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03/11/20 | Founders, Menu-Homepage

What You Need to Know About Startup Finances

As part of our Founders + Funders NYC 2019 summit, co-organized with Seneca VC and SheWorx, we brought together an exciting group of startup founders and investors for a day of learning, networking and growth.

Aimee Fearon, CFO at Newsela, has been deep into startup finances for years inside companies at several different stages.

She spent some time talking to us about how founders can think about their finance function from company inception through Series B and beyond, and what founders might need at each stage. While it’s probably not the thing that makes you jump out of bed in the morning (maybe for some of you!), it’s still super important to understand and be able to talk to – especially in those investor meetings!


I’m going to co-op a framework called Pioneers, Settlers, and Town Planners first put together by a guy named Simon Wardley. He uses this framework to explain that we need different types of talent at each stage of our organization, and the same is very true for finance.

From the very beginning, you need a Pioneer who can kind of come in where there’s nothing and create an MVP – maybe it doesn’t always work, or it’s very slow. Then you bring in the Settlers who will take it up to the next level, so it’s ready for a bigger audience. It’s much more reliable. Eventually, you’ll be ready for the Town Planner who brings everything to the next level, makes it all faster, scalable, and totally reliable.

Pioneers

These lucky people tend to come into the organization, they’re handed a shoebox of receipts and are asked to come up with monthly financial statements, maybe also asked to find a new office or a working chair for that new employee. Like all of us at the earliest stages, they’re wearing a ton of hats, and are moonlighting in a lot of different areas.

But there are a few very basic things that need to get done at this stage. A monthly financial close of pulling together your financial statements is super important. You’ll also need a basic financial model. It may just be based off of growth rates, but you’ll need something to get a good handle on what your cash position is, what your burn rate is, and what your runway is so you can answer those basic questions and get in front of any cash shortages that may be coming around the corner.

You need a cap table to understand what the ownership structure is. Accounts receivable, accounts payable, all that stuff needs to get done, as well as taxes. Even at the very latest stage of a startup, all the way through IPO, you’re probably not going to want to outsource your tax function, but it does need to be handled. Even if you’re not profitable, you still need to file your corporate statements and corporate returns, sorry. And also make sure you’re thinking about sales taxes. You don’t want that one to come up and bite you when you get audited.

Cash management: cash is always king but also especially at this stage. Pioneers tend to also moonlight in a bunch of different ways. They may be responsible for payroll or real estate. Maybe the People function, they’re kind of helping out in HR as well.

The pioneer stage will typically last up until around your Series A. From a resourcing perspective, you may have a bookkeeper or an accountant, perhaps a very junior controller. This is also a really great stage to think about outsourcing the whole function.

If you want to outsource it, you’ll have to pay for it, but that at least gets it out of your hair, and you can have access to people with a lot of different levels of finance expertise by doing that.

If you do want to hire in-house, I’d look for somebody who can roll up their sleeves. They’re getting really into the dirt. They’re coming into nothing and asked to create a lot. They’ll need to project-manage a ton of things that are coming their way. They’ll need a lot of operational expertise and definitely some bookkeeping chops. So you don’t need a Big 4 accountant at this stage, but somebody who knows their way around Quickbooks and can get in there and get it done.

The number one priority at this stage is cash. You can’t forget to deal with your cash situation.

Settlers

The key signs you’re ready for a Settler to come in is when all of those MVPs that your Pioneer set up are not quite working anymore. Maybe they’re too manual. They’re not reliable. They break down. They take too long. You need some Settlers to come in to upgrade the function.

The name of the game at this stage is somebody who’s forward-looking. Pioneers are typically backward-looking, dealing with past financials. A Settler is forward-looking.

At this stage you also need somebody who has Financial Planning & Analysis – or FP&A – muscle, who can do a lot of analytical work to drive key insights about your business. This can be super important for your next fundraise at this stage.

Your forecasting and budgeting, your sales analytics, and all of your financial KPIs is the key work of an FP&A person.

At this stage, you need a financial model that is upgraded from what something a Pioneer could create. It needs to be much more detailed and very, very reliable in terms of predicting what your financial results will be a year out, two years out, etc.

Your Settler will help you to think through resource allocation – are you putting your resources into the right projects? And are those projects paying off as expected? They can play a key role in fundraising from a support perspective because, again, that financial model will be important as you go through due diligence. Your Settler will typically be managing all of that. They’ll also be able to bring your systems and processes to the next level.

The Settler stage is usually from around your Series A through to your Series B or just before. The role could be a Director of Finance, a VP of Finance, or maybe a Manager of FP&A.

Look for a player-coach who can bring Pioneers to the next level, is forward-thinking and anticipating what’s to come, and is using analysis to show you what’s working, what’s not, where opportunities are that you can exploit, where there are things that you really need to focus some deep energy from an operational perspective to take this organization to the next level. They also need to be able to build scalable processes that the Pioneers wouldn’t be able to do.

At this stage of the game, your number one priority is gaining insights about the business. That will come in handy both from an operational perspective, as well as when you’re doing your fundraise at this stage.

Town Planner

Your Town Planner is the strategic right hand to the CEO, a true business partner who can help out with the company’s strategy. If you’re doing M&A, they’ll be playing a really, really deep role. And they should also be able to bring your entire executive team up to the next level by providin a deep financial lens into the rest of the what organization is doing.

They’ll be responsible for helping out with OKRs, dashboarding, and metrics. They’ll be a key go-to for your board members or your investors with regards to any questions around the business. While your Settler would be playing a supporting role in your fundraise, your Town Planner is a key person in that process. They’ll be pitching with you when you’re thinking about your Series B or Series C. So while private equity or VC still mainly want to deal with the CEO and get to know you, your Town Planner may be able to help out with the fundraise strategy and also the execution. They’ll be able to take all of the current systems and processes to the next level.

This stage is Series B and beyond. You might want to bring someone in just before your Series B. Once you get to Series C, you may be raising from private equity, and at that stage, it’s much less about the personality, background and the competencies of the CEO, and it’s about the cold hard numbers. You want to have all of this nailed down before you think about raising your Series C for sure, potentially even your Series B.

At this point, you’re thinking about hiring a CFO. You want somebody who’s a strategic business partner, and it may be somebody that you disagree with a lot. There can be a healthy tension between the CEO and the CFO at this stage. What you’ll find is that the CEO may think of all of the opportunities out there to exploit, and the CFO is a little bit more risk-oriented, but that can be a really nice balance. So find someone that you may be able to disagree with but still respect their point of view and come to consensus at the end of the day.

The number one priority at this stage is driving better decisions across the entire organization and being totally strategic.

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