How a Fractional CFO Gets a Software Company Ready to Raise

What We Need to Grow, Episode 068: What Good Looks Like. A Founder Talk conversation with Charles Solomon, Founder and Managing Partner of Centripetal Advisors. Cleaned for readability; the words are the speakers' own.

Caleb Pedosiuk: All right, Charles. Fractional CFO work: you started this in 2018, and it's doing really well. You're brought in as the outside judgment on some really big financial decisions that founders and others are making. A lot of people come to you because they trust you and your firm to help them navigate something that is very objective. Numbers are not subjective in that sense. Please introduce yourself and your firm, and share a little bit about what it is you're working on.

Charles Solomon: Happy to do it. Thanks, Caleb, I appreciate the chance to be on. I run Centripetal Advisors. We're an institutional quality, AI-powered finance function for B2B software companies that really, really want to scale. That means they're looking at how they finance their growth: debt or equity, and if equity, is it growth equity or more venture capital, with a higher growth expectation. They want to build a substantial business. And obviously the founders are thinking a lot about what their ownership is worth, how much ownership they'll have, and how to maximize those trade-offs to build the business they want and get the outcome they want, for themselves and for the other shareholders, the early investors and even the ones who are going to come on board. We're here to help solve that.

You talk about numbers being objective. We're posting a lot on LinkedIn now about how many little judgments you make even within metrics, in how you calculate them. Everything has a tinge of subjectivity, and it has to be relevant and tuned to the business. But we try to bring a lot of quantitative data based on performance, and that takes work to get to. Sometimes you have to clean up the books, in a pro forma way historically, so you have the data in a form where you can calculate certain metrics and compare them to what you're doing now and where you're projecting. So sometimes there's cleanup work. But often it's about installing the right measures. Getting the data right is no easy task, and then it's installing the right measures.

One of the things I think we do really well is that we're on top of a lot of benchmarks, so we can give someone a sense of whether this is good or not. Okay, maybe it's better than it was, but how does it compare to other companies? In the past year alone, frankly, we've talked to over 100 different equity investors and about two dozen lenders, on different deals for clients in market. So it's pretty easy for us to pick up the phone and ask, what do you think this profile of company would be worth, how would it be viewed, where would you see it fitting in the market today?

With the rise of AI and some of the results that have come from it, incredibly fast-growing stories, the market has changed a lot. The market for software businesses is very diverse, because the performance of software businesses nowadays is more diverse than ever before. So being able to hone in on that, find the right fits for folks, or recommend what would need to change for you to be a fit in a certain area, is all extremely important and valuable, and it's stuff we love to do.

Caleb: So how do you balance the two sides of the equation? You have conversations happening with family offices, individuals with capital, offices with capital, and you're also having conversations with founders and operators who are building companies and solving problems. How do you balance those two very different worlds?

Charles: They're complementary worlds. They're not entirely different. If you asked how I balance talking to tech founders and manufacturing leaders, that would be harder. And to be clear, we do talk to some family offices, but the majority of the folks we talk to are institutional capital: funds with LPs, traditional structures. We know them and we like working with them. There's room for family offices, but I have a bit of a bias, based on experience, toward traditional funds that are truly professional, have deployment schedules and goals, and are really buttoned up.

For the operator who wants to grow their business, they're probably going to need to hit certain milestones, or be in range of certain milestones and KPIs, to attract more equity capital, or certain other ones to potentially attract debt capital. So it's about helping guide folks. If you want to put $10 million on the balance sheet to grow faster, based on what you're telling me about market dynamics, customer demand, the product you need to build and the market opportunity, then here's what we need to show. We back-solve for that a little bit, or show what it would look like to solve for it. At the same time, on the fund side, you're constantly getting updated reads on what they're looking for, which are the things to back-solve for. And when you get close, you put the company in front of them: this is what you're looking for, and this group is meritorious. So it's about looking for fits, and guiding folks to fits.

Ultimately, here's one trap I think you're getting at that we want to avoid. We're not in the business of telling founders to make their business spit out numbers a fund will look at and say, great, I'll invest. Say you don't hire customer success for a while to get your margins up. That's something that's off in your model, and you get in market and a fund likes it, because you've cut some costs, you still have the growth, and everything looks really efficient. Then you get a term sheet and you're in diligence, and all of a sudden a couple of customers churn, because you didn't have those customer success people, all to make the numbers work. Then the whole thing falls apart and you're screwed. Or they write the check, the customers churn, and they're really upset.

