The lead-up to a Series A financing round is often a chaotic mix of pushing sales, accelerating product, and courting potential investors. Establishing an effective finance function is rarely top-of mind: an administrative necessity, rather than a strategic complement to the sales activities.
At a very early stage, it is rational for founders to deprioritise finance. Product, sales, and speed matter more than back office structure and decisions can often be changed without too much disruption.
It all changes when approaching Series A. This is the stage where finance stops being a nice-to-have, and should become an integral part of the maturing business.
Why finance function is important before, during and after Series A
Investor needs
Investors allocate capital based on growth expectations, profit projections, and cash needs. A large part of this is based on financial information produced by the finance function. Accordingly, the credibility of these numbers is fundamental to investment decisions, and may also play a part in valuations. With more certainty about the numbers, there can be more clarity about the valuation. This benefits investors due to the investment decision being more solid, but it can also benefit the founders due to valuation discounts for uncertainty.
And there will be other investment rounds, at higher valuations, with increased investor expectation. It’s much easier to scale a finance function from a solid foundation than it is to build from scratch at Series B/C.
Founder decision-making
Decisions based on inaccurate or incomplete financial information will often be sub-optimal. How do you know how many people you need without accurate revenue and cash projections? How do you decide on which markets to enter (and when) if the costs involved are unclear? How do you know whether a fixed asset investment makes sense without a complete understanding of the benefits it will provide?
Many (I may even go with “most”) companies tend to assume that finance can wait until later in the company’s lifecycle. But it’s not a binary decision. It is clearly not necessary to have an MNC-style finance function at a start-up. It is, however, very important to have a right-sized finance function throughout the life-cycle, and this finance function should fit the scale and complexity of the company and the needs of the decision makers.
What a “right-sized” finance function looks like at Series A
At a minimum, the finance function should deliver five things:
- Cash projections: how much do we have and what is our forecast under various plausible scenarios? A clear view of burn rate. Quantum and timing of funding needs.
- Performance reporting: accurate performance metrics, with explanations and scenario-based recommendations.
- Disciplined control over spend: budgeting, approval thresholds, ownership.
- Foundational governance: straightforward processes for accounting, internal controls, and oversight.
- Financial reporting: financial statements that are consistently compliant with accounting standards and can withstand external scrutiny, such as from investors.
These are the initial basics: a foundation that enables better and quicker decisions now, and can be scaled as the company grows. It is much easier to scale from a simple but solid foundation than it is to design a finance function from scratch when the business is larger and more complex, or worse, scrambling around to implement when investors ask for it.
Support available to founders
The good news is that building a Series A finance function does not require hiring a full-time CFO. Many founders and CEOs have started to implement a fractional CFO model, where senior finance expertise can be brought to bear where it is needed:
- Designing the finance framework, including systems and scalability
- Setting up reporting and controls
- Cash management and fundraising readiness
- On-call CFO, where founders can consult with their fractional CFO on matters related to the business
- Updates for founders and board on risk, accounting, and compliance matters
In combination with AI-enabled systems, the fractional CFO model allows founders to benefit from senior-level finance experience without building too much too soon.
A good fractional CFO will listen and provide insights based on experience, set-up and manage a right-sized and scalable finance function and be a partner to the business. Not simply a cost, but an investment.