Why Do Otherwise Sensible Companies Not Have CFO's?

The Canopy Financial fiasco (see my posts from late last year) highlights a very basic question (in that case, among many basic questions): "Why do so many fast growing startups not have a CFO?"

Here's an interesting table (I think it's from Ernst and Young, one of the Big 4 CPA firms, via the J. Robert Scott CompStudy):

As According to this only 17% of startups have a CFO when they have done one or fewer rounds of funding. In most cases this is probably appropriate - these companies tend to still be at the pre-revenue, product development stage and the business is pretty simple.

By the second and third rounds of funding, however, most of these companies are now generating some level of revenues and starting to grow and scale the business. Yet only 56% have a CFO. And only three-quarters of them have a CFO after 4 or more funding rounds.

To me this is bizarre. There are so many requirements piled on a business that need a dedicated CFO to help handle - revenue recognition, external audits (often a mandatory investor requirement as a condition of later-stage funding, though not always enforced), business planning and strategy, pricing, international structuring and tax planning, compensation structures, internal controls, economic models, budgeting, HR compliance etc...

So why do people not have them? I think its a combination of the following:

1. Lack of experience at the founder/CEO level. Not knowing what's important in managing the broader growth challanges of an early-stage business and the need for checks and balances, particularly in rapidly growing, multi-location companies. By the way, lack of experience doesn't just mean few years of experience. The challenge is also often true with an experienced sales or marketing executive turned into first-time CEO, for example.
2. Pressure to keep costs low and spending focused on product development and customer acquisition (sales and marketing). Unfortunately this is often encouraged by a company's Board - people who should know better about the need for checks and balances but often tend to be way too focused on minimizing unsightly or "unproductive" G&A overhead.

You have no idea how many companies I've seen over the years where some combination of these two factors has resulted in substantial problems later - restatements of financials (sometimes material enough to change an investor's view of the company's results), businesses with poor balance of resources, out-of-control compensation structures, untenable long-term economics, screwed-up equity structures, bad borrowing decisions, etc.

In the case of Canopy Financial they had, at some level, thought about the need and done some initial looking - as I know from my personal experience. But it clearly was not as high enough a priority as it should have been, and it took the appointment of new in-house legal counsel to blow the whistle on the problem. I guarantee you that a strong CFO hired a lot earlier would have discovered the problem before it escalated so significantly - and perhaps prevented it altogether.

So I know its self-serving to some extent but - please! - bring in the right CFO-level help at the right time. If its too early for a full-time person there are many well-qualified part-time people available. The cost of not doing so may be substantial - and not just the cost of fixing things. In the case of Canopy, it was disastrous.