???????? Hi friends!

OK, 20 editions in, how the heck did we get here!?

I have to be honest, I wasn’t sure where I would get to with this newsletter, but am enjoying putting it out there and seeing where it goes.

As with so much of my life, it’s about overriding my ADHD to get to consistency and building ‘muscle’ around writing regularly and trying to improve a little more every time ???? 

Now let’s get down to business…

In this weeks Off Balance, I’ll be chatting about:

???? What it takes to be a startup CFO
???? Startup boards – what you need to know.

Also, in this week’s Nothing Ventured, I spoke to Sam Beni; Sam was the Head of Innovation at Tech Nation where he continues, post acquisition by Founders Forum, as Strategic Advisor and has just dived into his umpteenth startup Platin. We talk about coming to the UK as a refugee, not being able to take a salary and having his shares held by a cofounder in trust and much more besides.

As always, our Primer episode gives you a bit of background on how he got to where he is today ???? 

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

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(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect ????????)

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Now let’s get into it.

How can did I add value?

I had some unexpected and really great feedback on last week’s section where I discussed small cheque investing, it turns out there are other people out there facing a similar conundrum who found the ‘advice’ really useful in terms of getting off the ground as an angel.

One of the other things I am consistently asked about is how to get into CFO’ing at startups, most recently by someone who has been in large corporates and PE backed businesses in FP&A roles before launching a couple of startups of his own.

The problem is that whatever role you’ve held in a larger business, the likelihood is that you will have been one of a team of several people delivering a specific outcome for your division.

However, a startup CFO is a leadership role. One where you are expected to have the answers, and it’s unlikely that you’re going to be able to rely on someone else to give you the answer (because let’s face it, the most likely scenario is that it’s just you in finance.

So I started thinking about codifying what it means to be a startup CFO, not only so people can use it as a checklist to see if they’re ready, but one that I can use myself as I continue to grow my team of fractional VC backed CFOs too.

I am fond of saying that becoming a CFO is not something that you qualify towards, rather it is built from the experience you have built up. So this is not just a list of knowledge you need to have, but skills you have acquired over the course of (probably) one to two decades working in finance and startups – and I would argue whatever you might have done outside a startup counts very little once you get into one!

???? Strong understanding of capital flows from revenue, investment, debt, working capital and impact on business.
This is the essence of being a CFO. If you don’t understand how cash flows and feeds the venture you’re working in, and how movements in cash can drive outcomes in your business, then you are unlikely to be ready for the CFO slot.

???? Ability to identify, define and set KPIs / leading metrics to track and course correct.
Knowing what drives the business (outside of pure financial metrics) is a critical role of the CFO. You are the person that founders (and leadership teams) come to to help them understand how the business is performing and how they can scale further.

???? Ability to build out data and metrics driven financial models and scenario plans.
Lots of CFOs who have come out of larger organisations tell me that it’s been several years since they spent any time in an excel model, they have FP&A teams for that. Sadly this is one of the primary things a startup CFO is asked to do – I think I would have spent more time messing about with models than in any other area of any of the ventures I have worked with. Again, it goes back to the fact that you likely won’t have a (large) team, so you need to be able to do the work.

???? Strong understanding of growth playbooks – market, product, geographical, acquisition etc.
Your role as CFO is to help build the systems, processes and financial strategy that allow the business to scale. In order to understand that, you need to understand other areas of the business, the playbooks they use, or, will use to scale so that you can feed that back into your cash planning – all of which impacts runway, burn, capital needs and hiring plans.

???? Experience raising capital both equity and debt.
You can be a CFO if you don’t have an accounting qualification, but you can’t really be one if you don’t have experience raising capital. This doesn’t mean that you need to have personally found the investor / debt provider and closed the deal (in a startup it’s always the founder / CEO that is responsible for ‘selling’ the vision); what it means is having experience raising large amounts, understanding term sheets, looking at economic and control factors and more.

???? Experience of M&A.
Whilst not essential in my opinion, having an understanding of mergers and acquisitions is incredibly valuable as a startup CFO. You will likely be involved in discussions around acquisitions at various stages of the company’s life (heck, I just spoke to founders of a seed stage venture who have already completed one strategic acquisition!), again, understanding how to review and assess other businesses and their fit as an acquisition is really valuable.

???? Experience of exits to a strategic acquirer.
This and IPO experience are not pre-requisites as a startup CFO at the earlier stages (pre late growth, i.e. Series C and beyond), but obviously having that experience and understanding how the process works will be really useful to the leadership team if they get to the stage where a strategic exit is on the table.

