Funding boom in U.S. startups fuels demand for outsourced CFOs

As startup fundraising surges, there has been a corresponding swell in the demand for outsourced chief financial officers who work part-time for several companies.

These on-demand finance chiefs, also known as fractional CFOs, serve a particular need for startups after their early funding rounds. outsourced CFOs can help establish processes and make day-to-day operational decisions, in addition to laying the groundwork for further rounds of fundraising and creating precise financial forecasts for these budding businesses.

The funding boom

According to financial markets platform Dealogic, venture capital firms invested more than $112 billion in U.S. startups as part of a boom in major funding rounds through July 2021. This represents an increase of about $51 billion versus the year-earlier period.

Additionally, funding has gone way up for young companies in particular. Early-stage startups in the country have attracted approximately $38 billion of venture capital so far in 2021, roughly on par with the amount of funding recorded in the entirety of 2020, and more than double the capital raised in 2016, cites financial data firm PitchBook Data.

Seeking growth sooner

Historically, startups had put off hiring senior finance executives until they matured into more complex operations or were preparing for a public listing or acquisition. But, with more funding available, these companies are looking to expand their finance departments sooner, and prepping up for expeditious growth by getting a more sophisticated handle on their financials.

For instance, Tesorio Inc., a San Francisco Bay Area-based firm that helps businesses with their cash flow, hired its first part-time CFO a few months back. This part-time CFO typically works for the company about once a week, but is currently putting in as many as four days a week to help the company prepare for a fundraising round.

Companies that provide fractional accounting and finance services report having received more calls than usual from startups looking for part-time financial services over the past year. Many of those early-stage companies were seeking help to evaluate an acquisition, a public listing or a potential merger with a special-purpose acquisition company.

The COVID-19 impact

The shift in views about the nature of work, with freedom and flexibility being the priority, in the wake of the pandemic crisis has also bolstered the outsourced CFO industry.

Finding it more manageable, many CFOs now prefer working part-time rather than doing traditional 70-hour workweeks. In fact, people who have worked as finance chiefs throughout their careers are embracing the opportunity to join the gig economy.

Betty Kayton, a fractional CFO, has switched to working independently since the early 2000s, after seven years of being a full-time CFO. She now splits her time among her three clients: Elegen, a biotech firm, Monarch Tractor,  a maker of self-driving electric tractors, and Bastille Networks Inc., a threat-detection company. Kayton focuses mostly on one client a day and bills by the hour.

It’s a win-win

Opting for outsourced CFOs in the early years helps startups implement financial discipline and other investment strategies while staying nimble and keeping payrolls light.

Additionally, working as an external contractor, it’s easier for these finance experts to give the right recommendations, as their career isn’t tied to a particular company. Jan Reed, founder of a fractional CFO firm, said when doing fractional CFO work for clients, “I’m calmer, more because my emotions aren’t part of it.”