BEING CFO AT A VC-BACKED STARTUP— IN A WINNER TAKE ALL ECONOMY PART 2. Day-to- Day Simon Jawitz Tax Attorney, Adjunct Business School Faculty, Adjunct La… January 25, 2024 The responsibilities of the CFO will multiply and evolve as the companyʼs business grows and it becomes larger in headcount, functions, and (very importantly) data. Without diminishing the importance of any of this and the difficulties involved, I would characterize all of this astable stakes.
You need to build a strong finance team (“Finance”) and hire an outstanding VP of Finance.[1] That individual obviously must have a strong accounting background and a proven ability to lead a team. Equally important is total comfort around technology and internal or external software engineers. You will want to have complete confidence in your VPʼs ability to migrate from QuickBooks to a more robust platform (e.g.NetSuite) when the time is right and to interact with all the companyʼs other technology platforms through APIs or otherwise.
In Commonʼs case this included our own proprietary Beacon plus Entrata, Salesforce, Stripe, Periscope, Plaid, Obligo, TransUnion and others. In a reflection of how quickly the technology ecosystem is changing, during my CFO tenure at Common AI was limited to customer service BOTs on our website. It is apparent that AI is going to impact all aspects of finance in countless ways.
Finally, and I want to underscore this point, make certain everyone on the Finance team has a deep and intuitive understanding of the business. That this requirement seems so obvious doesnʼt mean it is a fact. It is your responsibility to make sure it is true.
Finance will, of course, need to produce accurate monthly and quarterly financials.[2] As the business matures as CFO you will need to develop a strategy around FP&A (financial planning and analysis) and ensure that the FP&A professional(s)[3] work well with all the various functions at the company. Over time you will also need to take responsibility for the companyʼs tax returns and working with outside accountants to produce audited financial statements. Until very recently the responsibility for managing the companyʼs cash existed on paper but not in the real world.
Interest rates were virtually zero and earning any return on the companyʼs cash balances was of little significance. However, with the Fed Funds rate increasing by 500 basis points and bringing other rates with it, smarter cash management should no longer be ignored. I hasten to add that smart cash management includes and perhaps is most of all about protecting cash.
The startup ecosystem came close to a complete meltdown in the spring of 2023 when Silicon Valley Bank (“SVB”), Signature Bank and Republic Bank all failed. Thankfully for me (at least my emotional well-being) I was no longer at Common, but I had friends in finance there and at many other startups, VC firms and regional banks who had a very tough time as it briefly looked like we might be headed for GFC redux. This was a self- inflicted wound brought on by extraordinarily poor risk management exacerbated by technology that enabled VC firms and their portfolio companies to withdraw billions of dollars almost instantaneously.
Consequently, cash management and banking relationships need to figure large as the CFO manages and mitigates the financial risks of the company. As the CFO at Common I found myself playing an important but clearly supportive role to the CEO in connection with our Series B, Series C and Series D fundraisings. Helping craft the financial portions of the relevant investment decks predominated in the earlier raises.
Managing increasingly probing and demanding due diligence requests with shorter and shorter expected turnaround times took up more and more mindshare as later-stage investors not surprisingly were looking for better and deeper analysis and confirmation of their investment thesis. I am happy to admit that in some respects this all helped us to get a better handle on our own business and we developed important insights from this process. While serving as Commonʼs CFO I also (since 2014) was a member of the board of directors of Bank Leumi USA, a subsidiary of Israelʼs largest commercial bank.
Among my responsibilities I was chair of the bankʼs risk management committee and a member of the boardʼs loan (i.e. credit) committee. I confess that as CFO of Common I was surprised and initially mystified to discover the world of venture lending.
Commercial banks (SVB was the most successful—until it wasnʼt) as well as specially created funds extend loans and credit facilities to venture backed businesses quite early in their existence. These are by traditional standards not credit-worthy borrowers. However, through a combination of deal structure including covenants, warrants and substantially higher rates, and most importantly, close relationships with the VC firms who back the borrowers, this was a thriving business.
At Common I negotiated such a facility and several amendments over time. At its most basic level it is a textbook lesson in the cost of capital—equity v. debt, as well as the structural advantages and disadvantages of each.
Strong relationship banking skills are essential. My most important takeaway is that transparency and honesty pay huge dividends. One aspect of serving as CFO and managing the finance function that repeatedly surprised me was the very small role that the presentation and discussion of financials played in Board meetings for at least the first several years of Commonʼs existence.
We had a great Board of highly engaged, thoughtful and experienced investors who managed to be supportive while at the same time probing and critical when necessary. However, Board meetings were dominated by discussions regarding our real estate pipeline; member (tenant) funnel; sales; marketing; new building openings; lease-up timelines; and technology. I am sure this was reflective of the weltanschauung I referred to in Part 1.
Of course, I prepared and delivered to the Board quarterly financial statements together with discussion and analysis. Rarely, however, in the early days of Common did these exhibits engender animated conversation.[4] Regardless of how smart, experienced, engaged, and insightful your Board members are, they cannot and will not ever be able to understand the operations and performance of your business as well as you. (If this is not the case, you are not doing your job!) You need to be transparent to a fault.
Do not sugar coat anything. To the best of your ability make sure your Board understands what is going well and what is struggling. In the end, this type of engagement is going to produce the best results for everyone.
In Part 3 I will discuss the importance and challenges of data and performance metrics and make some comments on financial statements andpro formafinancials. [1] Fortunately, at Common we managed to recruit a “rock star” into this role. [2] In the early days it will be a struggle to get this done on a timely basis, but it just must be done.
[3]Seefootnote 1, above. Ditto. [4] This contrasted sharply with my experience as a board member at Bank Leumi.
Every bank board meeting began with a presentation by our CEO followed by an extensive presentation and discussion of financial results with the bankʼs CFO. Of course, that was a very different and mature business with well-defined metrics that were, by the very nature of the institution, financial in nature. 21·1 comment