???? Experience of IPOs valuable.
Obviously this is the pinnacle of a CFO’s journey, getting to ring the bell at a significant stock exchange having navigated the successful listing of the startup. But let’s face it, again, not only is it less neccessary at the earlier stages, but there is only a narrow cohort of CFOs that are likely to have had this experience at all.

???? Good network of liquidity providers (VCs, angels, debt etc.).
Whilst I said that it wasn’t necessary to be able to close the funding, you definitely want to be seen as someone that knows where to go to get funded. Whether you have networks of investors or financiers able to provide debt financing, this is something that most founders will look for in a great CFO.

????????‍???? Strong board management and governance skills.
As we’re about to see below, navigating boards can be tough (Open AI anyone?). CFOs are often critical in the provision of information to directors and more often than not may sit on the board themselves, even if only as an observor. Understanding how to manage a board as well as understanding the duties of a director so that you can provide guidance to founders is a huge part of being a good CFO.

???? Strong investor management skills. 
Having raised the capital, you need to know how to manage investors (and debt providers). This is about regular communication, providing the right information without necessarily providing too much and balancing ensuring that investors have full knowledge of progress without necessarily opening the door to a tonne of questions, remembering all the time that you may be back at their door soon enough looking for additional funds…

???? Data / BI knowledge.
The office of the CFO has moved beyond ‘just’ finance. CFOs are often the custodians of the business’ data operations. Therefore having a good understanding of how to find, clean, use, process and present data are essential skills for modern CFOs. Which means that there are some up and coming finance folk that have the edge on some of us slightly more ‘advanced in years’ ???? 

???? Understanding of accounting + policies around revenue recognition etc.
As I said at the top, you don’t need to be a qualified accountant per se, but you do need to understand key policies as, more likely than not, you’re going to have to ensure you are on solid ground when talking to auditors, investors and even internal stakeholders – many of whom won’t understand why accounting is so quirky – because any shocks to the system could have dramatic consequences.

???? Strong communication skills across all stakeholders, ability to translate Numbers into Narrative and guide strategy.
If you’ve followed me for any length of time, you will know that I am a strong believer that being a CFO is strongly skewed towards your ability to communicate, not just be numerate. Why is this? Because CFOs are part of the exec team. Collectively the exec team is responsible for selling, whether to investors, to employees, to clients or to any other stakeholder that may land on the doorstep. It would not be particularly useful to have a CFO who could do the numbers but couldn’t sit in front of an investor and explain not only what the numbers are telling us today, but where they could go tomorrow.

⚒️ Systems and Tech.
Let’s face it, in today’s environment – and especially when working in a tech venture – a critical skill is understanding what tools are out there that can make your business more efficient. Whether that’s at the transactional level looking at cloud based ERPs, payment gateways, spend management platforms or at the more strategic end of the scale looking at FP&A, forecasting, cash planning, cap table management or even building internal tools to help the business grow.

So there you have it, my attempt to codify what it is to be a great startup CFO operating in the venture ecosystem. Do you think I’ve missed anything? Just hit reply and let me know!

Off Balance

There has only really been one piece of news that everyone in the tech ecosystem has been talking about since last Friday.

No, it’s not about the ex Klarna COO getting sacked from his new role as CEO as I tried to joke about on LinkedIn the other day; it is very much about OpenAI and the extraordinary drama that unfolded when four board members essentially engineered Sam Altman’s departure as CEO and resulted in the resignation of Greg Brockman as Chair.

Bearing in mind this is the company behind ChatGPT, the AI chat technology that has led to an explosion in generative AI startups, that was about to go into another financing round mooted at $80bn, that has probably led to the first true platform shift in technology since the proliferation of the smart phone, it is hard to see how this saga unfolded the way it did and how it is possible that the board got it so wrong. (Even the person they originally wanted to take over as interim CEO from Sam – Mira Murati – signed an open letter demanding his reinstatement).

So are we going to dig into everything that happened in this fast paced corporate drama?

No.

We’re going to talk about boards – because this issue was essentially triggered by the board which, is not the board of a traditional corporation but rather of the non profit that controls the corporation (aren’t you glad we looked at Corporate Structures last week?!).

Corporate governance is all yawns, until it’s not, so if you’re a founder, CFO or even an angel or investor, understanding how it all works is pretty essential.

Boards and Governance, what you need to know

As we have seen from the OpenAI debacle, the nature and composition of your board can have dramatic impact on both the founder as well as the business. In OpenAI’s case, it has not only ousted the CEO but has probably destroyed a huge amount of value in the business as employees, investors, partners, users and customers reacted in real time to the news.

