Expert Speak is the first in a series of interviews, discussions, and conversations with leading business figures. In this series, I speak about emerging technology trends, dissect industry developments, and offer startup insights with prominent business leaders. This is a deep-dive into the new, ambitious, and resilient Indian startup ecosystem.
In this ExpertSpeak session with Raghava Rao, India CFO, Amazon India, we spoke at length on the role of CFOs in startups. Raghava has worked with both international and Indian companies in a career spanning over 25 years. He has worked in finance teams handling small businesses of $40M and also with teams handling large businesses of more than $5B.
With this wide experience in strategy formulation and financial evaluation, I knew it would be a good start to the #ExpertSpeak Series to have Raghava share his insights for today’s startup co-founders.
Raghava addressed several key points on the startup ecosystem in India and the value a CFO brings to the table.
I was grateful for the time that Raghava gave and the learnings from this session.
Vani: What’s the role of a CFO as a key partner to a startup founder?
Raghava: The CFO is the co-pilot-cum-navigator for the startup founder. The CFO must co-create a shared vision for the startup’s future, and ensure specificity around this future in terms of financial and non-financial metrics. These could be around revenue, profitability, customer count, market share, headcount and team size, business and product portfolio, customer satisfaction metrics, and geographical expansion. Then put milestones so that you can say that by the end of year 1, this is what we should be, and by the end of year 2, this is where we should be.
Both destination and milestones should be co-created with the leadership team, and not just be thrust upon by the CFO or the startup founder on others.
Next, create the capability to scale 10X, 100X, or 1000X from today to the future. This includes hiring the right team, building compliance and controllership processes, building taxation, treasury, IT and automation, analytical capability, and embedding governance.
By governance, I mean — Does the startup have a periodic cycle (annual or quarterly) for business and finance planning? Is there a mechanism for different functions to come together and plan for the future? Has past performance been reviewed to understand the room for improvement and course corrections? Does the leadership team agree on a set of core metrics that are most important? Are these metrics tracked regularly? Are there goals around them? Do the goals have the right degree of ambition? Does the leadership know why deviations happen against these goals? Are these deviations discussed in a vocally self-critical and honest manner?
I would call this embedding planning and performance management.
Next, the CFO needs to communicate performance to the board. This needs to be done crisply and with the right balance between pragmatism and optimism. Ensure that the startup has the trust of the board through thick and thin.
Finally, the CFO must act as a sounding board to the startup founder. Earn trust and confidence in giving objective feedback — call a spade a spade, and maintain the independence of the finance function. Know when to be a cheerleader and when to be a critic.
In all this, make sure that the ability to scale is not at the expense of passion that is the core DNA for a startup.
Vani: And how does the CFO create the ability to scale, without, as you said, losing the passion the startup has?
Raghava: To scale, the startup has to hire and bring new people on board. This means adding people to the leadership and team who may have operated under very different cultures and have different mental models. So, make it mandatory that all new joiners understand the core culture of the startup and get exposed to the thinking and vision that the startup founders have. I would call this culture assimilation.
Second, ensure that as the team size grows, the distance between the front line and decision-makers stays short and simple. There are two approaches here. First, make sure the decision-makers remain connected to the frontline.
Do senior leaders meet customers? Do they have access to anecdotes and feedback from customers, including customer complaints? Do leaders have the first-hand experience of sampling their product and service?
Second, create a set of tenets and decision-making principles so that the frontline is empowered to take decisions and respond quickly and entrepreneurially when they see an opportunity or a threat, without referring back to the central leaders every time. These tenets and decision-making principles define the guidelines for prioritizing (“When I have to choose between X and Y, what should I choose and why?”), clarity on spending authority (“Who can approve up to what limits?”) and policies and principles (“Our startup believes in X, hence Y”). You have to do both — ensure central leaders stay connected to the frontline and that the frontline is empowered to take quick decisions.
Third, build a tolerance for failure. You cannot breed and foster innovation and entrepreneurialism without being tolerant of failures and mistakes. Recognize and get comfortable with talking of failures and defects, and use them to enrich lessons and learnings.
Fourth, make sure that reward and recognition in the organization — appraisals, promotions, compensation revisions, awards — are linked to an ability to invent and delight the customer.
Fifth, make sure that a consistent set of metrics — both financial and non-financial — connects the entire organization in a consistent manner and ties together the frontline to the central leadership and across different functions.
And while doing all this, establish a culture of controllership.
Vani: How do you establish controllership in this process?
Raghava: By controllership, I mean the following:
Are we reporting financial and non-financial metrics correctly and consistently? Are our assets and liabilities being accounted for accurately? Do we know of leakages in revenue and have opportunities for cost reduction, and do we have initiatives to get better? Do we have goals that connect back to the long-term? Is there a financial and non-financial planning calendar that links to goal-setting? Are these organization goals then mapped back to individuals or teams? Does the team meet to objectively review actuals vs. goals? In such performance reviews, is there a culture of honesty and objectivity? Do corrective actions, including, say, resource reallocation, result from such reviews? Are spending limits well-established and embedded?
