Startups a bumpy but exciting ride for creative CFOs

By in Leadership

The CFO who takes on the responsibility of helping a startup move into a sustainable growth phase needs to be prepared for constant change, almost from the outset. In fact the accounting side of the startup might bear no resemblance to the disciplines normally associated with an established business.

“We see a lot of companies without financial skills. Sometimes they are not set up as a company and can be quite unsophisticated,” says Mick Liubinskas, co-founder of the Telstra-backed accelerator muru-D. “The hard part is finding a creative CFO.”

Since its launch in October 2013, muru-D has helped 74 innovative technology companies with global ambitions in its accelerator program. CFOs who get involved with these type of companies need to familiarise themselves with challenges markedly different from what they might traditionally be comfortable with.

For example, a digital company wants to raise money based on a $5 million valuation. Yet the picture on their books could look a lot different. Excluding cash, their financial assets could be less than $10,000 and only consist of two people and a couple of thousand lines of digital code. However, the founders, and possibly some investors, strongly believe that they can turn that code into a multi-million dollar company.

For a CFO without experience or exposure to an industry like this one, the business might not make sense financially. Instead, they let an investor take 80 per cent of the company because they think it’s only worth, say $700,000. Giving the entrepreneurs such a small stake might block the value of the company and adversely affect future capital raisings. A CFO familiar with the industry could use other non-financial means to create value such as the number of hits on a website, the level of engagement of its viewers, the type of users and their activities on the site.

“If they are potentially valuable to another company, then they can still be considered valuable. But obviously on the books that will be looked at differently,” says Liubinskas.

Full-time CFOs, like those described in the example above, are rare in the early stages of a startups life cycle. Startups have limited resources to employ a CFO on a salary exceeding $150,000 a year.

“[Yet] they’re struggling in areas that ensure their longevity – securing external finance, retaining staff and adapting to market changes,” says Chris Mason, a senior research fellow at the Centre for Social Impact at Swinburne University of Technology. Mason, is one of the authors of the new report, A Year in the Life of Western Australia’s Social Enterprises.

Getting the right advice on a limited budget is possible. Liubinskas encourages them to use advisers with a background in helping small investors. Often such advisers get paid with options while providing services at deep discounts until the business has a healthy cash flow.

Clients Seeking Virtual CFO Capabilities

Melbourne-based audit and assurance director at William Buck, Nicholas Benbow, notes that startups with a market capitalisation under $20 million tend to look for other alternatives such as ‘virtual’ CFOs.

“In the past few years we have seen a strong increase in demand from clients that are looking for professional services firms that go beyond the compliance. They are looking to tap into the expertise of our network, which includes our virtual CFO capabilities and our strong existing industry connections that are complimentary for our clients’ needs.”

Such CFOs can act as mentors or consultants on a retainer or fee for results. Amit Shah, managing director of The Startup Shop and the treasurer of Fishburners, Australia’s largest co-working space incubator in Sydney, says that startups usually start out with an accountant who ticks their compliance boxes, then move on to a finance manager. If they have sufficient cash flow, they use a virtual CFO.

In his experience helping more than 100 startups, entrepreneurs want to have confidence in their cash flows, followed by regular reporting to investors and team management.

“Startups are always between milestones such as going from capital raising to a launch. They need someone to help them understand how to get to those milestones as things often change in a startup,” Shah says.

But Shah stresses that CFOs, whether virtual or full-time, must have the confidence to be frank about when the business will run out of cash or achieve profitability. “The culture of these companies is usually very positive and they believe they can make this happen. The role of the CFO is to be a realist without squashing the enthusiasm.”

Or as Liubinskas says: “Startups need to make all the mistakes before running out of resources.”

This gap in having the expertise to provide professional reporting systems at a reasonable cost is leading to the development of digital tools that can present a new business in a better financial spotlight to stakeholders. Mason says the Centre for Social Impact is working on producing a web-based tool for social and financial data collection and analysis.

Will the introduction of such digital technology spell the end of CFOs who currently assist growing businesses to transition to more sustainable models? Benbow does not think so. “Many young entrepreneurs have lost the art of communication, and it’s really important,” he says. In his view, a key characteristic of top notch CFOs is being a pro-active networker who can draw on a solid list of professional advisers not only when the business is running well, but also can assist during a crisis.

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