As with much in the world of startups, the role of the board has evolved over time moving from purely governance to highly strategic imput into the growth and future of the business.

It goes without saying that your board will look different depending on the stage you’re at as well as the nature of your investors.

Who sits on a startup’s board?

There are normally two documents that will govern the makeup of your board of directors – your articles of association or incorporation and your shareholders’ agreement. Each of these are likely to get updated as your venture grows, but it is essential to understand what it means for who can sit on your board and what powers they have.

At the very early stages of a startups life, it is quite likely that there won’t be a formal board, rather the directors of the company are likely to be one or more of the founders of the business and there will probably be little formality around meetings with board matters being dealt with as they arise.

As the startup grows, founders may well bring in advisors though it is quite likely they will sit outside the formal board of directors. Occasionally, when one of them is hugely value additive (they have connections from within the industry or access to capital for example) they may be invited on to the board more formally.

But it’s normally only when a startup raises it’s first large institutional round (typically at seed and typically from an institutional investor) that the board starts getting more formal.

At this point, you will normally see a board composed of the founder(s), another senior executive from inside the business, an independent Chair (though not always), for every institutional investor you will likely have one board member or board observer (a board observer has no voting rights, cannot make decisions and is there to observe and input if necessary). It is also not a given that every institutional investor will have a board seat. This will depend on what has been agreed in the term sheets and what has previously been stipulated in the articles or shareholders’ agreement.

It is essential that there is a good balance at board level. You need enough people from within the business that understand what is happening in detail alongside members from outside the business who can probe or even challenge some executive decisions and acting in the best interests of the business and the shareholders.

If the board is skewed towards the executive, then it is likely going to be a weak board rubber stamping whatever the founder(s) or CEO put forward. If it is skewed too far the other way and non-executive board members have too much power, you may end up with indecision and / or the management team feeling like they don’t have the ability to execute meaningfully.

It feels like OpenAI fell foul of this latter situation.

What should your board be doing?

Strategic Guidance: The board should set or at least sign off on the strategic direction of the business. Non-executive board members (i.e. those not involved in the day to day running of the company) will likely have been through significant journeys in other businesses and will provide valuable insight into the strategic direction of the company. This may involve setting longer-term goals, understanding when it might be appropriate to hire new senior team members or when it might be sensible to raise additional capital.

The board will often act as an enabler of conversations with larger companies where they may have significant relationships, allowing a small startup to accelerate their sales process within these corporates, or even help identify the best talent to help the company get to its next milestones and beyond.

Financial Accountability and Planning: The board is ultimately responsible for overseeing the financial performance of the company which means they should be making sure that the business is being run responsibly. If a director doesn’t understand the numbers then they have no place sitting on the board at all. This does not mean they need to be able to give chapter and verse on every number (that’s the CFO and / or founders’ role), but they should have confidence in the numbers and be able to pick up on anything that looks untoward.

The board should also be involved in the setting and signing off of forecasts and budgets. They should hold management to account on hitting milestones and understanding why when they don’t. In fact, there are often board reserved matters such as setting founders’ remuneration, hiring senior staff, entering a contract or series of contracts that will cost over a certain threshold, entering into debt and, ultimately, whatever goes into the articles or more likely the shareholders’ agreement.

Fiduciary Duties: Directors’ fiduciary duties stem from the requirement to act in absolute good faith acting as responsible custodians of the company on behalf of others. This means acting in the best interests of both the company and its shareholders.

These duties (in the UK) form part of the law governing how Directors are expected to act and it is very important to understand that these apply to you whether you are formally recorded as a director at Companies House or not.

So what are these duties?

Duty to act within your powers, as set out in the articles, shareholders’ agreement, constitution or other corporate document.

Duty to promote the success of the business for the benefit of all shareholders and stakeholders.

Duty to show and exercise good and independent judgement.

Duty to exercise reasonable care, skill and diligence; to not take on the role if you’re not qualified or capable to do so.

Duty to avoid conflicts of interest.

Duty to not accept benefits from third parties.

Duty to declare an outside interest.

How these duties are defined in law will change from country to country (if they are defined at all) and the penalties for not upholding your fiduciary duties can be quite severe.

And of course, directors must always act within and comply with corporate laws and regulations – in the UK these are set out in the Companies Act.

The Board’s Role in Fundraising

Whilst it is not the board’s responsibility to raise capital per se, it obviously is part of their broader remit.

From a startup’s perspective this often involves the board leveraging their wider network, introducing potential investors as well as scrutinising or even assiting in the negotiation of new investment terms with incoming investors.

