptical about their contribution to fundraising process etc.
Matt awesome article and I couldn’t agree more. I’m a CPA with a background in audit, investment banking, private equity and credit markets. I now have been a VC for the last 5 years so I’ve been able to see the full spectrum of finance as well as the struggles that early-stage companies have with this function. I think because the function is explicitly a cost center and implicitly critical to all other aspects of the business, it unfairly gets overlooked at startups. It’s surprising to me how many seed-stage companies make little effort to organize themselves, their processes, and their finances when those initiatives would no doubt lead to smarter spending, operational efficiencies, and ability to raise more money at higher valuations. In fact, it is so shocking to me when a startup can’t actually tell me how much money it has made from customers or burned on business operations. I don’t think it needs to be this way which I why I am in the process of raising a fund to try and improve this aspect of the tech ecosystem. I truly believe that VCs could be better partners to founders with this function and help make their own investment capital be used more efficiently.
Great piece – and great to see my role described better than any job spec ever could.