Many of the companies that we invest in don’t have a Chief Financial Officer (CFO) at the time of our investment. The reason is that the companies are in the product or early traction stage, and have yet to achieve product market fit. In other words, they have yet to reach a stage where they have enough confidence in the market demand for their product that they begin spending dollars to scale the company’s team and marketing activities.
When you have yet to achieve product market fit, your primary goal is to achieve it. As a result, you keep your net burn rate relatively low. At least, that’s what you should be doing. And as a result of keeping your net burn rate low, you don’t need to have a strong grip on the details of your finances. Being over budget by 20% in a month isn’t ideal, but it also isn’t threatening to the life of your business. So you might delay hiring a CFO to project, manage, and track your company’s finances.
This changes once you’ve achieved product market fit. After that point your goal is to scale your business. This means growing your team and spending to acquire customers while making the investments necessary to retain the original level of service that you were providing them. Each of these actions, which you take with the goal of eventually producing higher revenues and gross profit, initially increase your net burn rate. So much so that being over budget by 20% in a specific month, especially if coupled with an unexpected pullback in demand, can cause your net burn rate to be double what you had planned. And when the numbers are big, a net burn rate double what you had planned means danger.
If you have a great CFO in place, they’ll identify the fact that you’re spending beyond budget and that demand isn’t coming in as strong as you had predicted during the first half of the month. You’ll therefore be able to make the necessary adjustments to avoid your net burn rate coming in twice what you had expected at the end of the month.
If you have a good CFO in place, they’ll look at the end of month results, see that your net burn rate was twice what you had forecast, and you’ll be able to take action for the following months. That’s not quite as good as having a great CFO, but it’s also not life threatening.
If you don’t have a CFO in place, you’ll only discover that you’ve been burning twice what you had forecast after this has been going on for 3 months. So if you thought you had 6 months of runway left 3 months ago, you might all of a sudden discover that you’re out of cash.
That’s why the absolute latest moment when you should onboard a CFO is when you’ve achieved product market fit. Scaling your team and marketing without one is very dangerous.