Why should startups hire a CFO?
David Biggs is the CFO at Pusher and a chartered accountant with over 8 years experience working in venture-backed fast-growing technology startups with considerable strategic expertise in financing, scaling and structuring organisations. Read his thoughts on why startups should best manage their finances with the help of a CFO.
Tell us a bit about yourself and your journey to Pusher.
I’ve been an accountant for 15 years and qualified for 10. I worked for BBC Worldwide for a few years and then went travelling for a year and on my return I really wanted to do a job connected to football. I ended up working for Mint Digital who were creating Picklive, a fantasy football game, which began as a startup in 2009.
On the grander scale, this does not seem like a long time ago but in terms of startups and tech, it was really early and we needed to raise money for that business and at the time there were only a small amount of visible VCs in London.
Coincidentally during the period I was working for Mint Digital we were competing with New Bamboo (the origins of Pusher) — both Ruby on Rails based digital agencies but fundamentally Mint Digital was building B2C products and New Bamboo focussed more on B2B.
As agency businesses you have to get used to managing periodic cash-flow fluctuations and you learn to get really comfortable working in risky businesses, which is fine if you enjoy that type of role, but then accountants traditionally do not like too much risk. This why working in startups like Pusher was very natural for me after working at Mint Digital for five years.
What do you find interesting about fast-growing businesses?
I like delighting people. When we sold products such as the Instagram Fridge Magnets for Mint Digital (Stickygram), people took pictures of their dogs, food or kids and we were one of the first to use the Instagram API to bring these photos to life. I loved seeing the delight of people when they received their magnets and the pictures of their loved ones.
This is also what I like about Pusher does which is delighting developers: we’ve taken a number of real-life developer problems, and created elegant solutions that work at all levels of scale, and truly delight the user.
Why is the finance function important for early stage startups? Do they need a CFO?
When you’re in the pre-Seed stages of your business and attempting to reach product/market fit, you don’t really need a CFO, you just need a bookkeeper to understand basic financial reporting.
But from Seed to Series A you need to have finance help, whether it’s a Financial Controller or CFO, because when you’re small the risks are not significant but, as you grow, the risks increase and multiply. You have more people (you have hiring risks), you spend more on acquisition (sales and marketing risk) and there are also legal issues (contracting, new deals, etc).
The majority of finance issues fall under two themes: you’re either spending cash too quickly or too slowly — the CEO of the company is sometimes too far away from that data to make the right decision, at the right time. This is why it’s important to have a CFO, to either prevent the company from running out of money or spend more when they see the opportunity for a positive ROI.
What are some of the common mistakes that startups make at the beginning?
Negative growth margins are a very common one. In fact it’s a deliberate tactic from a large amount of VC backed businesses to gain market share and drive out competition. A lot of businesses over-forecast their retention metrics and therefore think spending a large amount of money to acquire customers will repay significantly over time, when quite often this is not the case. As an example, when you are a year old company, how do you know your product will be successful for a long time?
Hiring too fast is also another mistake that startups make. They hire people to solve problems but sometimes they end up in a cultural mess because they haven’t screened well for team dynamic, or they hire too many people too quickly and the company structure ends up being far too flat with limited leadership and direction setting.
Finally, a lot of startups underestimate their overheads at the beginning of their journey. This could be items such as rent, insurance, legal and other costs that entrepreneurs often fail to identify at the start, yet are vital to trade as a going concern.
How do you advise companies to deal with financial change, in the short term and the long term?
One of the most important things is that you need to be able to measure the ROI of your investments as frequently as the business allows. Ideally you’ll have both a short-term and a long-term customer acquisition strategy in place so you can measure the effectiveness of both.
If you are in very early stage you might want to have marketing and sales strategies that ensure a short-term ROI and acquire customers quickly, like paid ads for example. In the long-term you want to be thinking about more intangible, brand building strategies like PR and events, which will take longer to convert to actual sales.
When should companies go through formalising a financial plan?
If you are going to raise money you will need a financial model regardless of your own internal needs to show to your potential investors. This is usually a projection for 3–5 years based on past performance and marketing and sales activity you believe will be successful, which integrates in a model. Your model needs to be credible, and you’ll need to have a selection of levers which you can flex so you can tweak a number of scenarios based on real-life variations in performance.
An annual budget is the best projection of how you are planning to perform in any single year, and it’s important to reforecast monthly, so at any point you have the best indication of when you’re going to need more cash. Cash is king in startups.
How important is it to keep people motivated ?
I enjoy working in a company that’s growing fast. The geeky things like the underlying metrics that make the business so valuable, get me excited. Working with really talented people is also a big part of it. I genuinely enjoy being part of an entrepreneurial industry and am always looking at ways to improve the business as a whole.
A lot about the CFO role is related to transparency. I tell people as much as possible about the financials of the business so they understand how it’s growing. We do a lot of workshops like SaaS Metrics 101 and Quarterly Finance Updates and they keep staff involved and motivated. Openness is key for us.
What’s the best way to keep a CEO on track when it comes to spending?
First off, it’s important that the CEO listens and respects the CFO and their experience. To work well you need to understand each other’s personality and show them what’s useful and valuable to the company in terms of finances.
The CFO needs to act as a filter and understand what financial data is important, and what is not. They also have to be able to use the most efficient communication method in which to discuss performance, every CEO most likely has a preferred method of communication (e.g. charts, blogs).
A CFO should be involved in the majority of strategic decisions of the company but also respect the knowledge of their peers in the management team when it comes to leveraging their areas of expertise. If the management team decides to make a decision that will affect business performance, the CFO should challenge if needs be and clearly define the potential consequences supported by projections of how the business will progress negatively, or positively in the future.
What qualities should a CEO look for in a CFO?
Hiring the best technical accountant is not always the best option. A CFO needs to understand what creates value for the business and what the underlying levers are that maximise it.
Managing cashflow is a key quality that a CFO should have. They should be pragmatic and have excellent communication skills. The larger you are as a business, it’s also important that the CFO you hire is well regarded in their network and will have some amazing personal references.