As the company scales, another area where Finance can be an effective partner is by developing the concepts of cohorts and segmentation. A cohort is a group of people that are similar in one dimension and you analyze that collection of people as one group. The most commonly used cohort is acquisition date, and it's helpful to understand how different cohorts behave under different circumstances. For a startup starting to scale, customer retention by cohort is an important analysis. It is a lagging indicator but measuring the change in retention rate by cohort can help you make better decisions on the product, service processes, and team structure.
Segmentation refers to creating groups by looking at a group of data broken out in a number of different ways, for example, looking at data by region. As you scale, customer acquisition cost, lifetime value, and retention rates can all be very different by region. A company may need to invest well ahead of revenue in order to establish itself in a region so customer acquisition costs may be high, dragging down your overall company numbers. And in some of the regions, local language may be critical to client happiness, so if you are still ramping up that part of your service offering, it could also drag down overall retention rates.
The point is, Finance can partner with Sales and help them both think about concepts like cohort and segmentation, and also provide Sales with analysis and tools to understand the impact of the business on cohorts and segments.
Service
Often, by necessity, startups build Service teams in an ad hoc manner with all hands on deck helping in any way they can to keep their clients happy. As startups start to scale and hire a dedicated Service team and leaders, it can become a major cost center and a major source of value. The startup CFO can get involved early to partner with Sales to ensure the team is making good decisions on team structure and prioritization. There are generally two major areas in the early days where the service team needs to be monitoring. One is the service team cost as a percentage of revenue (in order to drive a healthy gross margin) and the other is the retention rate metrics by cohort and important segments. On the gross margin, the finance team can help accurately measure the metric and benchmark it against similar businesses. Unlike operating margin, which will be very different for a startup versus a mature company, the gross margin should be fairly similar for a startup versus a mature company, or at the very least it will be in the same ballpark. Giving the team a target, say, “you have about 15 points of revenue in order for us to have a healthy gross margin and be comparable to our peers,” helps the team set reasonable targets for revenue under management per rep, and learn what the overall team cost structure should look like. On customer retention metrics, you want to help the team measure the gross number and the number by cohort and appropriate segment, especially by region and channel.
Marketing
Other than perhaps the Head of Sales and CEO, the startup CFO's most important partner on the executive team is the Head of Marketing. Why? A combination of the size of the budget and the sometimes lack of clarity of short‐term impact of the investments. There are a few areas where the CFO can be a partner to the Head of Marketing starting from the early days.
Pricing and packaging. Pricing products and services for startups is, more often than not, a bunch of guesswork and seeing what sticks. The CFO can work with Marketing to help benchmark pricing and help model out different assumptions and implications on the business in terms of margins and growth. Pricing models for startups typically are either a value‐based approach where the product is priced at some percent of total value the product will deliver to the customer, or a cost‐plus approach, where the pricing is dependent on how much it costs the company to deliver it. With either approach, clear analysis with testing is important. The CFO can also help the business understand what sort of packaging will work and how features should be bundled. Packaging can include all‐in‐one packaging all the way to completely modular packaging where each deal is customized. Regardless of the packaging, helping the team clearly state the value proposition will help the sales and marketing teams accomplish their goals.
Customer acquisition cost (CAC) and customer lifetime value (LTV). Overall, it is helpful for the CFO to help the organization with all of the key unit economics of the business. For Marketing, two of the most important are CAC and LTV. There are a number of ways to calculate both, so initially, just ensuring the calculation makes sense for the business is a great way Finance can help. Establishing targets for both of the metrics as well as the ratio and payback period is also helpful as it will likely require some benchmarking analysis.
Marketing initiatives return on investment (ROI). Marketing teams are continually looking at the ROI on their efforts, both in aggregate across all their initiatives and on individual campaigns. In a startup, the best way Finance can partner on this topic is to help with revenue attribution, marginal cost assignment, and segmentation. There are of course many ways to do all of the above, but the key goal to keep in mind is what Finance can do to help ensure the data will drive good decisions. This means providing accurate and useful analysis and also providing timely information that can be delivered to the right people. It's also helpful to work with Marketing to make sure that the analysis you provide is using the proper data sources and is aligned with Sales and Product.
Legal
Don't be surprised as a startup CFO if all the legal issues end up on your desk. It's common and often there's really no one else other than the CEO who can handle legal issues. The primary things to be concerned about are: (1) effective management of outside counsel, including knowing when to use them; (2) building useful and reasonable template agreements, including a master services agreement with appropriate insertion orders and a mutual NDA; and (3) document management and storage process. If you don't have a legal background or related experience, it is worth spending a session or two with outside counsel educating you on HOW to manage a contract negotiation or approval, draft a series of good templates, walk you through each term and show what's OK to give on, and help you understand risk areas.
The area where you can save most money is by working closely with outside counsel during transactions, especially if the company has to cover the legal costs of the investors. Spending just a small amount of time looking at your outside counsel's specific hours may give you the chance to lower the bill. For example, if your counsel is stating that it took them 20 hours to file a Form D for the financing (which is a one‐pager and takes minutes to file), you will want an explanation.
The startup CFO also ends up being the lead negotiator along with the CEO on most of the early legal decisions. This makes it easy in some ways as you and the CEO can quickly do benefit/risk math, but keep in mind that as you scale and create in‐house counsel, you'll want to transfer that ability to them.
At some point during the company's scaling up, and depending on how many transactions and other legal touchpoints the company has on a monthly basis, you