Your First CFO: A Playbook For Success In Year One
Hiring a great CFO is one of the hallmark transition moments that founders take as their startup begins to mature. Finding the right person is one of the most impactful things that you can do as a founder; and if you find the right person, they will execute tactical and strategic projects that will transform your business.
Despite how important this milestone is, few great resources are available to founders and first-time CFOs alike.
To develop this playbook, we welcomed Guido Torrini to FirstMark’s CFO Guild to unpack the topic with our community of 400+ venture-backed CFOs. Guido has served as the first CFO in multiple high-growth companies, including Celonis, GymPass, and is currently CFO at the $5b+ trust and intelligence platform OneTrust.
We also interviewed FirstMark Partners Amish Jani and Beth Ferreira to include the Board perspective.
Like many executive roles, one of the most common answers you’ll hear is, “most companies hire their CFO too late.” By the time the hire is made, myriad issues have already started to rear their ugly heads. Accounting processes begin to falter under the growth of the business, the exec team struggles to reliably calculate core KPIs, collections are becoming a major source of cashflow headaches, and so on.
The best time to hire a CFO is before there are financial problems to fix, particularly when you consider how long it can take to find and hire someone for the role. Amish Jani explains that “when you hit the $20M ARR mark, that’s when blind spots really start to emerge and you feel the gap in strategic leverage a CFO provides.”
As a general rule of thumb, you can think about hiring a CFO at some combination of the following milestones:
$20M – $40M of annual revenue (for typical SaaS/consumer businesses)
12 months in advance of a significant financing (Series B or infrequently Series C)
Company headcount is in the 200+ FTE range
Finance systems show signs of struggling to keep up with the business
As Beth Ferreria explains, “There is so much financial infrastructure to build out early on that should happen before raising significant capital (Series B and beyond). Your financial reporting and analytics will be front and center in a fundraise, so your finance leader (or lack thereof) is going to heavily influence whether or not your raise is successful.”
There are two personas you can target for the first CFO in a business. The more obvious persona is a repeat first-time CFO, who has “been there, done that”. The unfortunate reality though, is that many CFOs who have done it already, don’t want to start all over again—they would prefer to join a later-stage or public company where much of the building has been done and the financial infrastructure is in place. There is a subset of this group however, albeit a smaller one, that prefers earlier-stage companies–leaders who enjoy and thrive in building from the early to growth stages.
The second persona to look for, and the type of CFO most common to see in a Series A/B business is the up-and-comer; someone who held a lieutenant position in a later-stage business, and has seen the journey to the growth stages and beyond–and who will be excited at the opportunity to earn the CFO title and lead the full journey.
As a founder, how do you land a great candidate? Guido Torrini explains that, from the standpoint of the incoming CFO, “candidates will be drawn to the founder’s vision, to the strength of the existing leadership team, and most of all, to the opportunities they’ll have to learn new things.”
From the standpoint of the CEO, Guido emphasizes that your CFO needs to be someone you can trust, and who gets you excited. “If you don’t come away from your first conversation with them feeling like your CEO is someone you want to go to war with every day… it’s not going to go well.”
He adds that the best candidates are always recruited into companies by a founder, an early investor, or a board member—not executive recruiters.
There are many different ways to answer this question, but it really boils down to something simple: a VP of Finance can adeptly operate the finance function, including both FP&A and accounting. A CFO, however, can do that and act as a true strategic partner to the CEO and business.
Put differently, a VP of Finance can answer almost any question you ask about the business. A CFO tells you answers to questions that you didn’t even ask.
As Amish Jani explains, “A CFO is forward-looking while a VP Finance is generally backward-looking. CFOs are thinking about the operating levers that need to evolve in order to hit long-term financial goals, including raising the next round of funding. They are adept enough to independently work cross-functionally with other executives to help drive these goals to completion.”
As your business’ first CFO, there will be a fairly predictable set of tactical, blocking and tackling tasks for them to work through, many of which they will not be able to complete within the first 180 days. Your CFO should prioritize the most urgent and important among them, while also thinking ahead to the more strategic challenges still to come.
Some of the most common (and critical) initial projects include:
Auditing the operating model. One of the first things your CFO will likely need to do is review your current operating model and make sure your budget is sophisticated enough to reflect the current business and its realities. All too often, CFOs come in and realize a huge number of things are unaccounted for in the business model that are impacting revenues, forecasting, or burn rate.
Organizing customer and vendor contracts. In their earliest days, startups are far more focused on growth than on maintaining an orderly business. Almost invariably, your incoming CFO will need to spend time getting customer and vendor contracts organized in order to make downstream projects (Audits, etc.) far more efficient.
Reexamining quote-to-cash and procurement processes. Again, it’s almost a guarantee that no leader will have thoughtfully examined cash inflows and outflows from a business, or how to harden these processes/systems for scale. Your first CFO will do that. Interestingly, Guido notes that while a great CFO will implement more formal processes than a business is used to, they’ll invest equal time in making these processes (especially customers’ purchasing process) simpler. A great CFO will ask questions like, “how can we make the customer contract as short as possible?”
Building the data infrastructure. It’s important to build critical data infrastructure (ERP, CRM, and data warehouse) as soon as possible to allow the measurement and scaling of unit economics. This task is a prerequisite for setting up the first real strategic planning cycle for the company. It also creates the ability to drive accountability down the line.
Understanding point-in-time revenue. A typical challenge the CFO has to address early-on is to very rigorously understand a company’s exact point-in-time revenue. In a SaaS business, for example, it’s typical for companies to be non-rigorous in their treatment of expansion, contraction, churn, etc. – so the first CFO will need to build a clean time-series analysis of revenue.
