Q&A with Chief Financial Officers (CFOs) John Fong and Linda Chen
ivy Group recently spoke with two Vancouver-based CFOs, John Fong and Linda Chen, about their top tips for CFOs at early-stage startups and high-growth companies. John and Linda share their best pieces of advice for current and aspiring CFOs, from navigating common financial challenges to the most important qualities a CFO should possess.
John Fong has worked in CFO and finance management roles at various companies in the healthcare and technology spaces, including Invoke, Eventbase and more recently, Numinus. John is also the founder of f28, a strategic finance studio that works with early-stage founders.
Linda Chen is the CFO of Renewal Funds, a mission venture capital fund that invests in early-growth stage companies to accelerate the transition to a sustainable economy. Before working at Renewal, Linda was the Director of Finance at Vanedge Capital and was also the Head of Finance at Recon Instruments, a Vancouver-based startup that was acquired by Intel.
Q&A with John Fong
1. What are the most important qualities and skills that a CFO should possess to successfully navigate the challenges of a high-growth environment? How can aspiring CFOs develop these traits?
As a CFO, there’s this generalization that we’re all about money and numbers. We’re definitely more than that. If you really want to be a value-added CFO, especially in a high-growth environment, building relationships is really, really important. As a CFO, there are so many types of customers and stakeholders you have to build relationships with: your CEO, your board and shareholders, your senior leadership team, your finance team and other people throughout the organization.
While finance touches all parts of your business, not many people think about money in terms of the impact of the overall financial health of a company. Being a CFO means being the bridge builder to create company-wide alignment in terms of building product in a financially healthy standpoint.
For relationship building, aspiring CFOs should be curious and understand the needs of each specific stakeholder and how each of them process financial information. While at Numinus, I had to speak with shareholders, investors, the board, marketing and operations teams, therapists and medical professionals, all of whom had different levels on how they process financial information. You have to ask yourself, “How do I continue to tell the company’s story but cater to different audiences to be able to meet their needs?”
Attached to being a relationship builder is being a good financial storyteller. When you’re building a company, everyone is drawn to the grand vision and mission of the company. But you can’t build a grand vision and mission without understanding the financial health, the economics and the business model of what you’re trying to build. So I had to weave that story and narrative consistently through all these different audiences in a way that they’re able to understand.
To be a good financial storyteller, I found watching TED Talks and anyone working at Pixar to have some great examples of helpful storytelling techniques.
2. Startups often face challenges in securing funding at the beginning. As a CFO, what strategies or approaches have you used to attract investors or secure financing? How can startups replicate these efforts?
Investors need to understand what your business model is and if there’s a big enough addressable market that can generate the required return on their investment. At Numinus, the total addressable market for mental health solutions was $3 billion or $5 billion. Our business model was an easily understandable therapy service model, but focused on the higher margin and higher impact solution in psychedelic-assisted therapies.
If you understand what your addressable market is and what your business model is, then that really helps you tell your story and investors can really understand the potential of your product.
3. In your experience as a CFO, what are the most common financial challenges that early-stage startups encounter? How can they be avoided or overcome?
The first one would be overinvesting in your solution early on. When I was at Invoke, one of the problems I saw was that founders were so excited about their solution that they wanted to jump right into building their product without first doing the work to understand and validate if there was a big enough market for the problem they’re trying to solve. It’s not cheap to build a digital product and the last thing you want to do is invest a lot of time and money into building something that not a lot of people want to buy.
If you think of the early days of Tesla, their first car wasn’t the Model S but the first Tesla Roadster. They didn’t focus on building the whole car. They focused on building the battery technology to power cars. So they partnered with Lotus who provided Tesla with the actual car. Once they had a working prototype, they’d sell that through pre-orders to get market validation. Once validated, then they built more cars. When the Roadster was proven successful, they then went on to build the Model S, then the Model 3, etc.
The second one is underinvesting in finance activities. A lot of founders think of bookkeeping when they think of finance. But there’s way more to it than that. Founders spend so much time to bring in financing, you want to keep tight track of where the money is going. You need proper finance leadership to help oversee that function. It doesn’t mean you have to overhire by bringing finance activities in-house. I’d recommend looking for a fractional CFO that can help you build the right team, process and systems that align to your company’s strategy.
The last piece of advice is to build banking relationships early on, most likely after you’ve raised money, as banks will have more incentive to talk to you. If they know you, understand what you’re trying to build and you’re proving your business model is sound, they’ll be more than willing to help you as you scale. And it helps make funding conversations easier during those dark days of building your company.
Q&A with Linda Chen
1. What financial strategies and investment approaches do you find most effective in driving and measuring growth for companies operating within the sustainability sector?
One is impact measurement. Companies need to have clear metrics for assessing their impact. You need to be able to define your metrics and then determine how to actually go about measuring those metrics. This will help companies align their business with their sustainability goals and can influence investment decisions. In general, there’s an increase in disclosure requirements extending beyond impact-focused companies For example, there’s the introduction of the International Sustainability Standards Board (ISSB) and the Task Force on Climate-Related Financial Disclosures (TCFD). These frameworks enhance the transparency of climate-related risks and opportunities, and also help your organization understand and communicate the financial implications of climate change on your business.
Another important approach is staying informed on the evolving environmental regulation. Changes in laws and policies can really affect a company’s bottom line and the viability of companies within a sector. For example, California’s recent change to their net energy metering may have implications for companies operating in the solar energy business. I think it’s really important to stay on top of these regulations so you can adapt your strategy as these policies evolve.
Overall, there’s a growing emphasis and demand from customers for sustainable business practices. A lot of venture capital funds are also putting an emphasis on environmental, social and governance (ESG) factors in their investment decisions, not just impact funds.
2. In your experience as a CFO, what are the most common financial challenges that early-stage startups encounter? How can they be avoided or overcome?
I think the most obvious challenge for startup companies is funding and being bootstrapped. It’s important for startup companies to stay on top of their fundraising needs and to be able to accurately forecast when they’ll be out of cash. That way, you can begin planning for fundraising well in advance, before you find yourself in a situation where you’re like, “oh boy, we have three months of cash left.” Effective forecasting and budgeting help you understand when you need to turn your attention to raising more capital, because that is a real time suck out of building your company and you don’t want to be doing that throughout the year. Regularly review and adjust your forecast and your plans based on market conditions.
3. What are the most important qualities and skills that a CFO should possess to successfully navigate the challenges of a high-growth environment? How can aspiring CFOs develop these traits?
In high-growth environments, one of the most important qualities is to be able to adapt or react to changes efficiently, and in a way that would benefit the company strategically. For example, if something in the macro-environment is impacting your business, like interest rates or a change in your main customer base, then you need to be able to make decisions quickly. Whether that would be reducing your burn rate in a meaningful way to preserve cash or pivoting your strategy, I think you need to be flexible and be open to change.
Another thing is being able to wear multiple hats. Usually, startups and high-growth companies are small. Sometimes, the CFO is also the HR department or the IT department, for example. You need to be able to stay on top of all these different departments.
Communication is also really important. CFOs are usually the one to convey information to stakeholders. That can be good news or bad news.
For aspiring CFOs, seeking mentorship is one good way to develop these traits. And, asking other CFOs about what they’re doing in their day to day and how they deal with difficult issues or changes in their business. Also, by experience: you learn by doing it and by seeing how things operate within the company. The challenges that come with each company or industry are so different and so unique. The more experiences you can gather from your existing job or company helps set you up for success.
