A version of this article originally appeared in the Austin Business Journal. by Kip McClanahan and Morgan Flager.
Knowing when to bring experienced management talent into a young company is a subtle, yet critical decision point that almost all successful companies will pass through in their lifetimes.
In the early days, with little or no revenue traction from their products, start-ups can benefit from having a scrappy culture and a flat organization obsessively focused on delivering a compelling value proposition to their customers. At Silverton Partners, we work with early-stage companies and tend to favor entrepreneurs who have a “lean start-up” mentality. We believe the discipline of having to make hard decisions about where and when to allocate resources builds better, more capital efficient companies.
Maintaining an overly lean mentality as the company scales up can, however, have drawbacks. As early-stage start-ups execute well, their success brings added complexity to the business. If these new challenges are not adequately addressed, the company’s ability to continue to grow can be seriously inhibited. It is around this time, when the founding team may need to consider bringing on an experienced executive to help take the business to the next level.
What sort of help executive help do I need?
The answer to this is different for each business. Complexity arises in a number of forms, including the need to hire an increasing number of people, build out the required infrastructure and business processes, supporting and on-boarding larger numbers of new customers, generating more detailed financial reports and forecasts, as well as other issues. In our experience, many of the new challenges that arise within a growing start-up, including those listed above, fall into the finance and operations area.
When is the right time to invest in such expertise?
All too often, management teams wait until issues surface and things start to break before they seek help. And when a hire is finally made, it is often too junior. This can happen because the company is hiring for its current needs and existing budget instead of making a hire to address where in company will be in 12-18 months. In a rapidly growing company, that can mean disaster or, at the very least, it means the company is not as well prepared as it could have been.
Here are a few scenarios that suggest your start-up might need to bring an experienced executive on board.
Your company must scale multiple business processes simultaneously
The company’s customer traction has caused an implementation and support backlog that must be scaled simultaneously with limited budget to avoid jeopardizing the company’s credibility and reputation with customers. The company is bringing additional products or services to market that require different sales motions or have different support requirements. The company is acquiring a technology or another business which must be integrated and operate without disrupting every-day operations.
Your company requires a more mature financial function
The company’s product traction is driving increased revenue and your revenue recognition policy is undefined or unclear; implementing the wrong policy today becomes increasingly difficult to correct as time goes on and the company continues to execute. The company must perform a financial audit without disrupting the business. The company must develop an operational plan that extends further into the future than you have planned for in the past; here, any forecasting error has material impact on the businesses’ decision making and, in some cases, viability.
Your company’s audience expands
At their start, companies only have employees to manage. Then investors are added to the mix and eventually a few customers are won. As the company grows, its audience will likely expand to new board members, new investors, investment banks, commercial banks, formal Fortune 1000 customers, channel partners, potential acquirers and others. Who should get what information? What is the proper messaging and presentation of information to demonstrate that the company is a professionally operated business?
The company wants to “future-proof” certain operational scenarios
Is an acquisition is likely in the next 18 months? Who will be interfacing with the legal teams? Are you fully prepared to go through due diligence? If so, is the company going to have IRC Section 280g / 4999 / golden parachute issues as a result of an acquisition? Not sure what that means? Well, that’s the point.
Is the company selling to a Fortune 1000 customer that requires financial due diligence to be completed prior to allowing business to be done? In order to look credible, what is the right amount of information and in what format? How do you handle confidential information? How do you negotiate the contract that is they have said is non-negotiable?
Does the company’s sales compensation model not only incent the proper behavior today but scale well in the case of unexpected success? Are there scenarios that create business-limiting liabilities or revenue recognition issues? Does the compensation model pay out at the right time such there are no working capital issues and customers have accepted the product?
Why senior is better
An experienced executive knows many of the traps and pitfalls that young companies get into and can help prevent them proactively. Employing more junior talent may help solve today’s problems at a bargain price, but could create larger problems in the future that must be solved in a reactive and more costly manner.
In the end, the exact right time to bring in financial and operational expertise depends on the company and its particular circumstance. Without question, it’s hard for a young company to see around corners that it doesn’t know exist. However, what remains universally true is that by the time it becomes obvious that an experienced CFO/COO’s expertise is necessary, it may already be too late.