Finance as Strategy: When and How Startups Should Build a Finance Function | Summary and Q&A

TL;DR

Building a strong finance team early on in a company's life cycle increases the chances of success and prevents potential financial pitfalls down the line.

Key Insights

• 🤪 A strong finance team goes beyond basic bookkeeping and expense tracking; they provide strategic guidance, define KPIs, and manage financial resources.
• 👨‍💻 Accounting is essential for capturing and coding financial data accurately, providing historical context for better decision-making.
• 🥺 Skimping on senior finance hires can lead to costly mistakes in financial management and investor due diligence.
• 🇨🇷 Outsourced CFO firms offer cost-effective solutions for early-stage companies, providing expert guidance and support.
• 👨‍💼 Financial fluency is crucial for CEOs, as financials represent the state of the business and provide insight for strategic decision-making.
• 😤 Startups should consider outsourcing their finance function before transitioning to an in-house team, based on their growth stage and business complexity.
• 😫 Detailed financial data sets are essential for accurate analysis and reporting, allowing companies to make informed decisions and attract investors.

Transcript

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Questions & Answers

Q: Why is it important to have a finance team early on in a company's life cycle?

A strong finance team can identify and address financial challenges and help create an operating plan to guide the company's growth and success.

Q: What are the potential consequences of not having a finance team in place?

Without a finance team, companies may struggle with unsustainable business models, poor financial decision-making, and challenges with fundraise and investor due diligence.

Q: What are the similarities between a strong product team and a strong finance team?

Both teams work with finite resources and constraints to deliver results. They set and track KPIs, manage execution, and course-correct when necessary.

Q: What are the cost considerations for hiring an outsourced finance team?

Outsourced CFO firms can provide a full-stack finance team at a fraction of the cost of hiring in-house. The cost varies based on the company's stage and needs.

Summary

In this video, Caroline Moon from Andreessen Horowitz discusses the importance of having a strong finance team in place early on in a company's lifecycle. She provides case studies to illustrate the consequences of neglecting finance and highlights the role of finance in strategic decision-making. Caroline emphasizes the value of outsourcing finance initially and gradually bringing in-house finance as the company scales. She also addresses the misconception about the cost of hiring a finance team.

Questions & Answers

Q: Why is finance often neglected when building a company?

Many companies prioritize product development and sales and marketing, leaving HR and finance as the last areas to be built out. However, this approach can lead to problems later on, as finance plays a crucial role in understanding and managing the financial health of the company.

Q: Can you provide an example of how bad unit economics can lead to a company's failure?

In one case study, a company experienced rapid growth but had unsustainable unit economics. They expanded internationally and domestically, but their customer attention was low and their LTV (customer lifetime value) to CAC (customer acquisition cost) ratio was upside down. This resulted in the company being unable to secure additional funding and eventually shutting down.

Q: What does a great finance team do beyond basic accounting tasks?

A great finance team goes beyond basic tasks like payroll and tracking expenses. They also help define and track the right key performance indicators (KPIs) to measure the business's progress and assess the company's finite resources. They create an operating plan to guide the company's roadmap, ensuring it can reach key milestones while managing constraints, such as cash balance.

Q: How can finance be compared to product management?

Ben Horowitz has likened HR to QA and finance to product management, highlighting the importance of both functions in building a successful organization. A strong finance team, like a product team, takes the company's finite resources and figures out how to deliver great results under various constraints. They decompose problems, find solutions, and course-correct when things don't go according to plan.

Q: What is the role of an operating plan in finance?

An operating plan is like a roadmap for the company, guiding its strategic direction based on the available resources and constraints. A great finance team constructs and continuously revises this plan to ensure the company can achieve its next milestone, operating under constraints like cash balance. The plan helps the company make better decisions and measure progress against defined KPIs.

Q: How can a weak finance team impact a company's cash flow?

In a case study, a company paid suppliers upfront while collecting cash from customers 90 days later. This created a serious cash crunch, and the company burned through its cash 12 months earlier than planned. As a result, they struggled to demonstrate traction and had to take a bridge loan, diluting their ownership. A strong finance team would have identified the working capital issues early on and worked on a resolution.

Q: How is finance different from accounting?

Accounting is the process of translating financial transactions into a financial data set, while finance is a broader function that involves strategic decision-making and understanding the financial health of the business. Accounting is an essential part of finance, but finance also includes tasks like creating an operating plan, assessing resources, and making financial projections.

Q: Why is it crucial to capture and code financial data with detail?

Just like companies capture and track every possible interaction in product and transactional data sets, it's important to do the same with financial data. Detailed financial data provides historical context and insights into the business, allowing for better decision-making. Without proper attention to detail, financial data can be inaccurate or difficult to use, leading to wrong conclusions and poor business performance.

Q: Why should founders/CEOs be fluent in finance?

Financial fluency is as crucial as any other aspect of running a business. Founders/CEOs need to understand their company's financials and what they represent. Financials help assess the state of the business, make strategic decisions, and communicate effectively with the board and potential investors. It's essential to have a strong understanding of financial data and use it to drive the company's success.

Q: When should a company consider hiring an outsourced CFO team?

In the early stages, before generating revenue up to around $10 million, it's recommended to use an outsourced full-stack CFO firm. These firms offer CFO services that go beyond basic bookkeeping and accounting. They provide strategic financial guidance at a fraction of the cost of hiring an in-house team. An outsourced CFO team can help set up a solid financial foundation, establish an operating plan, and ensure compliance.

Takeaways

Having a strong finance team is essential for a company's success. Neglecting finance can lead to problems like unsustainable unit economics, cash flow issues, and difficulties in securing funding. A great finance team goes beyond basic accounting tasks and plays a strategic role in defining KPIs, assessing resources, and creating an operating plan. It's crucial to capture financial data with detail, just like other data sets, to gain historical context and make better decisions. Outsourcing finance initially can be cost-effective, and as the company scales, a senior in-house finance leader should be hired. Skimping on critical senior hires is a costly mistake that can impact the company's financial health.

Summary & Key Takeaways

• Building a strong finance team should not be left until the last minute and should be considered one of the first hires for a company.

• Case study 1: A company with unsustainable unit economics and bad customer retention failed to secure further funding and had to shut down due to the lack of financial oversight.

• Case study 2: A company without a finance team experienced a cash crunch due to poor working capital management, leading to a less successful fundraise and unnecessary dilution.