CFO Leaders: Do Startups Need CFOs?
There were 10 of them, founders and finance leaders of young companies. That was part of the problem—that many were founders AND finance leaders. When asked how many of them “had a guy” who managed their companies’ financial affairs, seven raised their hands.
“There was this one person, and him and I were basically managing it together, and it was more of a cash management and projecting—where we could go and where we will hit.” - Aakrit Vaish, co-founder and chief executive officer, Haptik
“We actually have a very, very smart guy who’s looking at accounts, finance, compliance on a day to day basis. But I’m very involved as well. My finance skills? I did an MBA. I hope that helps.” - Naiyya Saggi, founder, Baby Chakra
At Pocket Aces, they appointed a chief financial officer early on.
“We got one right away. We started generating revenue very early and we work with lots of vendors, production partners. There is a chain of cash which needs to be managed well, and working capital needs to be managed in an effective manner, otherwise you could grow and still go bankrupt.” - Anirudh Pandita, founder, Pocket Aces
The other two were in the hotseat for a different reason—they were the chief guests on the show. Sachin Parikh, chief financial officer of Nykaa; and Zishaan Hayath, founder and chief executive officer of Toppr.
This edition of CFO Leaders focused on finance leadership at startups, with both Parikh and Hayath sharing very different experiences.
Parikh, with a masters in electrical engineering and MBA with emphasis on strategy and operations, worked at Deloitte in the U.S. till he came to India in 2015, got married and found a new job. With three-year old Nykaa—a beauty products e-commerce site. “I was lucky to have both of them, two women in my life if you want to call it that. And four years in Nykaa has been I would say 8-10 years in my life.”
Traditional CFO-responsibilities made up just 15-20 percent of his work then.
There was so much else to do. At a startup you just don’t do one thing, You wear multiple hats. You do whatever’s needed to get done for the company to achieve the next milestone and the next target, and that’s when I got into supply chain, inventory management, customer service which still reports to me right now. This is something that I brought to the table to Nykaa—saying, let me focus on the bottom line, let me focus on the different line items in the business aspects below while you guys focus on the topline.
He still has 6 to 7 teams report to him, including finance and accounts, company secretary-legal, customer service, inventory audits and internal consulting (a group leadership programme of sorts).
As the company grew how did your financial priorities change?
“I think it depends on the phase of the business you are in and what you can focus on. (There’s) only so much you can do at a certain period of time and we have very strategically planned every line item in the financials, saying this is the year we are focusing on this and we are going to bring this down to the optimal level if that might be required.
Let’s go below the revenue level and talk about gross margin or your cost of goods sold, then talking about direct variables which is shipping, packaging and freight expenses. Then you get to indirect marketing—Google, Facebook and then any offline spends that we do, and then last is employee salary, rentals...
Every year, if you consider 2015-2016, we focused on gross margin, then we focused on direct variables and improving that, then we focused on marketing. So, it was not like the focus was not there in all the teams but as a management team or as a 2-3 people team we were trying to get those (metrics) efficiently right there. and its been a journey and that’s been a fun part. Now throw goods and services tax in the mix and that delayed us by around 6-9 months. What our planned strategy was and we couldn’t implement all of it, so we have to wait for 6-9 months for things to stabilise and then go back and work on it.
This year, as you said, debt, it’s not actually debt it’s actually working capital lines from banks. So, it is not technically long-term debt it is more like one-year debt which keeps on rolling over, and this year the focus has been to reduce interest rates. Imagine in this capital environment where people are not getting funding we are now in the market raising funds for debt or raising funds for working capital at the same time we are trying to reduce interest rates.
As I said, last year we were Ebitda positive, this year we should be profit-before-tax positive. We are trying to get our unit economics in place. We had that four years ago, we set a plan that (in the) fourth year this is how we are going to achieve it and these are the ten things which we need to achieve it and getting those ten things done over four years.”
A civil engineer from IIT Bombay, Hayath started his career with cigarettes and consumer goods company ITC Ltd., then spent two years with a consulting firm in the U.S. and returned to India in 2008 to build his first venture—a phone commerce marketplace that he sold to Future Group in 2010. Three years later he founded Toppr—a learning app. “At the core, I’m a product manager building a technology-based product but donning the hat of everything else that is needed to run a company.”
That included finance in the early years—he describes the combined roles as “business is maker, finance is checker”.
At an early stage you have to run more with gut. So, I think (formal) finance roles can be restrictive at this early stage. A pure classical CFO would come from a very different thought process and background and they would come with a lot of processes that might slowdown high growth companies like ours.
Toppr has a CFO now but Hayath continues to co-manage the finance function.
As the company grew how did your financial priorities change?
“We’re a content personalisation platform, you expect users to pay for something that they absolutely cannot touch. These are not small amounts, these are in replacement for tuition classes or coaching centres. Now you’re using a digital product, completely something that you cannot touch and is not tangible, and still you have to pay fees that are similar to your coaching classes.
So, to get there in the initial phase you have to overload on engineers, product managers, designers to complete the platform. This is pre-revenue and your spends are through the roof so you’re spending close to Rs 5-6 crore a month with zero revenue and you have to still keep doing that because your belief is when you start charging you will charge very high gross margins because it’s content and it’s close to 85-90 percent gross margins. So, in the initial phase the challenge is to keep committing money to product development. As soon as revenue comes in, they are close to 90 percent of gross margin, but also the sales cost comes in.
The second phase is your revenue needs to be greater than your sales cost. And in the third phase your revenue needs to be greater than all the lines C1, C2, C3. I would say, now we are in our third phase where we’re profitable at C3 level but not profitable at Ebitda level. So, that’s the journey for us. Overloading on product spends with zero revenue, getting some revenue and beating sales cost and then getting some revenue that beat direct costs, sales costs and other costs.”
At Most Startups Finance Is An ‘Ignored Function’
“In most of the (young) companies, this role is not managed by a finance guy but an engineer,” says Anil Joshi, prompting laughter and agreement from the founders seated around him (both Parikh and Hayath are engineers, turns out Joshi is one too).
The founder of Unicorn India Venture, an early-stage venture investor, says his firm invests between $500,000 to a $1 million in the first stage. He then narrates what usually happens at young companies at this stage.
“So, we have written cheques, the guys are very happy, they are partying, they are working on the products, they are focusing on the business. But one fine day, (they) would realise that the money is still lying in the current account. So, imagine Rs 6 crore lying in the current account, 30 days, nobody making money, probably only banks, and the company could’ve earned some interest, could have paid the salary of two peons. The founder would have realised the importance of this (only) when they are running out of cash.”
His firm insists that investee companies have a finance professional on board. “It needn’t have to be a decorated CFO but at least someone who understands the meaning of finance and cash flow management.”
Haptik, a conversational AI company, ran what founder Aakrit Vaish describes as “ a completely different spread sheet to manage or track finance” in the early years. Essentially, it was a cash flow record that documented all spends, whether on fixed assets or marketing. At first, Vaish too “had a guy”, but the company was recently acquired by Reliance Industries Ltd. and now, he says, he’s “going through a bachelor’s in finance”, describing the financial rigour that investors bring.
The one big learning since his company was acquired—financial control.
I’m sure that all of us have done it, wake up in the morning and put like $6,000 on my corporate credit card which is needed for the business at that point because it wasn’t as if I felt like doing it, it was important and the process wasn’t set. I think now we have control. I just feel like because of control...every single person in the company values money a lot more.
Haptik now has a chief financial officer who runs a six-member finance team.
Watch | Sachin, Zishan and other startup founders and funders discuss financial management