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Why climate startups should hire a specialized fractional CFO

Managing a climate startup’s finances comes with unique challenges that are not often seen in traditional businesses. The good news is, rather than handling everything yourself, you can bring on board a specialized fractional CFO (person or firm) to keep your business’s financial health in ship-shape.

Jon Schwartz is a fractional CFO and COO for early stage climate startups. We sat down with him to discuss when founders should bring in a fractional CFO, why they need to have climate-specific expertise, and how you can get the most out of the relationship.

What does a Fractional CFO do?

For the purposes of this piece, we define “Fractional CFO” as either a person or a firm that might perform the same work as a full time CFO, but at a percentage of the time and cost, given the lighter requirements of an early-stage company.

In practice, fractional CFO work comes in two forms. A thinner version of the role covers bookkeeping and accounting, as well as some basic forward-looking elements of financial planning and analysis. If you want them to spend more time at your company, they’ll go much deeper on these financial matters, as well as getting involved in strategic, operational aspects of your business, essentially working as a sounding board for every decision you need to make that involves money.

In most cases, if you bring in a fractional CFO, they’ll start by performing a basic financial health check-up. They’ll look at things like whether your bookkeeping and accounting firm is appropriate for your business, how you’ve filed your taxes, and where your money’s parked, as well as get a good understanding of your financing trajectory (both historical and future). The answers to these questions will help them decide on the best use of their time going forward and where they can provide the most support.

When to hire a fractional CFO

You should hire someone to take on bookkeeping and accounting for you as soon as you’re responsible for other people’s money, even friends and family. Doing so will boost your accountability for the decisions you make with their cash, and reduce the burden on you as a founder to handle this side of things.

You’ll need to hire fractional CFO as soon as you raise any institutional funding (post your Pre-Seed, for example), if not sooner. At this point, accountability goes up, your need to carefully manage burn and growth go up, and the analysis/planning/etc requirements get much heavier.

You’ll also start growing rapidly and your time as a founder will become more and more scarce, so rather than spending your time talking to your bookkeeper and building excel models in the middle of the night, you need to be laser focused on things like finding product market fit, hitting revenue milestones, and building relationships with partners, future investors, etc. With every round of funding you raise, the stakes get higher - while you might have gotten away with a looser approach to financial management before, that won’t cut it now.

Why your CFO needs to know the climate space

1. Knowing the capital landscape
Climate startups are eligible for a broad range of funding options that aren’t available to other companies, which your fractional CFO will need to be on top of. If they aren’t familiar with the space, they won’t know about the levers you can pull across public and private grants, alternative financing for equipment and inventory, off-balance sheet financing for your hardware-as-a-service business, etc.

2. Understanding climate business models
Climate companies tend to be complex, with multiple revenue streams, complicated customer relationships, and convoluted contract structures. Not only is this difficult for traditional accountants and fractional CFOs to manage, it also presents challenges for generalist FPA teams, who’re used to typical SaaS startups with a simple P&L. Their templates just aren’t cut out for this level of complexity.

3. A strong (and relevant) network
A climate-specific fractional CFO with a solid network of investors (warm connections, specifically) will be incredibly valuable when it comes to fundraising. They’ll know who the right VCs are for your business, who’s offering venture debt in the space, who’s willing to do equipment financing, etc. They can also connect you to people who offer fractional support for other areas of your business.

How to pick the right fractional CFO

1. Do they completely understand your business model?
Unless your business is incredibly simple, and you don’t have to report your accounting to the government or your investors, you can’t rely on a generic bookkeeping and accounting firm. They need to understand the startup world, and specifically startups at your stage, as well as the climate sector. And when it comes to FP&A, which is more of an art than a science, it’s even more important to hire someone who is mission oriented, thinks creatively, has seen comparable businesses before, and knows what questions to ask.

2. Can they bring extra value?
If your CFO will be more embedded in your business, perhaps spending 50% of their time there, it’s worth taking on someone whose expertise extends beyond finance, and can add value in another area such as operations or HR. This isn’t a hard requirement, but can be a good value add.

3. Ask for a client list
Don’t ask for reference calls - no one wants to force their customer to do a call for them. Instead, ask what industries the CFO has worked in, and for a client list, which act as testimonials on their own. If you know their clients, feel free to reach out directly, but just be mindful of their time.

4. Think about where your gaps are
While accountants and fractional CFOs add a ton of value, the relationship won’t be hands-off for you or your team. Do some introspection about your team’s strengths and weaknesses, as well as your own level of knowledge and interest when it comes to these conversations - if they’re low, then finding the right fit is even more crucial, and you’ll likely need to spend more money on hiring a CFO who’ll engage more deeply in the company and take the burden off you and your other teammates.

How to get the most from hiring a fractional CFO

1. Commit to regular check-ins and timely responses to asks
Regardless of how well accountants and CFOs know your business, they’ll still need your input on a regular basis. Whether it’s helping with unknown accruals, answering questions about lines on the balance sheet, or getting your input on model assumptions, you’ll need to be involved. Plan for this; for example, anticipate at least 1-2 hours of responsibility to review accounting information every month as you close the books with your accountants and your CFO team.

If you commit to a weekly 30-minute check-in with your fractional CFO where they can provide critical updates and get the answers to questions they need to move forward, that's even better, and it will mean they need to ping you less frequently throughout the week to accomplish their work.

2. Help them understand your business
To best serve the financial needs of your business, fractional CFOs first need to understand it. That means they need to be entrenched in it as much as possible, so give them access to your Slack channel, invite them to your all-hands meeting, and let them be a fly on the wall in your weekly leadership meeting. This will give them the visibility and context they need and minimize the number of questions they’ll have to come to you with and make better recommendations regarding your business.

3. Spend time building good systems
The better the infrastructure you set up to document the things that affect your finances, the more you’ll get out of hiring a fractional CFO. They’ll be able to engage more deeply if you’re proactive about things like keeping your customer contracts in one place and regularly updated. Hiring the right person is just one piece of the puzzle - you also need to have the right systems and processes in place. If you’re unwilling to do so, you’re wasting your money, because they won’t be able to perform at their full capacity.

Jon Schwarz started his career in the corporate world working for Gap Inc., but with a deep interest in closing the opportunity gap for low-income students and families, he quickly pivoted to education reform, where he spent the last two decades in executive team roles at venture philanthropy-backed organizations. After participating in Terra Do's "learning for action" course and Climate Vine (a curated membership community that combines elements of a continuous conference and an action-oriented lab), he pivoted again to addressing the climate crisis as his next professional chapter and currently serves as a fractional CFO and COO for seed to series A climate tech start-ups