September 25, 2019
As Competition Spikes for Full-time CFOs, Startups Exploring Other Options
Posted by Dovile Norkeviciute
Back in May the Wall Street Journal published an article highlighting some of the challenges that high-growth tech companies are facing in recruiting or retaining experienced CFOs. See the full article here.
Coming from a firm (Armanino) with thousands of clients in the tech and other industries and a practice area focused on executive search and interim financial management, we would agree that most of the article was spot-on – of course, is the Wall Street Journal!– but we did take issue with one idea, and were also surprised the article didn’t offer tangible solutions for addressing the oh-so-real talent shortage.
One of the key points the article got right was the important role CFOs play in startup tech companies. A CFO thinks about finance as a catalyst to propel the company forward and is invested in the company’s success way beyond finance. Depending on the company’s growth stage, this may include safeguarding the startup’s cash supply, implementing growth strategies and representing the company effectively with the investment community.
Searching for Talent
We also agree that finding a full-time CFO is challenging for several reasons, starting with the short supply of finance talent and the high demand for top candidates.
We’ve seen this repeatedly, and we know from our experience that it takes several months to hire a permanent CFO because the pool of finance leaders with experience in raising capital, growing a company and perhaps taking a company public (or selling to a strategic investor) is relatively shallow. If the startup is a so-called high-growth unicorn, the search will likely take longer.
The search challenge is compounded by the fact that, beyond the required technical skills and experience, companies also want to be sure the individual will be a good match for the company’s culture.
The article quotes Ash Ashutosh, founder of software startup Actifio, who says: “You’re trying to find someone who has already seen the movie before. And the problem is: There are not many who have seen the movie before.”
There are people who have seen that movie, but, in some cases, you just have to know where to look.
Finding Financial Pros
Where the WSJ article fell short, in our view, was in discussing the short-term implications that tech startups have to address while they’re searching for a permanent CFO.
For example, an extended search for a finance leader carries opportunity cost. Who’s running the finance organization while the search continues? What is being sacrificed by “future unicorn” companies during the search process?
Similarly, the article doesn’t offer practical advice about the ways that startups can address their challenges in finding permanent CFOs.
Depending on the company’s growth stage, most startups follow two basic paths. Early-stage companies often choose fractional CFOs to provide financial leadership on a part-time basis. Later-stage startups usually prefer to bring in interim CFO with experience who can ‘parachute in’ to a variety of situations and immediately solve problems.
A fractional CFO — a part-time professional who works with one or more companies on a consulting basis — can help a startup use its financial resources effectively to reach its next capital raise or other key milestones.
For example, they will help the company invest prudently to develop its product, while also keeping an eye on the market and the organization’s evolving financial and operational needs. Once the startup reaches the milestone the CFO was brought in to address, he or she can move on to new challenges.
Fractional CFOS are typically seasoned veterans who have broad experience guiding companies through financing rounds, M&A or public offerings. They often enjoy the process of building a company more than the responsibilities of running an established enterprise.
An interim CFO can provide critical financial stewardship to help the company maintain its momentum during the hunt for a permanent hire. For example, one of our clients has been looking for 10 months for a CFO who checks all their boxes and is a perfect culture fit. Board pressure and another round of financing prompted them to reach out for an interim CFO, who was on board within two weeks.
While the search continues, the interim CFO will drive key projects, partner with functional leaders and, critically, help create a solid infrastructure for the permanent CFO to take over. The interim CFO will become part of the company fabric while working closely with the CEO, the board, developers, salespeople, and other key stakeholders.
Before a permanent CFO arrives, the company is investing “blood, sweat and tears” into the recruiting process. A fractional or interim CFO can ease tensions across functional leadership areas, investors and board members. Finance does not have to be frozen while the search for the ‘perfect fit’ financial officer is ongoing.
For investors, the involvement of a strong fractional or interim CFO is a sign that the company is serious about raising capital and using that capital responsibly.
The CFO’s experience with numerous investor-backed companies is helpful to both sides in negotiating fair terms and conditions – the company’s management and the investors. A finance executive who has been through the financing process before typically can contribute to a faster and smoother closing.
If a company hopes to launch a public offering, an interim CFO with IPO experience can be a critical addition who helps guide the transaction and the creation of the reporting infrastructure the company will need after the offering.
Using an interim CFO allows a company to access the specific skillset and experience that is most important for that stage of its development.
To learn more about fractional and interim CFO options, contact our Rapid Deployment CFO team
Dovile manages a team of CFO and Controller consultants at Armanino. Prior to Armanino she was with the Brenner Group, where she led the interim management business, serving mostly startup clients in Silicon Valley. She has spent the majority of her career with consulting and financial services firms, focusing on business transformation and client management.