Hardening the account function. One of the most important things a great CFO will do is to have an excellent accounting function. Paradoxically, accounting is the part of the business that is absolutely critical to be run effectively, but it is also the least valuable use of your CFO’s time.
Preparing for your first audit. At this point in a company’s development, it’s unlikely that it has been through an audit. All of the above tasks tend to culminate in a company finally being prepared to complete its first annual audit.
“Formalizing the budgeting process, and holding leaders accountable is a critical early motion for new CFOs setting companies up to scale,” explains Beth Ferreira, “By having a point person to drive these processes, establish goals, and hold teams accountable to them, you as CEO are now freed up to work on other things, like selling new customers or working on the product.”
There are countless other common patterns and projects to tackle (for example, state-level tax requirements that have typically been ignored in the early days), but the above is a typical starting list for a company’s first CFO.
Once a CFO has successfully set in motion these critical, cleanup-oriented projects, the next phase typically revolves around three fundamental milestones.
The first is for you and your CFO to sit down together and write out the equation of the company. It is vital that both of you are completely aligned on the physics of the company, and understand the business model in mathematical terms. Do you deeply understand the levers that drive customer acquisition? Do you understand the full cost of onboarding and servicing a customer, and how that affects your unit economics? Do you have a sense of how variance in repeat purchases or renewal rates impacts the rest of the business?
Everything that comes next will be downstream of this equation, and for you to succeed, you need to be on the exact same page as your CFO.
The second is for your CFO to build a data dictionary that establishes clear definitions so that when they are communicating with other team members, there are no misunderstandings around terminology. “Retention” could mean something entirely different to Sales, Finance, and Product, so it’s important they make sure they are on the same page in terms of definitions before they engage in strategic discussions or start implementing changes.
The third step is to, as Guido puts it, “get people on the ‘yes’ train,” given the inevitable pushback that comes from significant company changes. He does this effectively by:
Starting with first principles so that the conversation begins from a place of agreement,
Giving credit where credit is due for the work that has gotten the company to where it is,
Explaining that what worked before might keep working, or might not work for the company’s next stage,
And explaining that the same idea applies to any new tactics he tries himself—they might work for the next phase, but not the phase after that.
The most important thing for your CFO to remember when it comes to change management is to be an extremely active listener and to be ready to adjust the pace at which they make changes. They need people to come along with them to succeed, and not everyone will be ready to move immediately.
One of the most important things an incoming CFO can do to build strong relationships with CEOs, peer CXOs, and the Board: make problems disappear.
“If in the first 90 days, your CFO can make problems for other CXOs disappear, they will be indispensable.” Guido also explains that “it’s okay if they drop some balls. Remember that before they were there, all of the balls were being dropped.”
Equally as important to winning over colleagues is winning over the board. The key to your new CFO winning over the board is to engage with them, be transparent, and understand what “great” looks like to them. The board wants to be helpful, so your CFO should ask for their help and advice, nurture those relationships, and make sure everyone is clear on what exactly their role is as the financial leader of the company.
With the core of a strong finance function in place, your CFO will now have many important projects in the rearview mirror. Finance systems and processes will run like a well-oiled machine, and most of your “scaling debt” will be paid down. You’ll also have a very crisp handle on the financial levers of your business, and the instrumentation to give you deep insight into your company operations in near real-time. At that point, it’s time for your CFO’s next chapter: predicting the future.
Everyone knows that the ability to reliably forecast your business is essential to succeeding in the public markets. What many founders don’t realize, however, is that this expectation begins in the private markets. Late-stage investors, who are looking for public market candidates, prize businesses that have the operating discipline to set and meet a forecast.
What does it look like to build forecasting rigor in practice? The CEO, CFO, and executive team should partner to forecast the next quarter of the business as accurately as possible, with a particular focus on your most important operating metrics. Then, after the close of each month or quarter, review how you performed against your forecast. The goal of this review is to get to the bottom of any meaningful variance, diagnose the root cause of the miss, and determine how you can adjust your operating model going forward. Repeat this process until you can reliably predict your business.
This is just one example of how your CFO will need to partner cross-functionally with the rest of the executive team. Guido shared a number of other specific examples of how he gets in the trenches with leadership team members to understand the business from top to bottom.
On the revenue side, for example, Guido holds 3 weekly recurring meetings with Sales leadership: a pipeline meeting, a forecasting meeting, and a recruiting meeting. The last of these is arguably the most surprising; but in order for a CFO to understand what revenue capacity will look like one year from now, they need to understand what sales headcount will look like one quarter from now.
In these meetings, among other things, he helps the company’s revenue teams determine where to invest, how to measure returns, and what the unit economics are for the business. He also helps to evaluate and optimize territory planning, compensation plans, margins, and most importantly, prioritization when it comes to hiring.
Predicting the future accurately is a significant challenge, which is why it is so critical that your CFO be set up for success from the moment they join. Without cross-functional buy-in, a close, collaborative relationship with you as CEO, and perfect alignment on the fundamentals of the business, it simply isn’t possible.
There will be a lot for your new CFO to take on when they join, and they should expect to be pulled in many different directions at once. There is always more to do, and wherever finances are involved, it’s almost always a high-priority task.
That is why at the end of the day, it all goes back to you and your CFO having an excellent relationship and a shared vision. If you have both of those things, your CFO will always know what their priorities are, and you’ll have in them a partner, advisor, and ally that will play a critical role in the ultimate success of your company.