Why Your Startup Needs a Strategic CFO

Why Your Startup Needs a Strategic CFO

Before the CPA community declares me a persona non grata let me express that I have the greatest respect for what accountants and bookkeepers do every day. We need them now more than ever as it looks like regulation is only going to get worse before it gets better.

That said, if you plan on raising capital and achieving world domination with your startup, you need a strategic CFO on your side, not an accountant.

Allow me to briefly explain the two fundamentally different types of finance professionals. On the one hand, you have the before mentioned accountants, tax preparers, bookkeepers and controllers. Let’s call these Type 1 finance professionals. On the other hand, you have the strategic finance professional who is versed in fundraising, M&A, investment banking, etc. Let’s call these individuals Type 2 finance professionals.

What differentiates the two? Type 1 professionals mostly digest historic information; things that happened in the past and that we cannot change much anymore. Their work is highly regulated and more often than not scientific. There are standard accounting and tax rules the Type 1 professional has to follow. Type 1 finance professionals were trained to apply rules and regulations, and not to challenge or bend them (hello, Enron!).

On the other side you have the strategic finance professional, the Type 2 professional, who digests a large amount of information, often provided by Type 1, and who uses this information to try to forecast the future. This professional dissects your business into little bits and pieces, prepares bottom-up financial forecasts and runs what-if scenarios. Ultimately, Type 2 finance professionals help CEOs and other founders make better educated management decisions. This professional was trained to think creatively. The work of a Type 2 professional is more an art than it is a science. To put it side by side:

Type 1 Finance Professional Type 2 Finance Professional
Focuses on the past

Work products and skill sets include:

  • Bookkeeping
  • Account reconciliation
  • A/R and A/P
  • Tax preparation
  • SOX compliance
  • Back-office management
Focuses on the future

Work products and skill sets include:

  • Financial models
  • Cap tables with future scenarios
  • What-if scenario analysis
  • Investor presentations
  • Hiring of talent
  • Legal contract review

There is one other factor that distinguishes the two types of finance professionals, and I am perfectly aware that I am generalizing here. It is relatively rare for a Type 1 finance professional to become a Type 2 finance professional. On the other hand, it is necessary for the Type 2 professional to at least know the basic tools of a Type 1 professional. As such, it is easier to move from Type 2 to Type 1 than it is the other way around.

As a founder or CEO, you want that Type 2 finance professional on your side. He or she should be your sounding board, provide a sanity check and supply you with information that will make it easier for you to make decisions for the growth of your company. You need a creative finance professional who can think strategically.

One of the issues we see over and over again is that companies realize this way too late (the CFO is usually the last of the C-Suite to join a startup, most hire accountants in hopes that they can grow into a more strategic role). Remember, Type 1s don’t usually become Type 2s.

Start looking for that individual or rent-a-CFO service early on. You don’t need to hire that person full-time immediately. His or her responsibility can grow over time as the company grows. You do want to establish this relationship early on, as early as you do with investors.

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