I’ve spent almost twenty years as a CFO, mostly working with smaller and midsized companies backed by venture capital or private equity.
When I say smaller, I mean smaller by Wall Street standards. The companies I’ve worked with have generally ranged from around $10 million to $200 million in revenue. You probably haven’t heard of any of them. But I’ve been inside the room for acquisitions, fundraising, board meetings, financial crises, growth spurts, layoffs and sales of companies to strategic buyers and private equity firms.
And after spending enough time on the inside, you start to realize that the way business is portrayed from the outside bears only a passing resemblance to how it actually works.
There is much less certainty than people imagine.
There are fewer geniuses.
There are considerably more spreadsheets.
And a surprising amount of what determines whether a company succeeds comes down to fairly ordinary things: hiring the right people, understanding where the cash is going, having accurate financial information and being willing to tell the CEO something he doesn’t want to hear.
I Didn’t Start Out Planning to Become a CFO
My career wasn’t some perfectly designed path.
I did a short stint in consulting and eventually took an FP&A job at a large company.
That job taught me two important things.
First, I hated working for large, bureaucratic organizations.
Second, I learned how to build really good financial models.
Big companies have enormous amounts of data. Learning how to take all of that information, figure out what matters and present it clearly turned out to be one of the most useful skills of my career.
Later, I moved to a midsized company where I oversaw accounting operations while also building out the FP&A function. That was incredibly valuable because I learned both sides of finance.
I wasn’t just sitting around building forecasts.
I learned how accounting actually gets done.
I learned what happens when the books aren’t clean. I learned how difficult seemingly simple operational tasks can be. I learned that the person entering transactions into the accounting system may understand something about the business that the executive looking at a PowerPoint presentation doesn’t.
That company grew substantially and completed a number of acquisitions while I was there. Eventually, in my late thirties, I became CFO.
Once you get the CFO title, interestingly enough, it becomes much easier to remain a CFO.
Getting that first opportunity is the hard part.
Companies are strangely reluctant to hire someone to be a CFO who hasn’t already been a CFO.
That’s why, if I were advising someone earlier in their career who had to choose between being second-in-command at a prestigious company or actually taking the CFO job at a smaller business, I’d seriously consider the smaller company.
The title matters.
But more importantly, the experience matters.
At a smaller company, you learn everything.
I actually prefer smaller businesses for exactly that reason. There is something comforting about knowing virtually every customer, every vendor and every employee. You understand how the machine works because you can see almost the entire machine.
The CFO’s Job Isn’t to Say No
There is a stereotype of the CFO as the person sitting in the corner with a calculator telling everyone they can’t spend money.
I think that’s a terrible CFO.
You don’t want to be the “no” person.
The company exists to grow. Marketing needs money. Sales needs people. Product needs engineers. Operations needs equipment. Sometimes the smartest financial decision you can make is to spend a lot of money.
My job isn’t necessarily to step on the brakes.
My job is to make sure everyone understands where the car is going and how much gas is left.
That’s why one of the most important things I build is a monthly forecast containing the income statement, balance sheet and cash flow.
And I want the assumptions to be painfully obvious.
What happens if sales grow 20 percent instead of 40 percent?
What happens if we hire those twenty people?
What happens if the next financing round takes nine months instead of six?
When do we run out of cash?
Once everyone understands that, the decision isn’t really mine anymore.
The CEO, board and major investors decide how aggressively they want to pursue growth.
If they want to hit the gas, fine.
If they want profitability by a certain date, fine.
My job is to show them what each choice is likely to mean.
One of the Biggest Ways Startups Waste Money Is Surprisingly Boring
People imagine startups blowing their money on lavish offices, ridiculous parties or executives flying first class.
That happens.
But one of the most common problems I’ve seen is much simpler.
They hire too many people.
Early-stage companies become wildly confident about the future. Revenue is growing. Investors are excited. Everyone assumes the next year is going to look like the current year multiplied by three.
So they start hiring.
And hiring.
And hiring.
Then growth slows down.
Suddenly you’ve built an organization for the company you expected to have two years from now instead of the company you actually have today.
That’s how you end up doing layoffs.
I’ve always pushed companies to hire intelligently.
Growth is wonderful.
But optimism isn’t a financial strategy.
Every Company Forecast Has a Hockey Stick
I’ve been involved in plenty of acquisitions, and when I’m evaluating a company, there is almost nothing the seller gives me that I simply accept at face value.
I want a Quality of Earnings study.
I want to understand the assumptions.
I will take the seller’s financial model apart and run my own scenarios against it. Sometimes I’ll build another model from scratch just to see whether I reach the same conclusions.
And there is one thing I’ve learned to be extremely skeptical about:
Long-term forecasts.
Anything more than roughly twelve to eighteen months into the future gets a substantial discount in my mind.
Because somehow every company on Earth is about eighteen months away from becoming incredible.
The forecast always turns into a hockey stick.
Revenue is going to accelerate.
Margins are going to improve.
Sales productivity is going to explode.
Everything is going to work.
Maybe.
But when I’m evaluating an acquisition, I care much more about what is actually happening.