In fact, given how important fundraising is for startups and growth companies, one could argue that at the earlier stages, founders should index towards finding board members that can either open doors for investment or for revenue (especially important in enterprise solutions).

Building and Maintaining Effective Boards

OK, so you know the sort of things that board members have to do and where they may add value to your business, but how do you actually go about finding them?

There are two schools of thought on this, you can advertise the role and treat it very much as you would any other role you’re recruiting for but I think this is the wrong way. The better way is to not wait for inbound interest, but instead search yourself.

You will be looking for people with certain industry experience or professional skills (legal or finance), people with experience operating on boards at your stage and, importantly, people with networks that you can leverage – be that for investment, for recruitment or anything else. Go to LinkedIn, look at boards of similar businesses to yours, find equivalent people and reach out to them directly.

And as these board positions are not ‘output’ driven, but are about how people interact with each other, often the soft skills they bring to the table and how they are able to digest and synthesise information to make ‘the right’ strategic decisions, it is imperative that as part of your process you spend as much time as you can with prospective appointees so that you can really get to know them (and they you).

Of course, some of your board members will be appointed by your investors so you may not have much of a choice, but you should still speak to founders whose boards they already sit on and get a feel for how they operate.

You may wish to include specific terms into each directors’ contract so that you can rotate if necessary (and allow for changes in the growth profile of the company), but really great board members can stick with you for the whole journey.

Best Practices

There are some ways to ensure that your board works efficiently rather than being a bit of a free for all.

Figure out a cadence that makes sense for your board to meet. I would suggest that at early stages, quarterly is more than sufficient, as you progress you may require monthly board meetings – and certainly if the business is facing headwinds or has some large milestones it’s about to cross, more regular board meetings are going to be a necessity.

Ensure you have a board pack that goes out in relatively the same format every meeting – I like to include an executive summary, recent financials (often with a focus on cash), KPIs / progress against agreed milestones, specific (important) business updates, key personnel changes, any wins the company might have had and, importantly any recent or upcoming issues the board should be aware of. You should clearly state any matters you need the board to resolve (and provide any backup required).

This should be in the form of a deck or a doc if in long form and, most importantly, should be sent to the board at least 2 – 3 days prior to the actual board meeting (a week would be ideal but may be difficult to achieve).

During the meeting itself, stick to the agenda as far as possible. First going through minutes from the previous meeting and checking if there are any matters arising. Thereafter, don’t re-explain what is already in the deck, but ask if there are any questions that the board have on the information presented. Discuss those matters and wherever possible and necessary, make sure that you are clear about what actions need to be taken on any particular matter.

Bear in mind, professional non-executives and board members are likely to incredibly busy so it’s a good idea to try and stick to timings as far as possible – though allow for the fact that there may be some issues that you hadn’t expected to come up that require discussion.

After the meeting, get minutes out within the next couple of days so that matters are fresh in peoples’ minds and check if anything needs to be changed or updated.

Remember, the board has to act in the best interests of the company and all stakeholders, so make sure it’s operating on those principles.

Challenges and Common Pitfalls

One of the biggest challenges is having a board that is too big or is poorly composed. As discussed previously, getting the right balance of people on it is critical. Too many people often results in inaction or lots of talk without any outcomes so keeping numbers tight is really important.

If the board is too weighted towards the executive or to non-executives, it will not function as you need it to, so make sure there is a good balance.

Ensure that there are no conflicts of interest at a personal level (though of course, directors should disclose these upfront). Where they exist, if there are matters that would bring that conflict into light, it’s better for a director to recuse themselves.

Founders and the executive are often focussed on the short term and dealing with a multitude of operational pressures (are we going to make payroll on time every month this quarter, when can we reasonably make that critical hire we need to make, what happens if we don’t close this client in the next 30 days). The board, on the other hand, needs to be mindful of these operational challenges but also be focussed on the bigger picture and longer term strategic planing.

Wrapping it up

There are plenty of other issues to be mindful of when thinking about the purpose, composition and operation of your board, but what I have covered here should give you a good start in getting yours set up the right way.

Let’s face it, Sam Altman isn’t the first founder or CEO to get removed by their board (anyone remember Steve Jobs’ ousting in 1985?), but in the current market where traction and performance are imperative, I think we will see a lot more of these corporate reshuffles (though they are unlikely to be this public every time).

So if you’re a founder get to checking your articles and your shareholder agreements and know what your board can – and can’t – do.

I hope you found Off Balance #20 useful. As always, I’d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at [email protected] and let me know ????

????And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish