With European startups raising record amounts of funding, leadership teams are finally figuring out how important it is to have their financial house in order.
After all, running out of cash or failing to secure new funding can be one of the top reasons startups fail. And with recent public market turbulence, later-stage startups might find themselves pushing out fundraising or IPO plans, which means runway management could be key in the coming months.
Of course, every startup would love to hire a superstar chief financial officer (CFO) to get all this done. But it can take time to hire for such a key role — and involve paying a big salary.
Enter the fractional CFO — a part-time CFO that manages multiple companies’ finances and provides the benefits of having a veteran finance leader a startup likely couldn’t afford or attract at an early stage. Startups — particularly in North America — are beginning to recruit a fractional CFO for a limited period or with a particular milestone in mind (eg, funding rounds), and to help it mature its finance operations.
Every startup would love to hire a superstar chief financial officer — but it can take time to hire for such a key role, and involve paying a big salary
Generally, fractional CFOs are seasoned professionals with board-level experience that provide a bridge as a company grows, offering a breadth of experience that early-stage companies may lack. Fractional CFOs aren’t freelance specialists, but rather act as pay-as-you-go or "on demand" employees with a wealth of experience, keen for a change of pace and to apply their skills in different ways to several organisations at once.
Why are we seeing this trend, and what benefits can fractional CFOs provide startups?
1/ Creating and maintaining a financial model
Some founders underestimate or don’t fully grasp the fundamental importance of the financial model — a quantitative record of the company’s operations in the past, present and forecasted into the future — that runs their business. This typically includes the basics such as profit and loss but also needs to provide support for functions such as marketing expenses, growth plans, the cost of new customer acquisition and customer churn.
In the SaaS world, having a model that allows companies to more accurately predict revenue and expenses is key not just to sustain the business but also to plan for the future, whether it be for additional fundraising or when to spend more on sales efforts or operational issues. Fractional CFOs who have experience with different company models can offer valuable insights from their knowledge working across multiple organisations.
2/ Preparing for sustained growth
Fractional CFOs can help founders and company leaders take an objective step back and rethink the strategies and go-to-market tactics that may not be as effective as they once were — particularly if they are inhibiting the next stage of growth. For instance, a startup may benefit from a fractional CFO’s view into revamping its pricing or packaging, identifying discounts with suppliers, or rethinking sales compensation plans to align with new strategies. A fractional CFO can help understand total addressable market and prepare forecasts for how customer segments could be scaled.
For example, are you better off bundling more into your offering or does it make sense to separate product lines? At pre-revenue stage, the freemium approach is commonplace to attract customers. If your product or service is delivering continued value to customers, set expectations that it is worth their investment. A fractional CFO may also advocate putting in place a different subscription model after a funding round to help ensure continued — and potentially even accelerated — growth.
3/ Building credibility and maintaining balance
If a startup plans to grow, expand internationally and appeal to investors, it needs to blend infrastructure with finance leadership early on. Too often, founders think finance can be tackled with a solitary third-party bookkeeper. But what they really need is a true accounting function and systems that provide a level of reporting that help investors (or potential investors) truly understand the business.
Simple accounting systems may not be auditable, and most investors want a true accounting system and an expert running that function before they invest in a company. They expect accrual accounting. They want to see how deferred revenue is handled and whether equity is properly accounted for, and that the cost of goods is in the right place. (If some of these terms sound foreign to you, even more reason to get help!) They want a startup they invest in to show them solid information about margin and the cost of sales, marketing and R&D. Selecting a finance system is a key strategic decision and often, a startup could benefit from the wisdom of a fractional CFO to help them choose and implement one.
Whether a fractional CFO is there for the short term or with a longer-term milestone in mind, more startups are beginning to recognise the expertise they can deliver instantly, while setting up their financial house for future growth. With no sign that the flow of capital to startups will ease any time soon, bringing in a fractional CFO could be a strategic move for any new aspiring business with big plans.
Dave Rosenberg is head of marketing, EMEA at Oracle NetSuite.