One of our new clients asked us a simple question last week. “Why is the interim or fractional Advisor model growing in popularity?” Great question. We can start by considering the road faced by startups today.

It is always about the money, and it is almost always a race to the top. The digital rags like Crunchbase, TechCrunch,  Alley Watch and others always proclaim the start of huge funds, growing like tall trees, giving shade to all parties. If your startup makes it to page one on the daily news sheet, then you are pretty much set. Pretty much.

Things are looking great for the firm, but…

When I asked this client what it was like in the first year, her eyes grew dim. She had received $1.2M in seed funding 11 months prior. Things are looking great for the firm, but they need to create a compelling Pitch Deck for further seed funding, or to move toward the A-round.

 

“We are in good shape if our new clients pay on time.”

 

There had been a Board Meeting last week. After reporting that sales have exceeded the quarterly estimates, one of the seed funders asked a simple question about cash flow and cash forecasts for the next quarter. You can probably hear the nails scraping the chalkboard at this point. The heavily taxed bookkeeper, who apparently is a cousin of a friend of the founder, looked as if he was about to fall off of a cliff.  He said, “We are in good shape if our new clients pay on time.” That was it.

A visiting funding source who manages a modest fund ($75M) was present and he sort of smiled. He had been there before. He had seen this played out countless times with many startups. It is about the front end and the front end only. Right up until it isn’t.

No CFO on Board

He knew that there was no CFO or full-time CPA on board. As crazy as it sounds, that is perfectly normal in a startup. Why? This is where the story comes together. This startup, like most, has some large expenses; licensing costs, prototype build, facilities, and the salaries of the CEO and other actors. That sucks up 75% of the seed capital. Luckily, their MVP was sales ready, and there were several nice sales in the closing process at the time of the meeting.

The focus on efficiency and lean startup costs required sacrifices. This is one of the key factors in early growth and viability. Extending the runway at virtually any cost is part of the game in today’s competitive funding market. The startup CEO and the VC portfolio investor (if any) both understand that there is a critical balance between a lean model and an effective model that can be managed for strong early growth.

Often the trigger point for a startup bringing in finance talent or other advisors emanates from this type of board meeting, where the sales pipeline is being discussed in specific terms as it relates to receivables, free cash flow/EBITDA, and sales volume. Can our client collect fast enough to stay liquid? The problem in a lean startup is that when they need those answers, there is no one qualified to give them.

Operating under lean and stressful conditions…

This is the razors edge that most CEO’s sit upon, as they pilot their company in shallow waters. This challenge of operating under lean and stressful conditions is part and parcel for startups, particularly in our focus of technology. How can a company operate without a quorum of talent? As those readers who have worked with startups in technology know, this is the norm, not the exception. Every single available resource has to support the front end.

This is the time when fractional advisor talent is most needed. The startup needs a Controller to oversee the back office build, and a CFO to help them understand the funding requirement needed for scale. Here are the tasks that a fractional CFO and Controller can provide.

Services for early-stage businesses:*

• Preparing for and leading fundraising efforts, including doing accurate reporting and realistic projections of the company’s current and future finances;
• Using a broad scope of contacts to choose the best advisors early in the company’s life cycle, such as lawyers, CPA’s, tax accountants and bankers;
• Consulting on matters of corporate governance and formations of boards and advisory committees.

Services for later-stage businesses:*

• Maximizing cash flow for the short and long term by using hands-on management and forecasting tools;
• Organizing management and leading growth initiatives;
• Researching and implementing financial benchmarks from the client’s industry, a process that boosts the value of the business;
• Capital planning;
• Helping clients strategically maneuver through the challenges and opportunities of economic booms and busts.

*From The CFO Advisory

This should clarify why fractional advisor services are a necessary and integral component of the early and later-stage business landscape.

Written by Scott Long
Business Development for DecisionCFO, LLC.

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Scott Long is Business Development at DecisionCFO, and during his career, has served in international business development roles both as an entrepreneur and advisor in the healthcare sector. Scott holds a BA from the University of Michigan, and an MA in International Relations and Business from the University of Chicago and is fluent in Portuguese and Spanish.

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