So we try not to have folks game it that way. If you have a margin problem, we're certainly going to talk about how you could update packaging and pricing, rather than cutting costs. If sales efficiency metrics are not great, have we had a serious conversation about who's producing and who's not, and how we could deal with that? I think that's where it gets helpful, as opposed to, these are the ratios, these are the numbers. It always goes back to what the customer wants and what they're going to pay for, whether that's based on what they're saying or on what a CEO founder with deep market expertise is able to divine about market dynamics.

A lot of times someone says, I'm going to do all this and it's going to be amazing. Well, that's not realistic, because you would have performance so far outside the norm. Do you really want to bet your future on being a 0.0001% company, or do we need to come up with a plan that's more reasonable? And if we do, this is what our future looks like. That's a lot more of it. We're not in the business of helping companies game numbers, but we certainly want them to know what good looks like and what great looks like, and help them think about ways to get there if they're not already there. And if they're there, let's take credit for it and move on.

Caleb: So are you being introduced to some of these companies, or are they finding you? And then you'll take a look and potentially consider a fractional role for a period of time, and say, I think we could help. We would step in in this capacity for the next couple of quarters, or over a 12-month period, set a goal, and get the financial position and the offer situated in a certain way. Almost stepping in like a coach on a team, or a key player, or a trainer who says, I think we can actually improve in this way in preparation for an upcoming season.

Charles: It's interesting. We certainly look at the businesses, and we try to get some colour and some insight. Obviously, once we're engaged, we'll know the business a lot better. There's always, here's what we think we can do based on what we think we know, and then there's, here's what we really know, once we've gone deep into the data.

But I would say, look, if you're going to hire someone, you make that decision because they're a fit and they can add value for a reasonable period of time. I think of us the same way. You're going to hire us, and we're part of the team. That's why we're not going to charge you extra for introductions in a fundraising process. We joined the team, so our network should come with us. We're not going to price-gate like that.

Our bread and butter is two-plus-year engagements. Have we done shorter ones? Can we? Are there good use cases for finance talent to show up, make a difference and leave? Sure. But the firm is built on longer-term engagements, and we built a model that's flexible that way. We can go up to 20, 25 hours a week with a customer, and I think we're pretty good at what we do. I'm sure there are VPs of finance in this world who work 60, 70, 80 hours. How productive the marginal hour is at that point, I don't know. But I think in 25 hours you can do a lot of damage with our expertise, our experience, and some of the Python scripts we have to set up reports that we can customize, to get folks up and running on certain reporting faster and execute faster and more consistently, with more of the AI that's coming.

So it's not, we'll be here for a little bit and then we'll go. We try to stick around and maximize customer lifetime value by maximizing the lifetime of the engagement. The tough thing about short engagements is that for them to make sense for a firm like ours, or any firm, you've got to charge extra. There's a customer acquisition cost, there's only so much you're going to make on that engagement, and then you leave in three months and have to replace it. When you're going to work with someone for two, three, four, maybe five years, like we have with Megadata or Adventure, that's much more valuable to the firm. It makes things much more interesting, and we're able to commit and do so much more. With short-term work, you've got to price for their urgency and price for the fact that they need to be replaced, and I've certainly seen that. So we built a model where we can allocate the resources we need to serve folks really well, really give a VP of finance a run for their money, and hopefully save folks $100,000-plus a year, maybe more, and certainly some equity. That's what we want to do, and that's what we're good at.

Caleb: I'm curious to hear your perspective on the structure of some of these deals. You're no stranger to seeing deals come together, so you understand the role that capital plays. One of the things I've been thinking about lately, if we visualize it in a simple way: you have a VC or a financial institution with capital available, and a team that's looking for that capital and waiting on doing certain things until it's unlocked. They get funded, and once the funding comes over, the team allocates those resources to certain areas. Let's say 20% of a raise went to a certain category of work that a vendor would do, if the team didn't build the internal capability.

I'm curious to know what you've seen, or what's being done, where instead of the money changing hands from the venture capital to the team, and from the team to the vendor, vendors were engaged almost like a vendor venture capital engagement. From what I understand, this does happen in some instances with key talent. Sometimes leadership might take a role in exchange for equity or options. Or some development companies have said, we'll help you build the platform. How common is it for a vendor to come alongside a team and be factored into the options or the terms of an agreement in the same or a similar way that a venture capital team might be?

Charles: I would say the answer is: possible, and uncommon. The key thing that's not going to happen is a vendor being truly treated like a VC partner, in terms of investing in preferred equity and so on. But let's go through it a little, because we're certainly familiar with options and grants and different strategies to lower fees.

