Many Startups Operate Without a CFO. That Was a Challenge as SVB Collapsed
Early-stage companies often rely on their banks or venture backers for financial guidance, but many now see the benefit of independent advice in managing their capital
By Anna Mutoh, published: The Wall Street Journal, Mar 24, 2023
Silicon Valley Bank marketed itself to startups, which may have leaned more heavily on it for financial guidance in the absence of an in-house chief financial officer.
Photo: Taidgh Barron/Zuma Press
When Kevin Lee on the morning of March 9 first heard that Silicon Valley Bank could be in trouble, the 32-year-old co-founder of Immi instant ramen frantically called his partner. “I’m concerned there will be a bank run,” Mr. Lee said he told Kevin Chanthasiriphan, 34, who soon after wired their entire $15 million in capital out of SVB and into fintech provider Brex Inc. where they also had a business account.
Messrs. Lee and Chanthasiriphan, who call themselves the “the Kevins,” launched Immi three years ago, reinventing ramen as a low-carb, high-protein and fully plant-based instant food. Just a week before the run on SVB, the Kevins announced a $10 million series A funding that included a bevy of celebrity investors such as tennis player Naomi Osaka, R&B singer Usher and speedskater Apolo Ohno, and were poised for a period of rapid growth with revenue up sixfold last year.
But the 11-person company didn’t have a chief financial officer to navigate or prepare for crises such as the collapse of a banking partner. “A CFO probably isn’t going to happen for at least a year or two,” said Mr. Lee, who recently hired a senior finance manager, and said he can’t think of any company that has a CFO before series B financing in his packaged-foods industry.
Not having a finance chief or other financial professional is common at early-stage companies whose priority is often growth. Many startups simply rely on their venture-capital backers or their banks to provide financial guidance. While there are no statistics on how many startups lack a finance chief or other financial professionals, one industry expert who provides financial services to startups estimates that roughly 80% of early-stage companies don’t have a CFO.
Jeff Laborde, who is CFO of Jaggaer, a cloud-based provider of business-automation technology, said a lot of early-stage companies have been investing less in administrative functions in recent years “because of all of the easy money until about nine months ago.”
“We’ve been amazed at how many of these early-stage startups … don’t even have a CFO or VP of finance,” said Mr. Laborde, who is also an adviser to venture-capital firm PeakSpan Capital. He says he has seen this absence of financial expertise at companies small and large, including those with recurring revenue of $2 million to $3 million or even up to $10 million.
Yet while startups often don’t focus on building out their finance function when they are first seeded, industry players say the SVB blowup underscores the need for at least some financial management beyond the guidance they get from their VCs or the banks where they park their cash.
SVB was a bank for almost half of U.S. venture-backed innovation companies, which include tech, life sciences and firms like Immi, according to a company presentation in 2022. For many, not only did they receive venture debt from SVB, but they also were prevented from doing business elsewhere.
Take Soona, a same-day photo and video studio for brands that today is a post-series B company with $52 million in capital—and a vice president of finance. But as an early-stage company, Soona was unable to get a loan from others and agreed to SVB’s borrowing covenants that prohibited the startup from doing its banking business elsewhere.
Customers outside SVB headquarters in Santa Clara, Calif., earlier this month.
Photo: george nikitin/Shutterstock
“Never were we once asked in a board meeting about our banking relationships,” said Liz Giorgi, chief executive and co-founder. “Priorities one, two and three at a startup like mine is growth.”
While an independent finance chief or other financial professional might not have been able to steer clear of the SVB blowup entirely, a dedicated financial voice might have encouraged startups to diversify their working capital. Since SVB’s collapse, nearly 30% of CFOs say they will look to diversify their banking counterparts, according to a recent survey of more than 250 finance chiefs and senior finance leaders by research firm Gartner Inc.
Kyle Doherty, managing director at Cambridge, Mass.-based venture-capital firm General Catalyst, said, “A VC would love to have [a CFO] as early as possible … but there’s always trade-offs that you’re making around prioritization.”
Since the SVB implosion, Mr. Doherty said he has spoken with a dozen experienced CFOs from small to large companies asking what the right balance would be for early-stage startups to spend on a finance function or professional. The consensus was to have an experienced person in the role, not necessarily with a CFO title.
Experience is the key word, however, as that is hard to come by, said Mr. Doherty, who said he has been involved in many CFO searches for growth tech companies. “It’s been an area with the most scarcity in talent, leading people to wait for longer to fill.”
And that experience comes at an increasingly hefty cost, a potential hurdle for startups operating on a lean budget. Jack McCullough, founder of CFO Leadership Council with over 1,900 members across the U.S., said, “CFO salaries have been increasing rapidly in the last few years, as companies recognize the value they bring, and the critical role they play.”
According to a recent report by Compensation Advisory Partners, base salaries of CFOs rose faster than those of CEOs in 2022, with CFOs on average seeing an increase of 5.5% while CEO’s pay increased by 4.4%. “A first in my experience,” Mr. McCullough said.
This is where partial, or fractional, CFO services can come into play. Fractional CFOs, where a finance professional works part time at one or more companies, can help an early-stage growth-focused startup bridge the gap to an in-house finance function.
Mairtini Ni Dhomhnaill is founder of Countsy, an on-demand back office that provides outsourced CFO services to newly minted companies. Since SVB’s collapse, Ms. Ni Dhomhnaill said she has been receiving calls from startup founders seeking help and venture capitalists referring Countsy to their portfolio companies.
It would cost a typical early-stage company with seed or series A funding, on average, $5,000 a month for Countsy to provide a fractional CFO, Ms. Ni Dhomhnaill said. The cost depends on the size of the company and the fee will go up as more services are required, she added.
Still, a fractional CFO is more of a stopgap than a cure-all.
Michael Bayer, finance chief of cloud-based storage provider Wasabi Technologies Inc., is a self-described serial CFO who has served in the role at more than 10 early-stage companies—including some where he served as fractional CFO. He says the CFO at an early-stage company helps to tell the origin story, while a fractional CFO is there primarily to provide financial guidance at a crucial phase in a company’s life.
“I often refer to the position at early-stage companies as ‘CF-GO,’ because it’s a financially sophisticated executive who is there to figure out how you can best leverage capital and resources to facilitate growth,” Mr. Bayer said. “It’s hard to be part of the culture and to be a strategic driver of the business … when you’re a contractor versus you’re part of the team.”