AWS Startups Blog
How startup CFOs can integrate the cloud into their long-term success strategy
You are reading the fourth installment of our thought leadership spotlight, “The evolving role of the startup CFO.” This series features perspectives from prominent players in the startup ecosystem.
Imagine you’re a CFO leading the quarterly forecasting meeting for your startup. Your CEO points out a line item in your spending plan–cloud computing services–and asks, “How are you predicting this spend?”
As executives assess the impact of cloud adoption on bottom-line costs and top-line revenue growth, it’s more important than ever for CFOs to understand the cloud and develop metrics to effectively allocate resources and objectively measure return on investment. Equally important, CFOs need to effectively forecast cloud spend and communicate the business’s plans to stakeholders at every level of the company. To explore this, we sat down with Danel Dayan, investor at Battery Ventures, a global, technology-focused investment firm to discuss how CFOs can strategize and plan for the cloud through each stage of company maturity.
“You’ve got to figure out the core metrics you’re optimizing for based on your current stage of development,” says Danel. In his role, Danel focuses on early stage and growth-equity investments in cloud infrastructure, big data, security, and next-generation enterprise applications. “As the CFO of a fast-growing company, you have to have a plan to eventually grow into gross margins of 75-80% annual recurring revenue (ARR). You should be adapting your roadmap with the destination in mind.”
Startup phase
The startup phase includes new businesses earning between $0-5 million ARR. During this phase, for tech startups, it’s common for a majority of resources to be funneled into research and development (R&D). As many early stage companies are not yet able to bring a CFO into the fold, Danel warns startup leaders not to let R&D become a vacuum.
“It’s actually okay to be somewhat over-provisioned as you’re deploying a product early on,” he says. “But there’s this assumption that as long as you’re investing in R&D and product, it’s okay to spend. Up to this point, CFOs have rationalized cloud infrastructure and other R&D expenses as necessary to optimize overall costs, but we can think more critically.”
Danel recommends that early stage startups focus on accelerating product velocity, making sure that the team has adequate resources and budget to take their product to market. Then, they can develop solid performance indicators to ensure that the investment is paying off, such as measuring logo adoption, customer acquisition, and ultimately ARR growth. “[At Battery], we’re very objective around what makes a successful sales or marketing team. Are they hitting quota? How many leads are they able to close? What are their on-target earnings relative to their quota? How much capacity do they have?”
A modern CFO should feel comfortable navigating conversations with their chief product officer, chief technology officer, and head of R&D and leading board-level conversations about R&D investments, and how they’re driving business outcomes such as: percentage of the product completed, expected ARR to be generated, or ratios on new product development versus product maintenance.
Scale-up phase
The scale-up phase begins when a company enters the $5-15 million ARR territory. In this phase, the product is established and reliably profitable. As the company founders set their sights on full maturation, they typically begin to build a more robust executive team to help steer the ship. That means a new level of scrutiny on company expenses that CFOs need to be prepared to navigate.
“In the last few years, we’ve witnessed the trend of startups hiring as much talent as possible versus the right talent, for the right stage, for the right opportunity,” says Danel. Hiring hastily is not only a potential blow to cash flow, but it can create rifts within the company culture. “Being very intentional about team-building is important. We’re seeing today the effects of companies that rushed hiring to meet the demands of their scaling business. And now they’re having to right-size their team, which impacts morale.”
Cloud-based services can be a boon to a startup in the scale-up phase, taking on some of the heavy lifting that comes with scaling. The flexibility the cloud offers lets CFOs commit company dollars when necessary and scale up and down as needed. A great scale-up CFO focuses on optimizing investments to reach the profitability, retention, expansion, and ARR metrics for the business.
Maturity
A startup reaches maturity once it crosses the $15 million ARR threshold. At this point, the company is likely functioning with a full board to advise on resource allocation. It’s crucial at this stage that the CFO is able to communicate the value of their cloud strategy and predict cloud spend, both at present and down the line.
“Ultimately, what investors want is predictability,” says Danel. He explains that CFOs should consider how to build a foundation of trust and predictability when reporting to internal and external stakeholders. “Where a great CFO shines is being able to dial in a business’s budget or forecast quarter after quarter. It doesn’t have to always be positive data, but it needs to be predictable.”
Among their many functions, CFOs of mature startups act as liaisons, communicating between the functional leaders of a company (chief marketing officer, head of sales, chief product officer) and the high-ranking execs to build a model that supports growth and keeps costs under control. Danel says that tension is necessary to balance. “Part of a CFO’s role is to maintain a healthy bit of friction with both sides. Where the CFO really comes into play is providing a counterpoint. [CFOs] manage expectations so that the bigger picture never gets lost.”
No matter what stage of maturity a company is in, Danel says the important thing for CFOs to keep in mind is the relationship between cloud expenses and the benefits they provide. “Those two things go hand-in-hand. You can’t think of them in isolation.” As cloud-based solutions change the game for startups at all levels of maturity, it becomes more standard for CFOs to understand the cost implications and how they work for or against their overall growth strategy. As Danel puts it, an effective CFO is one that can communicate the value of such services, incorporate them into a cohesive financial roadmap, and manage the healthy bit of tension that comes along with building a business.
This article is just one in a series on the evolving role of the CFO. Find the other installments in the series: