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Lessons from a CFO

Thank you to Mike Osborn for contributing this excellent list of lessons-learned from a CFO’s perspective. This is well worth reading and pondering.

  1. Define personal objectives up front — honestly — as it will drive key decisions relative to growth objectives and outside funding
    • Bringing in outside investors is an irretrievable step with profound implications
  2. Strive to finish initial product and produce sales before initial external equity funding – This is the single most important thing you can do!
    • Figure out ways to generate revenues and cash – sell the products you have to anyone who will buy them
    • If a potential customer with cash says “Can you do this?” — say “yes” and then go home and figure out how…
  3. If founders don’t include someone with experience (preferably sales experience) in the market being addressed, add one ASAP — critical if you intend to acquire outside funding
    • Got to understand total market size as well as its segments
    • Got to understand market segments and where your product is positioned
    • Got to understand competitor strengths and positioning relative to the segment you’re addressing
    • Got to sell your product to actual customers who will pay you
      • Validate assumptions about selling points, competitive offerings, pricing, value proposition, customer buying and funding process, sales cycle
  4. Fill glaring management gaps early; focus on skills CEO does not possess
  5. If liquidity objective is merger, ID potential acquirer targets and strategy early, maintain awareness of probable strategic fit (value, positioning)
    • This usually falls out of your analysis of your markets
  6. If either IPO or merger is liquidity objective, invest in back office early
    • Strategic business plan
    • Detailed operating plan and monthly management reporting
    • Clean financials (revenue recognition, quality earnings)
    • Audited financials
    • Scalable operating systems and processes
      • Manufacturing, inventory, cost accounting
      • Product/project management
  7. Invest in service providers with broad experience and deep resources (you’ll need them to move quickly and avoid mistakes)
  8. Acquire the discipline of a Board of Directors (start with an Advisory Board, move to formal BOD when outside $s come in)
    • Acquire Board members that fill gaps in your experience base and interact with them frequently
    • Solicit their input to your tough problems; don’t hide bad news, make them your partner in figuring out solutions
    • Also, a good Board will force you to:
      • Clearly define strategy
      • Make commitments, track results
  9. If you’re the founding CEO, ask yourself if you possess these leadership characteristics; if not, fire yourself and hire one who does:
    • Vision (where are we going?)
    • Force of will (set priorities, make decisions, over-ride dissent/second- guessing/diversions outside your priorities)
    • Physical energy and emotional strength sufficient to sustain 24/7 engagement for 5 years or more (it’s not a part time job)
    • Comfortable with experienced functional managers who know more than you do about their functional areas (beware of promoting from within in early stages — who will do the OJT?)
    • Classic management skills and discipline (establish objectives, assign responsibilities, reporting progress, holding accountable)
    • Delegation skills (leverage yourself through others)
  10. Know the motives and objectives of those you ask to invest in your company
    • Four levels of venture capital investors
      • Institutional venture capital (professionals investing other people’s money)
      • Sophisticated angel capital investors (invest directly, but typically have a group filtering deal flow)
        • OEF’s Portland Angel Network is an example of this; Seattle’s Alliance of Angels is another example
      • Individual angel capital investors who invest directly
      • “Friends & Family” investors who invest because they know and trust you
    • All experienced venture capital investors will focus on six key variables, so have answers before you look for money:
      • Size of the market being addressed (is the market opportunity large enough to support $100MM business?)
      • Product strengths relative to competition (who is the current or potential competition and how are your products different?)
      • Customer value proposition and sales cycle (why will the customer buy your product (urgency) and how long until revenue is realized (sales cycle)?)
      • Strategy for obtaining and protecting market dominance (proprietary technology or scale/execution?)
      • Years of relevant experience in management team (has the team had experience in doing what they’re proposing to do?)
      • Track record of CEO in achieving results in startup environment (can CEO manage rapid growth?)
    • Understanding institutional venture capital investors
      • They work for their investors and are judged/rewarded on the basis of ROI, period.
        • Their loyalty is to their investors and their personal measures of success, period. Not you, your company, your products, or your personal vision. Just financial results.
      • They’ll pay more if they’re competing for the deal
        • Always work to create more than one alternative; create the fact (or illusion) of competition for your deal