Student entrepreneurs speak out: #4 in a series
by CMU-Portugal student, Guilherme Pamplona Santos
One of the most common types of financing for startup companies that manage to survive their foundation and initial growth stages is venture capital. The National Venture Capital Association’s Venture Impact study from 2011 estimates that VC-backed companies generate 21% of the US GDP, a figure most would say is significant. However, with VC funding there are caveats: thorough due diligence processes, intense term sheet negotiations, long waiting times for exit events… And, perhaps most important of all, sometimes interference with the company’s management (or, in worse cases, its replacement altogether).
I bring up this particular type of investor to illustrate a broader issue – every company reaches a certain point when it needs to have someone who is dedicated to managing it from a financial perspective; in this case to manage the relationship with investors, but there are many other roles a CFO plays.
So, what can a CFO do for you after all?
The mundane, everyday accounting
Most entrepreneurs we hear about – including here on New Venturist – do not have business management as their primary background, much less one that is focused on Accounting or Financial Reporting. But they still have to keep records on how the company is doing, and the most common solution is to hire an external accountant, typically a firm that specializes in doing that.
It is the CFO’s job to ensure that everything is being done properly and according to the newest and latest International Accounting Standards, freeing you as a CEO from having to dedicate time to learn and constantly stay up-to-date with accounting rules and procedures.
Businesses are often funded at the earliest stages by bootstrapping or by friends and family. As time goes by you might raise additional funding from angel investors and perhaps some working capital financing from suppliers. Venture capital financing may come into play. And as the company starts showing positive cash flows, perhaps it will take on some bank debt.
Dealing with all of these financing sources can become cumbersome as time passes, turning into a major distraction from the “business side” of the company. One of the main roles of a CFO is to design and execute what the ideal financing mix is for your company – choosing when and how to seek financing – which frees you as the entrepreneur and CEO from having to spend time dealing with it.
The “social” stuff
Investors demand attention: they want to know how their money is being used, and – more importantly – how and when they will be rewarded. Essentially, there are two different stages of your company’s relationship with an investor: your chase for their money, and their chase for your company’s money. Managing both of them is what takes a CFO’s time.
But should you hire a CFO to raise money from friends and family?
Certainly not: CFOs come at a cost, and most startups are simply unable to afford one when they start; but you probably don’t need them that early either: pitching to friends and family about the project you want to start is likely to be something you can do without compromising the time you actually need to dedicate to it.
I guess what sums it all up best is the principle of comparative advantage in Economics: “A situation in which a country, individual, company or region can produce a good at a lower opportunity cost than a competitor.” (Investopedia) Your job is to be the best entrepreneur and CEO you can be, and that involves so much more than managing the company’s finances; every day you spend doing that is a day you are not taking care of the rest of the business. As soon as you are able to afford it, hire a CFO – you stand to gain from it.
Guilherme Pamplona Santos is a student of Católica-Lisbon School of Business & Economics’ Master in Finance, in Portugal, and currently studies in Carnegie Mellon University as part of an Exchange program.