How Soon is Too Soon: Fractional CFOs for Seed Stage Entrepreneurs
An experienced CFO can accelerate your early-stage business, bring in investment and help you avoid common mistakes. When is the right time to bring them on board, and will they be worth the investment? Our Venture Partner, Colman Stephenson, sat down with some founders and fractional CFOs to find out.
Raza Rubbani is COO of Sorair, the creator of high-end surveillance systems. As an experienced businessman, he didn’t feel the need for the advice of Andrea Sasso, a fractional CFO made available by the Techstars accelerator programme. “I felt that Sorair was my baby, and I needed to know everything all the time, but that approach didn’t work. When you’re thinking about the details, you can’t see the strategy.”
After meeting Andrea, Raza realised that “it was good to relinquish the responsibility”. More than that, Andrea also keeps the founders “honest” and when investors see her, “they feel at home.”
Bringing a CFO into your senior team for the first time can feel like a difficult and risky thing to do. What if they don’t understand my business? Why pay so much for providing better numbers. Won’t this increase overhead and shorten runway? Why should I pay a significant daily rate when others are offering to advise me for equity, or for free? And what if we just don’t get along? These are the questions that result in founders delaying making this step. Sometimes until far too late.
Wouter Merkestein is founder of laiout, creator of automated architectural floor plans. When customers came knocking, he was getting stretched. “At laiout we were at a stage of increasing commercial traction where I was needed, while at the same time strategic decisions had to be made regarding hiring, expenses and additional funding. The risk here as a founder was to be spread too thin, which was why I started looking for this financial individual with significant strategic experience in the growth stages we’re about to enter.”
Wouter is now working with Niralee Thanki. Niralee feels that the fractional CFO brings an increased level of professionalism to investor and board conversations. “Founders are generally really good at knowing their business’ key metrics, but the storytelling is not always as sophisticated as it could be. There can be errors within their assumptions or calculations because their forecasting isn’t polished enough. For example, the P&L and cash flow are often forecasted separately, and the link between them is not understood well; the balance sheet is almost never forecasted (though I don’t know anybody who does balance sheet forecasting who isn’t in finance!) and I’m not sure that all founders understand the importance of balance sheet forecasting”
What is the job?
Andrea sees her role as acting as the right hand of the CEO. She ensures decision making is based on data, not hunch or (worse) ego. “By looking at numbers you can be much more objective”. She helps founders tell their story to investors and she translates the business into financials.
She also helps entrepreneurs avoid common mistakes. “As a fractional CFO, I get to see so many different projects at all stages. My value is that I’m going to stop you from making some mistakes that you might have made without me.”
Wouter agrees: “The idea isn’t for our CFO to do accounting but more to provide a critical opinion during important decision-making moments.”
Focus for the CEO
Andrea likes to quote one of her CEO clients “The CEO’s time is the cheapest and the most expensive in the company”. Meaning, when it comes down to it, who is going to do the invoicing. If there is no finance resource, it will be the CEO but their time is best used elsewhere. A fractional CFO frees up the CEO to focus on the things that matter: winning business, hiring the best talent, networking with investors.
So much advice!
But recently-raised founders rarely find themselves short of individuals offering advice. What differentiates the CFO from the investors, the NEDS, the “growth consultants” and all the folk that clutter a LinkedIn inbox, all offering their help?
CFO Dhosjan Greenaway-Dalini (a member of the Startup CFO group) says “the fractional CFO is actually closer to reality of what the business is doing. Yes, you have the investors and advisors who do provide valuable guidance and context. But I get to see more of the day to day, more of the reality of what’s happening on the ground, and the reality of what the internal teams are doing or can do. I think that brings you closer to what’s actually happening and gives a better perspective of risks and opportunities.”
Niralee says, “Experienced people in the boardroom will often suggest things like going into a new market, new vertical, new product expansion which will all sound great in theory but won’t all be practical. It will be the CFO that will sit down with the CEO afterwards, stress testing the ideas with rigour to help figure out, ‘What can we actually do? And how’s the cash actually going to get spent?’”
How to start?
But how does an entrepreneur go about making this important (and expensive) appointment?
Dhosjan thinks the trigger of raising capital is a good time to test the waters. She recommends “hiring a CFO for a fixed-term engagement at the point of raising to talk through your plan. This can be done in a cost-effective way, but the value add is immense. Two days will add a lot of value by asking the questions investors will ask”. After raising, most fractional CFOs will be happy to scale up or down according to the business needs. Along the way, you can judge whether this person is really going to be your sparring partner.
According to Raza, Andrea’s relationship with Sorair “was pro bono initially”. As the commitment grew, she “had clean lines and a soft approach with no minimum fees, but a hard maximum of the time she could devote to us.”
So, CFOs don’t just prepare the numbers. In fact, most fractional CFOs will encourage you to retain the services of your existing outsourced accountant (if they rate them). Accountants do bookkeeping and taxes far more efficiently. But as you scale, the CFO knows which services to insource and when in order to ensure your finance operations don’t end up dragging down the business.
How soon is too soon?
Your part-time CFO can bring rigour, insight, and experience that will help you avoid common pitfalls and set you apart from other opportunities in front of investors. The seed stage is not too soon.
Pi Labs is an early-stage venture capital firm based in London backing founders who are creating a digital and sustainable built world. The firm has made over 80 investments since 2015, across 15 countries, over three funds, and has delivered 14 exits. Pi Labs’ portfolio of globally-scalable solutions are transforming the built world by building a digital, sustainable future, fit for generations to come.
Sorair Technologies’ new security solution, Soranet™, uses robotics, sensors and computer vision technology to enhance and automate perimeter security operations, negating losses made from theft, whilst reducing labour costs.
Laiout produces automated floor plans in seconds. From weeks of back and forth to a single meeting, with all your floor plans concluded on the spot in a collaborative way. Go from an empty floor to a filled-up architectural floor plan in as little as 4 clicks and leverage increased optionality, data insights and sustainability advantages.
