In today’s volatile and competitive landscape, venture-backed startup founders confront unprecedented challenges. From the complexity of global regulations to the rapid changes in fundraising market dynamics, building a robust and adaptive finance function is no longer a choice but a necessity.
The pressure to scale quickly, comply with diverse legal frameworks, and still maintain financial control requires a strategic approach to financial management. This article explores the core components and considerations essential for entrepreneurs looking to strengthen their finance function in today’s demanding fundraising environment.
Three Step Mental Model to Building Your Finance Function
Step 1: Start with Leadership
Understanding the skill sets and experience you already have is foundational to building your company’s function, especially for a startup. Oftentimes the CEO or other leaders may already have skill sets necessary to cover some areas of a finance function in the early stages, allowing the company to prioritize other skill gaps the business needs.
You can think about a finance function’s core areas or components as the following:
1. Accounting (Financial Operations): This encompasses managing costs, accounts payable/receivable, and audits. Proper accounting ensures accurate cost management and prepares you for both internal and regulatory audits.
2. Financial Planning & Analysis (FP&A): Also known as budgeting or forecasting, FP&A takes today’s transaction numbers and tries to forecast the future. It’s vital when fundraising, as investors want to see not just past success but future profit and cash flow.
3. Treasury: Often considered a luxury for startups, treasury involves optimizing interest income and cash management. It’s particularly vital in businesses dealing with large fund flows and reconciliations.
4. Tax and Compliance: Early tax planning and compliance with regulations are crucial, even if they might not be immediate concerns for early-stage startups (depends on the business model, e.g., fintechs may need this earlier to secure licenses and work with regulators to operate legally in a market).
5. Corporate Development / Investor Relations (Corp Dev / IR): This role may be worn by the CEO or CFO from day one, building investor confidence through constant engagement.
Step 2: Align with Business Priorities
Apart from considering your existing resources, the way your finance function is built must align with your business’s stage, industry, and revenue:
Pre-Revenue vs Revenue-Generating: Tailor your focus according to your revenue status. Pre-Revenue finance functions may not find tax and compliance or treasury a priority. Regardless if pre-revenue or revenue-generating however, corp dev or IR will be a consistent key area for venture-backed startups.
Industry: Differentiate between fintech and commerce. For example, fintech requires specialized attention to regulation, fraud prevention, and cybersecurity, and this tax and compliance and even treasury will be critical already early on compared to say commerce, where accounting may be a bigger priority (to track multiple SKUs, for example).
Budget: It may be necessary to forego some priorities based on stage or industry if the business does not have enough to spend on hiring new talent. Another option is to engage with your investors / advisors for some functional areas (like Corp Dev / IR) or hire internally, but this is not sustainable long-term.
Step 3: Finding Candidates in Intersection Between Gaps and Priorities
Of course, it is important to filter for company culture fit (values, grit, prioritization skills, etc.). Read this article for more on this topic
The Fintech Case for a Finance Function
Fintechs presents unique considerations when building up a finance function in these types of businesses:
(1) Fund Flows, Transactions, and Reconciliations: Errors in these areas can lead to burdensome audits and put a strain on the team.
(2) Regulation: Compliance with authorities like the central bank is essential.
(3) Fraud Prevention and Cybersecurity: While these might not have clear ROI, they are vital investments that can save your business from serious breaches.
(4) Tax Planning: Complexity increases as you expand into new countries, each with unique regulations and requirements.
Understanding these unique aspects of your company’s business model is key to setting up your finance function.
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Paulo Joquiño is a writer and content producer for tech companies, and co-author of the book Navigating ASEANnovation. He is currently Editor of Insignia Business Review, the official publication of Insignia Ventures Partners, and senior content strategist for the venture capital firm, where he started right after graduation. As a university student, he took up multiple work opportunities in content and marketing for startups in Asia. These included interning as an associate at G3 Partners, a Seoul-based marketing agency for tech startups, running tech community engagements at coworking space and business community, ASPACE Philippines, and interning at workspace marketplace FlySpaces. He graduated with a BS Management Engineering at Ateneo de Manila University in 2019.