People

How to Be CFO of a Venture-Capital Firm

Foundation Capital's Gail Haney doesn't spend much time on financial matters. When she does, the job is both similar to and different from other CF...
David McCannApril 28, 2015

While the title of CFO is almost ubiquitous across organizations of every type, what’s required to perform the role may appear to diverge radically between, say, a manufacturing-industry finance chief and one at a venture-funding firm.

Gail Haney

Gail Haney

Just like her peers at manufacturers, Foundation Capital CFO Gail Haney prepares GAAP financials, is heavily involved in operations, and has a deep understanding of both customers’ and investors’ needs. The differences are in the details: the sole audience for the financials is the investors (not analysts or regulators) and her customers are Foundation’s partners.

Haney has been at the firm for 16 of the years it’s been in business and finance chief since 2007, making her a good source for insights on just what the job entails at a venture-capital firm. Following is an edited discussion she recently had with CFO about that.

How Startup CFO Grew Food Company 50% YoY

How Startup CFO Grew Food Company 50% YoY

This case study of JonnyPops’ success highlights the unusual financial and operational strategies that enabled rapid expansion into a crowded and highly competitive frozen treat market. 

How is the finance department set up?

There is myself, a director of finance, an accounting manager, and two part-time staff accountants who work 24 to 30 hours a week. But preparing financials and making capital calls and things like that aren’t what we do day to day.

Along with our chief operating officer, Gene Trainor, we’re in charge of the entire office and managing our 37 employees, including the partners, and the partners’ priorities. We work on everything from human resources to IT to business development.

What does managing the partners’ priorities entail?

For instance, if we’re opening a new office someplace, it’s “Gene and Gail, go do it.” If we’re deciding what systems to put in place, it’s “Gail and Gene, go figure out what our best options are and propose something, and go do it.”

Another example: to the extent we have public holdings, our job is to get the proceeds of those companies into the hands of our investors — our limited partners who invest in our experience in finding the best entrepreneurs and most exciting businesses to invest in. By public holdings I mean stock in a startup we own that’s gone public, or a portfolio company that was acquired by a public company where we receive stock from that company. The disposition of these securities is important to our investors, and it’s near and dear to our partners’ hearts, because it’s generally their babies that we’re unwinding.

How do you account to the investors for how you’re using their money?

There are quarterly financial statements that are fairly typical of what any CFO would have to prepare. They’re GAAP financials with balance sheets, P&Ls, cash-flow statements, and in our case a schedule of investments. We tell the investors what we’re valuing the companies at, what the cost is, and what’s been realized.

Each limited partner has a share in that based on the amount they’ve committed to the fund. Think of it like a bank statement with more detail — how much the limited partner originally committed to the fund, any income and expenses that have been allocated, any appreciation that’s been allocated, together with an ending balance.

The income statement shows expenses, like audit and legal fees, and if we’re valuing a company above what we bought it at, there’s a gain that flows through to the partners’ capital accounts. On the balance sheet, the assets are not [property, plant, equipment and] inventory, they’re essentially a basket of portfolio companies, valued at fair market value, and cash. The statement of partners’ capital makes up the owners’ equity section.

So the limited partners don’t see the financial activity of Foundation Capital as an entity, just how their money is being used and what it’s returning?

As a venture fund, we’re not required to consolidate our portfolio companies’activities or financials into our financial statements. Think of a brokerage account, where you buy 10 different companies. You have a cost, over time the value goes up and down, and you look at your statement each month to see what it’s valued at.

All venture-capital and private-equity firms are generally going to present the same information. Some will have more transparency into the individual companies, some will have less. The Institutional Limited Partners Association years ago issued a pretty lengthy document around all the transparency they think is “best practice.” We adopt a lot of that.

Are the limited partners the only audience for the financials?

Yes. We’ll let everybody in the world know who we’ve invested in, just not how much and what we’re valuing it at. That’s confidential information for the portfolio companies.

Really? It’s pretty common to see headlines and press releases touting a specific amount of Series A funding being raised, for example.

That is mostly a marketing or hyping tool for a larger company. For example, Uber wanted it out there that they’re a big company that’s going to be the giant of car service. Our investments are generally in more early-stage companies that are starting up with maybe 10 people.

How much money are you managing?

We have multiple funds at any given time. Say we have 20 partners commit $5 million each, so it’s a $100 million fund. Once we’ve spent or reserved that money to spend on portfolio companies, we’ll then raise a new fund. The size of a fund is variable based on a number of factors. We’re on Fund 7 currently.

Do your investments tend to be in companies that pitched themselves to you and just want to find capital wherever they can get it, or those that you targeted as great investments and that you may be competing for against other venture firms?

It’s more the latter. If it’s a hot company, VC firms are going after it. If it’s very fast moving, we’ll get all of our partners on board for a meeting with the company and let them know what our experience is, why we’re a better firm, and what we can bring to the table as far as introductions and helping the management team. It can be very competitive.

One of our competitive weapons is our term sheet. It’s a simple one-page document that gets the entrepreneur comfortable with all the terms without a lot of legal language that will just impede our bonding.

What kinds of introductions are you talking about?

Customer introductions, people they could recruit and hire for executive positions, other VC firms that might be good partners as well, relationships with banks and other debt providers, etc. We also will provide a partner for their board with domain expertise, and that partner will ask everyone within Foundation Capital to provide introductions.

In what domains does your firm have expertise?

We’re strong in financial technologies, so we have companies like Lending Club, LendingHome, and Motif. Also marketing technology, with companies like TubeMogul, Conviva, Localytics, and AdRoll, as well as mobile IT, with MobileIron, for example, and IT security, with companies like Venafi and ForgeRock. We built a deep domain expertise about 10 years ago around clean technology but are doing less and less of that because of the opportunity set that’s out there.

We talked about your marketing to portfolio companies. How do you market to the limited partners?

It’s a small universe out there, but it takes years of cultivation, of telling your story. You’re selling the skills and expertise of the partners and then over time trying to demonstrate that through a track record that’s consistently executed on over time. It’s very rare to get an introduction to an investor and six months later they end up investing. They want to get to know the story and the people, because they’re signing up with you for a long period of time. A fund is a minimum of 10 years, often as many as 15.

How did you get into the venture-capital game?

While in public accounting I audited all sorts of companies, from large public ones to small startups, software and construction companies, all over the board. I was fortunate enough to also audit a couple of prominent VC firms. The idea of backing awesome entrepreneurs and investing in them seemed very interesting, and in talking with their CFOs I realized that the role wasn’t just financial but also operational. I was able to find a position at Mohr, Davidow Ventures, or MDV.

How has Foundation Capital changed since you started working there?

They were on Fund 2 then and had 13 people, so it’s changed quite a bit as far as growth. It’s still the same down-to-earth firm with intelligent people who are great to work with, but there’s been a big shift in the speed at which decisions are made and how competitive the landscape is for investing in the very best companies.

Also, with the growth we’re focusing hard on people, processes, systems, and data. It seemed to be simpler back in 1999.