In terms of the money and how it flows, which is what you're talking about, I think the money is always going to flow from the VC to the company. I don't think the money's going to go to the vendor, depending on whether they perform. The money's going to go from the VC to the company. That's always step one, and the job of the manager always goes back to being a capital allocator. How do you allocate that money, and how do you allocate other resources? One of those, which you hinted at, is the employee stock option pool, which is negotiated in the financing. Usually there's a top-up or the creation of one, so now you have a certain number of options to issue. So it always goes back to the company first and foremost.

Now, in terms of a vendor being a potential investor, or being willing to take equity, the software development example is always a good one. That's still possible. There are vendors that are sometimes willing to take some equity instead of cash, and I'm happy to put my hand up: we can be one of those, when the engagement's right and the flexibility presents itself. We're also willing, as a vendor, to do things like buy secondaries from management, or even invest in a round. We're not necessarily going to be treated like a VC. Some vendors are savvy that way, but pretty few, and some of them, like lawyers, have certain compliance constraints. Some just don't have the bandwidth to think about it, or the guardrails. We don't have those constraints, which I really like.

So we do like investing in customers, because we know them extremely well, and we know them in the area that's critical to evaluating past performance and what the team has been capable of, which is usually an important part of diligence. Someone who's done a horrible job but promises a really good future is probably not a good opportunity to run down. So we like to use our seat to potentially invest in businesses when it makes sense, and even buy secondaries. Sometimes founders are happy with that: it's not a huge check, the fund doesn't need it, and they'd much rather have the marginal ownership with someone closer to their side than with someone who won't always share their interests.

Now, the one area where we can get treated like a VC, which is very uncommon, and I haven't seen it elsewhere, is that we've gotten board seats. Whether that's as a board observer, or, as at Adventure or Megadata, where I'm actually one of the three board members. Sometimes it makes sense to have someone who's financially savvy and savvy in the markets, and who may not be one of the original team members, where you'd otherwise have to put someone ahead of someone else and it's uncomfortable. You can solve a lot of problems by being a compromise. Would your IT vendor fit that bill? Probably not. I don't think another vendor is going to be that. But because as a vendor we're also a team member, and we sometimes have expertise and perspective other folks don't have, we can be really helpful when a business is led by people who come from the industry their technology serves rather than from the technology industry. So that's another example of where and how we can differentiate and add value in a unique way.

The other thing I would say about issuing equity to vendors: we see this a lot, and almost every time it gets done, it's because folks don't have a ton of money. That makes sense. It's a way to preserve cash, and cash is king. But they don't know how to do it properly, and there's always stuff to clean up whenever they do it, unless we're involved in helping them think about it. They're not aware of compliance: did we issue options, and at what strike price? They're not aware that if we say you can get equity on certain terms on a SAFE, there's still consideration, and now you have withholdings associated with that. You can't just give someone something. Gifts aren't allowed. So there are withholdings on your end and tax implications on their end, and people never get that stuff.

So there's always stuff to clean up. It always sounds easy: I'll just give you some equity. It's never that simple. It's a good thing to do if it saves cash. There are times where it makes a huge difference, and times where it aligns incentives. But there are compliance elements to it, and there can be legal costs if you don't know that stuff or don't have someone on the team who does. Almost always, when founders are doing this themselves, they're guessing at it, and then there's cleanup work down the road, and maybe some people are a little disappointed with what they get versus what they thought they were getting.

Caleb: Charles, really appreciate it. Last question, and if we can hit it in about 30 seconds, because I know out of respect for your time you've got a commitment. What would you say you need most to grow right now?

Charles: You know, I was thinking about this this morning. It's a good question, Caleb. I'd say the number one thing we want to keep working on, given our team and size, is sales process execution. We're getting more and more interest, so that's going well for us. But I've got to manage clients, I do hiring, and I've got to help with go-to-market and top-of-funnel activity. For me, it's making sure it's really easy to stay on top of all the different leads coming in through Slack or WhatsApp or email or phone calls and voice messages, all these different places. People say, I'll refer you to someone, and it's making sure we're following up and executing against the opportunity that's coming to us. It sounds like an easy thing to do, but when you're doing so many other things and some of them are very urgent, and with sales it's a tight window, you either pounce on the momentum or you don't. I think that's a critical area.

So that would be number one. Number two is the number of qualified opportunity conversations we book, which is another key metric. Not just general top of funnel, which can feel good, but true ICP top of funnel, with folks who are looking for that multi-year engagement and really want to ride with us.

Caleb: Very cool, Charles. Thank you.

Charles: Caleb, thank you.