There are so many startup accelerators that take a team of engineers / product people and do their best to make businesspeople out of them. I'm one of those CEOs, for sure, and learning about the financial world, accounting, and trying to make sure to not mis-speak was quite difficult.
The primary training I received during the accelerator helped a lot, but it was more along the lines of how to more accurately model in excel. It was up to the CEO (?CFO? if you're lucky) to get all this exactly right, and it's not easy.
I think that when an accelerator knows that its teams are not well-versed in the financial part of running a startup, there should be more emphasis on helping them learn. It's daunting to try to do that alone.
What are the reasons startups can't hire good finance people? Or at least contract with an expert?
Is it a difficulty in judging their abilities when it's not your area? Is it something where only at a certain size would it be worth the reduced financial risk to have someone on it? Learning from scratch has to be the slowest, highest risk way of doing it -- which is the exact opposite of what a startup should be optimizing for (reduce risk where possible, move fast)
It seems like helping identify business talent is what an accelerator should be helping with, not becoming a half assed B-school for engineers..
There's some implicit assumption here that learning from scratch is better than hiring talent, and I think that's a mistake.
you're a company. you're built to make something and grow it. outsourcing financials (I don't mean getting help with them, but actually offloading them) is in some ways like outsourcing development.
the "CEO" personally does finances for the same reason the "CTO" personally codes. If either of them can't do something they learn it.
I do want to make a distinction between "offloading" and "outsourcing".
That said, you may very well be correct. My point was simply that, if it's a good idea, it's mostly not for the same reason that has the CEO emptying waste baskets.
They can, and do if they are being sensible. One of your fairly early hires should be a real finance person (not an executive but someone experienced enough to take over the day to day effectively). Not doing this is false economy.
Well before that point, you should have a contract accountant of course.
Why didn't you hire people to empty the trash? Would save your time, and another soul out there who is struggling to find a job get something.
Personally, I love the fella who empties our trash. He's become a close friend of ours, with his heavily accented "Hello friend!" message he greets us all with and everything!
Hiring anyone to do anything carries a (quite significant) cost both financially (not their hourly wages -- all the other fixed costs) and in management time, and in the cost of added risk (perhaps they steal employees' stuff, set the place on fire...). In that case it wasn't worth all those costs vs just emptying the @&^#& trash myself, which took all of 5 minutes at the end of each work day with the added bonus of giving me some brain-idle time to wind down.
The accountant and lawyer examples have the opposite characteristics : lots of risk from not hiring someone competent and experienced.
> What are the reasons startups can't hire good finance people? Or at least contract with an expert?
Its the exact same problem with hiring quality engineers. The good ones have many options. So a startup's offer of $150,000/year plus 5% of a company that might not be around in 3 years just isn't that appealing.
I'm guessing the good ones have job options starting around $400,000/year, whether in Finance or public companies.
If you are a great company though, you'll be able to hire a very capable person...
This isn't really finance though; it's accounting. Accountants don't even cost $150k a year, and a CPA can explain to you the difference between the terms and what is legal / illegal (or at the very least a non-GAAP measure).
If your startup is past the garage stage, you should probably have a corporate accountant on retainer so you have an "expert" with whom to discuss these terms. They're not super-expensive.
I cannot disagree more strongly with this. It is essential for a small business owner and/or startup founder to understand the fundamentals of business finance -- at a minimum the basic accounting equation (A = L + OE). Outsourcing that knowledge to someone in finance is a recipe for the "accountant" to steal all the money in the corporate bank account. Only once they understand how to do it, should they then proceed to outsource the work to someone else to minimize the distraction to the core business.
> What are the reasons startups can't hire good finance people?
Perhaps there is a correlation between being a good finance person and not overlooking the risk associated with working for a startup, such that good finance people -- who command high salaries anywhere -- aren't particularly attracted to work at startups, making it even more expensive for startups to hire them than it would be for others to do so.
What are the reasons startups can't hire good finance people? Or at least contract with an expert?
In the early stage, when your total team is 2-5 people, there's rarely enough work to justify spending a full time, senior salary on a good finance person. You probably have close to zero revenue/billings, so the main jobs are around payroll, taxes, a few accounts payable, and cash-flow projections.
You can (and should) hire an accountant to do the first 2, and work with your accountant to do the second 2, but
1) Pushing all of payable through the accountant is an easy way to lose track of what your outgoings looks like, and end up with dangerously high expenses. At an early stage startup, the founders should be aware of every expense.
2) The founders definitely need to own the projections. Some help from an accountant is going to make a big difference, but they can't do it for you.
But the more important issues are:
- You aren't likely to drag your external accountant into investor presentations. You might (should) get the accountant to review the financials that go into the presentation, but they won't be there to talk about them, so the founders need to know what they mean, and use the right words.
- The average accountant cares about accounts, not investor terms. You cannot really expect your external accountant (who you hired based on their ability to keep the books to an appropriate legal standard) to know whether that piece of paper in your drawer )that they had no part in producing) is a contract or LOI or MOU. Nor would they necessarily know whether certain income streams should be classed as revenue or GMV unless they are quite familiar with your business. They know about income & expenses & liabilities, but those aren't the same thing and part of the problem for founders is that they seem like they should be.
You can hire a part-time accountant. When big enough, you'll hire a full-time CFO, but that person will have an eye on a personal return via merger or IPO. As a small startup, it is absolutely the CEO's job to live and breathe financials, in terms of where money comes in and goes out. Outsourcing that role is a major red flag.
The primary training I received during the accelerator helped a lot, but it was more along the lines of how to more accurately model in excel. It was up to the CEO (?CFO? if you're lucky) to get all this exactly right, and it's not easy.
I think that when an accelerator knows that its teams are not well-versed in the financial part of running a startup, there should be more emphasis on helping them learn. It's daunting to try to do that alone.