To embed all these, I would consider the following as building blocks:
● A well-defined budgeting and forecasting process
● A well-run goal-setting exercise
● Regular Business Performance Reviews on a monthly/quarterly/annual basis
● Rewards, Recognition, Compensation, and Growth of individuals are determined objectively and linked to a blend of What (Performance) and How (Leadership Style)
● Programs for continuous improvements (e.g., cost reduction, automation, defect elimination)
● Independence of Accounting and Internal Audit teams
● Written SOPs and policies, including policies for expenditure management
The trick is to set up this governance without making the entire process bureaucratic because bureaucracy is the poison for any startup.
Vani: Many startups have a difficult time determining when to hire a CFO. At what stage should a startup hire a CFO?
Raghava: Quite early! I would say you need to think of this when your leadership team, beyond the immediate set of founders, or co-founders or co-promoters, expands to perhaps three or five, one of them must be the CFO.
Also, equally important is whether you can hire the right CFO — the sort of CFO whom you believe will take you for the next five years or more.
Vani: What, do you think, are the typical qualities that a startup founder should look for in hiring a CFO? How do they narrow down the choices and make the right fit? Other than technical financial experience, what experience is most important?
Raghava: You need somebody who has the skills and experience to complement what the promoters have.
My ideal textbook experience is somebody who’s worked in stable and established companies and been part of a small team.
At the same time, the CFO must be capable of setting a vision for what the startup would look like when it has scaled.
Look for somebody with good experience, not just in finance and strategic decision support, but in taxation, treasury management, compliance, and who has the maturity and gravitas to speak to the board and the investor community.
The minimum age would perhaps be somewhere in the mid-30s. If you go lower than that, you get the exuberance of youth, but you may miss the experience necessary for a startup. And of course, this person must have integrity and backbone. The CFO should be comfortable expressing a point of view, which might be very different from that of the promoter founders and be capable of challenging them, doing so in a respectful but firm manner.
Also, please make sure that in the hiring process, you include a member of the board.
Vani: In a startup, should a CFO report to the board? Would that make the CFO conservative when taking tough decisions? What would be ideal in such a case?
Raghava: I am a firm advocate of the fact that the CFO should not report to the business head of the startup. The CFO should report to the board. It’s important to make sure that the independence of the finance function is protected structurally. Keeping the reporting line away from the business head assures this independence.
At the same time, the compensation and reward structure should make sure that just like the promoter-founders or the CEO, the CFO is incentivized to partner with the business and get a reward in terms of value creation when the startup grows.
Therefore, independence of reporting for the CFO would come pretty high up on my list for setting up a startup for success.
Vani: In a startup, many things can go wrong. What, in your experience, are the things that you have observed most go wrong? How can having a CFO help prevent or mitigate the impact of such a situation?
Raghava: Many things can go wrong in a startup, and very often, they are all inter-related.
First, the startup can keep missing its financial plan. It doesn’t hit its Revenue goals or milestones, doesn’t produce the desired improvement in margins, or losses are higher than planned. Usually, both (missing Revenue and Profit goals) happen together, but they are a symptom of a problem, and not the problem themselves. The underlying problem when financial plans are missed is most likely that the startup is not able to serve its customers and that customers see better value elsewhere, or that its product is not priced correctly, or the startup doesn’t have the cost structure to make long-term profits at the price it charges customers.
To mitigate this risk, the startup should have the right mechanisms to stay connected with customers and track metrics that pertain to customer trials, retention, engagement, loyalty, and complaints. It should have tech or R&D programs that address the opportunities identified by these mechanisms. The financial planning process must nurture and pour resources into these areas. Also, have a system for benchmarking vs. competitors. Competitors can be a good source of learnings — irrespective of whether they get it right or wrong.
The second thing that can go wrong is that the startup fails to execute properly. This shows up in consistent misses in financial and non-financial goals, often in launch deadlines, capacity creation, competitors possessing better technology, or simply the inability to inspire breakthrough thinking. The underlying cause can be that the startup hasn’t hired leaders who have scaled. The solution here is to hire big.
The third thing that can go wrong is that there is a lack of trust or a shared vision in the core leadership team. The underlying reason is that debates on strategic alignment haven’t happened at the right stages, and there are no mechanisms that encourage constructive debates or letting off steam. A good practice to build trust among the core leadership team is to have annual or half-yearly exercises that involve a “time-out” where the core leadership team retreats for introspection, surfacing debates, and just building camaraderie.
Another thing that can go wrong is that the P&L is doing fine, but cash flows are a mess. This usually points to poor balance sheet management, poor cash flow forecasting, or poor controllership on working capital or Capex. The solution here is to make sure operating business reviews hold the management team accountable for the balance sheet, working capital and cash flows and not just the P&L.
Vani: A CFO has the responsibility to anticipate and fix all these defects. So, own and run a financial planning exercise that does a bottom-up review that combines looking back (“How did we perform? Why did we miss our goals? What did we learn?”) with looking forward (“What are our priorities and why? Are we allocating resources correctly to the right priorities? Are our goals ambitious but feasible?). This exercise must be preceded by a rolling long-term forecast that inputs observations from customers and competition and the overall industry landscape.
What’s important is that the CFO builds the governance and the mechanism so that all discussions can happen in a healthy way.
From financial processes to handling tough challenges, Raghava Rao gave us many thoughts to mull over. It was wonderful to have had this opportunity for this chat with Raghava.
I look forward to our next session. Let me know if there’s anything you would like to know, in particular, in the comments.