Startups are expanding their finance departments as their balance sheets grow and SPACs provide a new pathway to public markets.
As startups raise record amounts of venture capital, one position stands out: chief financial officer.
Historically, startups, many of which have fewer than a couple dozen employees, have sought to remain nimble and operate on a shoestring budget during their early years. Many companies delayed hiring senior finance executives until their operations grew more complex or they were preparing for a public listing or acquisition.
However, over the last year, as balance sheets have expanded and a new route to public markets via special-purpose acquisition companies has emerged, startups have beefed up finance departments and hired CFOs more quickly.
According to data from analytics firm S&P Global Market Intelligence, the number of CFO appointments at US startups that have raised between $10 million and $100 million in venture capital — a typical range of funding for early- and mid-stage startups — increased 95 percent to 162 in the 12 months ended May 14.
Venture capitalists, executive recruiters, and startups report that startups are expanding their finance departments to gain a more sophisticated handle on financials as they raise larger funding rounds at higher valuations.
Bungalow Living Inc., a San Francisco-based startup that operates an online house-rental marketplace, has raised approximately $90 million in venture capital since its founding in 2017. Initially, founder and CEO Andrew Collins desired to hire a vice president of finance to assist in managing the company’s expanding balance sheet.
However, over a half-dozen SPACs expressed interest in acquiring Bungalow this year. Mr. Collins then decided to hire a chief financial officer. Mr. Collins hired Karen Walker in May, the former senior vice president of finance at PagerDuty Inc., a business management software company that went public in 2019.
“One of Ms. Walker’s responsibilities will be to assist me in determining whether to pursue SPAC participation or to remain private for a bit longer,” Mr. Collins said.
“Startups are all thinking about CFOs earlier,” said Bilal Zuberi, a partner at Lux Capital, a venture capital firm with approximately $2.4 billion in assets under management and an investor in companies such as Zoox Inc., which was acquired last year by Amazon.com Inc. “They’re realizing you can’t be loosey goosey” when it comes to finances, Mr. Zuberi explained.
Historically, many startups sought to hire a CFO during their growth stages—Series C or later—once they had established a sound business model capable of generating consistent revenue. Mr. Zuberi noted that some startups have accelerated the hiring milestone to the Series A or B stages.
Businesses are maturing more quickly, and the need for a CFO may occur four to five years after the company is founded, rather than six to eight years as was the norm ten years ago, according to Zach DeWitt, a partner at venture capital firm Wing VC.
Not only venture capital firms, but also large corporations, hedge funds, and private equity firms are looking for the next big thing. According to analytics firm PitchBook Data Inc. and the National Venture Capital Association, early-stage startups in the United States raised a record $14.5 billion last quarter, a nearly 41 percent increase over the prior year.
Mr. Zuberi explained that the hiring drive is being driven by both founders and investors who want more robust financial planning and analysis, audits, and spending oversight. Mr. Zuberi added that some startups have hired CFOs from public companies, a move that was less common in previous years.
Simultaneously, the burgeoning venture capital market provides executives with increased leverage when negotiating job titles, according to Rhoda Longhenry, co-head of True Search’s financial officers practice. Vice presidents of finance are frequently required to hold a CFO title in order to transfer to another company, Ms. Longhenry explained.
However, not all investors believe that appointing a CFO early on is necessary. Several portfolio companies have recently inquired about hiring for the position, according to Daniel Hoffer, managing director of Autotech Ventures. “In general, I oppose it,” Mr. Hoffer stated. “I believe it is generally excessive for the majority of early-stage companies.”
Mr. Hoffer noted that larger financings and valuations are not sufficient reasons to hire a CFO. Unless a business is going public, he added, sharing a part-time CFO with other businesses is sufficient.
While other senior finance positions are typically focused on internal accounting, CFOs frequently engage in more public-facing activities, such as preparing the company’s finances for a transaction or cultivating relationships with investment bankers and investors.
Excision BioTherapeutics Inc., a gene-editing therapeutics startup, relied on a part-time controller and financial consultants prior to hiring its first CFO in May. Then came a $60 million Series A financing in February, the largest fundraise by the San Francisco startup since it was founded in 2015. Excision hired Christine Silverstein, who previously served as CFO of public biopharmaceutical company Abeona Therapeutics Inc. Ms. Silverstein stated that she would strengthen internal financial controls, conduct internal audits, hire up to five full-time finance employees, and move the 10-person company closer to a public listing.
“It is prudent to have that early on,” Ms. Silverstein stated. “It is prudent in light of the current state of the markets.”
Truebill Inc., a financial management startup, has raised approximately $40 million and plans to announce additional funding soon, according to Reyn Holden, head of finance and accounting.
Mr. Holden stated that when he was hired as the company’s 22nd employee in 2019, he was the company’s first full-time finance and accounting staffer. Finance currently has five employees, but he expects that number to double this year.
“With these additional funds, we didn’t want to proceed in this blind, gut-feeling manner,” Mr. Holden explained. “We want to ensure that as we scale, we use the appropriate metrics.”