I once took a red-eye flight to Israel to help manage an audit of a software company where I was CFO that was technically based there. We sat in a windowless conference room for many hours. In case you are under the impression that this something you would like to do to yourself – believe me, it’s not. I wasn’t afraid that I would die in that room. I feared that I might live and have to do it again the next day.
Somehow I came all the way around and instead tried to act like it was the most fun thing I had ever done in my life. With that, some good humor from the partners from the Tel Aviv office from Deloitte, and a lot of coffee, we got through it somehow (and my company did fine in the audit, too).
This technique really worked for me and I find myself going back to it all the time. When dealing with insurance and worker’s comp reviews. In prepping analysis for the investor who just can’t seem to get enough of it. In re-jigging a chart of accounts, which can happen quite a bit in a build-stage company that is constantly pivoting.
If you fake that it’s fun, eventually you can (almost) make it so. The term for this was once “grasp the nettle”.
I think it’s rubbing off on people I work with. The above was a screen shot of a meeting invite I just received for an hour-long session sure to be a brain twister as we figure out some inventory ordering and accounting issues.
As a TechCXO partner of mine often says, “life is a sales call”. Not everything in startups is glamorous – so sometimes, you have to sell it to yourself.
Typically when raising money at the build stage, the item that entrepreneurs focus on most is valuation. Makes sense. Usually by the time you get to build phase, the number of dollars is high enough and the valuation low enough that it matters (unlike a friends and family round, or a Series F). One item that is often overlooked at the company’s peril is governance.
Governance put simply is the list of rights, or lack thereof, that investors get. Usually when you raise preferred stock, which is how build rounds work, you have to give up certain rights. No longer can you decide to raise more money or sell the company without agreement from each block of investors. I have seen companies where the “block” of investors is exactly 1 person, meaning that this single person’s consent is required for any significant transaction to go forward. No bueno.
I also have seen companies where current investors have very few rights compared to a small number of insiders who effectively control both the ownership and day-to-day management of the company. Convenient for them and helpful when it’s time to make quick decisions, but less helpful from the standpoint of attracting new investors who will want some protection.
This also comes up when writing convertible notes. A convertible note isn’t equity yet, so it doesn’t have typical rights of preferred stock. Convertible note investors need reassurance that when it does convert, it will do so and grant their block certain rights that are on par with existing investors (just get more than 1 investor in this block).
Finally, I also have seen blocks where if you don’t get a particular investor to assent to an action, it’s very difficult to construct the necessary margin. This can happen when you have 1 or 2 large investors and then a large group of very small ones.
My advice to CEOs with whom I work is to think almost as carefully about this as they do about valuation. For sure you want to keep as much of the company as you can, but you want to make sure you can still run that company and make it possible to attract future investors to it if you need to.
I call myself a build-stage CFO, meaning that I tend to work with companies that have found product-market fit. They’ve passed the “prove” stage. My goal is to get them to the “scale” stage, where the foundation of the house is sturdy and they can start to build more stories onto the building. I’ve succeeded at this a few times and yielded to a full-time CFO after a significant fundraising round.
Startups being what they are, sometimes this goes the other way. That is, a company hits build stage and either the world changes, or the niche they thought they’d found isn’t so attractive after all. Then they have to pivot, and sometimes, that means moving back to prove mode.
Moving back to prove mode is hard. You have people on payroll who no longer match the direction you are going. You’ve built processes and reporting that may not be relevant anymore. The cap table likely has people who invested in one vision who need to be brought along to the new one. The sooner you do this though, the better.
For a CFO, it means a few things. Likely you need to skinny down the infrastructure you built. Almost certainly you will have a re-forecasting exercise that will involve a new way of showing KPIs and financials to the Board and other stakeholders. Probably you will be part of letting people go and opening up hiring in a different part of the business. It is also possible that one of the people you will need to let go is yourself. Because I am “on demand”, I can scale myself and my team down (another reason to hire a fractional person).
The bottom line is that startups that hit the build stage have not hit escape velocity. Far from it. Sometimes they start to fall back to earth and as a CFO, I’ve had to develop tools in my toolkit for when this happens.
Recently I created 2 very simple spreadsheets to show and solicit feedback on monthly business results from 2 of the management teams I work with. My accounting team (which for these 2 companies includes the same remote, part-time controller) puts together great, detailed, multi-tab workbooks that are sophisticated closing packages that are perfect for me to dive deep into every detailed account. Since I manage cash tightly, this is crucial as I examine, for example, many of the balance sheet items.
For my audience in build-stage companies, this proved less useful. Typically what you want there is to balance transparency and accountability with a digestible level of information that helps manage more effectively. Until recently in both situations, I think the balance was off.
It turns out that creating a simple spreadsheet is a lot more work than a complicated one. You have to make conscious decisions about what information is truly relevant, how to format it for easy consumption, and how you want the management team to use it to make operational decisions in fluid environments. This is an important part of what a build-stage CFO does and I think I’m improving at this.