One of the easiest places to manipulate optimism is the sales pipeline.
A seller might show you a gigantic pipeline of potential customers.
Great.
How real is it?
What probability are they assigning to those deals?
Are those legitimate opportunities or conversations somebody had at a conference six months ago?
And perhaps most importantly, is the entire growth story dependent on two enormous deals closing?
If so, I want to know that.
Founders Are Often Their Own Company’s Biggest Scaling Problem
One uncomfortable lesson from working with venture-backed companies is that the person who is brilliant at creating a $10 million company isn’t necessarily the person who should run a $100 million company.
Those are different jobs.
Founders understandably have difficulty accepting this.
They created the company.
They survived the early years.
They convinced employees to join when there was barely a business.
They raised the money.
They landed the first customers.
So naturally they think:
“I got us here. Why wouldn’t I be the person to get us there?”
Sometimes they are.
But often they’re not.
I’ve encountered founders who were excellent at the early stage and struggled badly as the organization became larger and more complicated.
The founders I really respect are the ones who recognize it.
Maybe they’re an extraordinary technical founder, so they move into the CTO role and bring in a professional CEO.
I’ve seen founders do that successfully.
The key is actually allowing the new CEO to run the company.
That’s harder than it sounds.
Venture Capital and Private Equity Feel Very Different From the Inside
People often lump VC and PE together because they’re both “investors.”
My experience has been very different.
Most of the venture capital people I’ve dealt with have been smart, curious and genuinely interesting. They’re dreamers to some extent. They’re betting on an idea and on a management team.
Private equity is different.
I’ve certainly worked with good PE people.
I’ve also worked with PE people I hope never to see again.
Some PE firms come into a company assuming the existing management team doesn’t know what it’s doing. They’ve bought the business, they have a playbook and now they’re going to implement it.
Sometimes the playbook works.
Sometimes it doesn’t.
But there can be a cookie-cutter quality to the approach.
I’ve dealt with PE people who seem to inhabit a world that most ordinary employees simply don’t live in.
That doesn’t mean private equity automatically destroys a business.
I’ve seen PE firms provide capital that allowed successful companies to grow substantially faster.
I’ve also been pleasantly surprised by PE owners approving employee bonuses or off-cycle compensation increases. When I’ve helped sell PE-owned companies, I’ve pushed for meaningful “thank you” bonuses for employees, and PE firms have sometimes been very supportive.
So I don’t subscribe to the idea that every PE firm is evil.
But I understand why the reputation exists.
And if your company is being acquired by private equity, I would tell you something very simple:
Have a backup plan.
Your employer will look out for itself.
You should look out for yourself.
If Someone Owns More Than Half the Company, Understand What That Means
Founders sometimes talk about investors as if they’re partners.
That can be true.
But ownership matters.
If an investor owns more than 50 percent of the company, ultimately they control it.
You may still be CEO.
You may still be the founder.
You may still be the person everyone associates with the company.
But if the majority owner decides you’re no longer the right person to run the business, they can find another person to ride the horse.
Founders considering PE investment need to understand that tradeoff.
You may receive capital that lets you grow faster than you ever could independently.
But you’re giving something up in exchange.
Control.
Debt Has Become a Huge Part of the Private Equity Machine
Another thing people outside the industry don’t always appreciate is how much debt can be involved in PE deals.
A tremendous amount of capital has poured into private equity.
That means firms are competing with one another for attractive companies while simultaneously trying to produce strong returns for their own investors.
And if you’re sitting in Excel trying to maximize the return on your equity, leverage can look wonderful.
Use more debt and you can potentially juice the return.
The spreadsheet loves it.
The problem is that reality doesn’t always behave like the spreadsheet.
The company still has to service that debt.
If the assumptions are wrong, somebody eventually has a problem.
Employees Often Don’t Understand What Their Equity Is Actually Worth
Stock options sound simple.
You own a piece of the company.
Company sells.
You get rich.
Unfortunately, it doesn’t necessarily work that way.
When an employee asks me whether they should exercise their options, there are several things I would want to know.
How good are the company’s actual prospects?
How much cash will you need to exercise?
What are the tax consequences?
But there is another question employees often don’t know to ask.
What do the preferred investors get paid before you?
A VC- or PE-backed company may have preferred investors with liquidation preferences. If the company sells for an underwhelming amount, those preferences can consume a substantial portion of the proceeds before common shareholders see much of anything.
As CFO, I can usually see the whole capital structure.
The average employee usually can’t.
So “$50 million acquisition” doesn’t necessarily mean what people think it means.
Who gets paid, and in what order, matters enormously.
Bad Accounting Is Much More Common Than Fraud
People have asked me how much outright accounting fraud I’ve encountered.
Very little.
What I’ve encountered constantly is something less exciting and far more common:
Bad accounting.
Early-stage companies often treat accounting as something that can be handled by the cheapest bookkeeper they can find.
Then the company grows.
Now you’re operating in multiple states.
You’ve got employees everywhere.
You’re selling different products and services.
Maybe you’re selling SaaS.
Now you have sales-tax questions, revenue-recognition questions, payroll issues, state tax nexus issues and different HR laws.
Suddenly the bookkeeping problem isn’t a bookkeeping problem anymore.
And somebody like me gets brought in.
A depressing amount of my first few months with a company can involve figuring out what was done incorrectly in the past and cleaning it up.
None of that creates value.
We’re spending money fixing yesterday instead of building tomorrow.
This is why I think good accounting talent is incredibly underrated.
Running a Business in America Is Much Harder Than People Realize
One thing my career has made painfully clear is how complicated simply operating a legitimate company can be.
Put employees in twenty states and suddenly you’ve got twenty sets of rules to worry about.
Payroll.
Employment regulations.
Taxes.
Local requirements.
Sales tax.
Different products can be taxed differently in different jurisdictions.
If you’re a virtual company with employees and customers scattered around the country, achieving perfect compliance everywhere can become extraordinarily difficult and expensive.
People think the finance department just “does the numbers.”
The reality is that an enormous amount of finance work involves keeping the machinery of the company functioning legally and accurately.
Operating a complex business is hard.
The Most Important Thing I Learned About Being a CFO Had Nothing to Do With Math
Someone on my team once told me:
“You’re too nice to be a CFO.”
I took that as a compliment.
I’ve always tried to put employees first when I can, particularly employees toward the lower end of the pay scale.
Because the longer I’ve done this job, the more I’ve realized that being a good CFO isn’t about squeezing every possible dollar out of the organization.
It’s about making good decisions.
Sometimes paying someone more is a good decision.
Sometimes approving the marketing experiment is a good decision.
Sometimes hiring another accountant is a good decision.
And sometimes telling the CEO his favorite project is burning money is a good decision.
The numbers aren’t the decision.
The numbers help you make the decision.
Eventually, I Stopped Being a Full-Time CFO
A few years ago, I switched to fractional CFO work.
Instead of working for one company full time, I spread my time across several smaller companies.
I don’t charge hourly.
I structure engagements around percentages of my time: perhaps 20 percent, 33 percent or 50 percent, each associated with a retainer.
Usually I’ll quote the first three months and then reevaluate.
If the client uses substantially more of my time than expected, I’ll tell them we need to adjust the retainer.
I’ve rarely gotten pushback.
Financially, the retainers put me in roughly the same neighborhood as what I earned as a full-time CFO.
A full-time CFO at a smaller or midsized company might make roughly $250,000 to $375,000 in base compensation, plus a bonus of perhaps 20 to 50 percent.
But the potentially life-changing money is usually the equity.
A CFO might receive something around 0.75 to 1.25 percent of the fully diluted shares, depending on the situation.
If the company eventually sells for hundreds of millions of dollars, that can become meaningful money.
As a fractional CFO, I still sometimes ask for options.
Most will probably be worth nothing.
Occasionally one works out and produces a few hundred thousand dollars.
I don’t count on it.
And that’s okay.
Because what I gained by going fractional was something I value more than maximizing every possible dollar of compensation.
Freedom.
Freedom Changed the Way I Talk to CEOs
This may be the biggest change of all.
When you’re the full-time CFO, you have a boss.
Usually that’s the CEO.
And CEOs can be intimidating.
You’re sitting in the executive meeting and the CEO loves an idea.
You know the numbers don’t support it.
There is a very human temptation to soften the message.
Maybe you tell the CEO what he wants to hear.
Maybe you emphasize the optimistic scenario.
Maybe you convince yourself it could work.
That’s dangerous.
Fractional work changed that for me because I’m no longer particularly worried about losing any single client.
I tell clients this upfront.
I don’t worry about my future with you.
Therefore I’m going to tell you what I think you need to hear.
If you don’t like it, that’s okay.
That’s incredibly freeing.
And ironically, I think it makes me better at the job.
I’ve Become Much Pickier About Who I Work With
I have a network built over decades, so these days I can be selective.
I’ll turn down work if the assignment doesn’t match my skills.
But I’ll also turn down a company if I meet the founder or CEO and think:
I don’t want to spend my life dealing with this person.
Earlier in your career, you don’t always have that luxury.
Eventually you realize how valuable it is.
There are always more companies.
There is always another deal.
There is always another spreadsheet.
Time is harder to replace.
The Longer I’ve Done This, the Less Impressed I Am by Complexity
When I was younger, I probably thought senior executives possessed some mysterious knowledge.
Now I think the best executives are usually the people who can take complicated situations and make them understandable.
That’s one of the things I attribute my own career to.
I learned FP&A.
I learned accounting.
I learned how the work actually gets done.
I learned financial modeling.
But perhaps most importantly, I learned how to explain difficult things simply and how to work collaboratively with people.
You don’t need to be Gordon Gekko.
You don’t need to walk into every meeting trying to prove you’re the smartest person in the room.
You need to understand the business.
You need good information.
You need to know what the numbers are actually telling you.
And you need enough independence to say something when everybody else in the room would rather pretend the numbers are saying something else.
After almost twenty years as a CFO, that’s probably the biggest lesson I’ve learned.
The spreadsheet is rarely the hardest part.
The people are.