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In Silicon Valley, Hired-Gun CFOs Are in Big Demand

The flood of Internet start-ups is creating a lucrative niche for interim financial officers.

SAN FRANCISCO -- Doug Barry is a glutton for learning curves. As an "interim" chief financial officer over the last decade, Barry has lent a helping hand to dozens of start-ups in the wireless, software and medical device industries. In exchange for his services, Barry charges an hourly fee and often takes equity stakes in the companies he assists.

But these days, Barry is gorging on the Internet. He's got five clients -- all of them Internet start-ups backed by elite venture capital firms like

Benchmark Capital

and

Institutional Venture Partners

. "Lately that's all I do," says Barry, 54, who works with

David Powell Inc.

, a well-known executive search firm in Menlo Park, Calif.

Barry is an example of the hottest trend that's seized the Internet industry: rent-a-CFO. There's huge demand for CEOs and other top-level talent, but the hunger has been especially keen for CFOs because they're crucial in raising early capital and setting a start-up on the road to an IPO -- the golden ring of the new economy.

For more than a decade, Silicon Valley start-ups have occasionally employed interim CFOs. But in the last two years the torrent of Internet start-ups has boosted the demand for experienced, part-time financial officers to unheard-of levels. The rise of the rent-a-CFO has come amid concerns that the practice is pushing its limits.

"The whole concept has become acceptable," says Richard Brenner, president of the

Brenner Group

, a Cupertino, Calif., management consulting firm that has helped companies such as

Concentric Network

(CNCX)

,

Organic Online

and

NetGravity

(NETG)

find interim management. Outside of Silicon Valley, however, the practice is still rare, he says.

Before the Internet explosion, venture capitalists in a pinch knew they could hire an interim CFO to fill out the management team of a company they were nurturing. In these situations, VCs relied on a stable of friends and colleagues -- executives who were between jobs or nearing retirement. But over the last few years, as investors and entrepreneurs realized that part-time CFOs were a low-cost way to build a fledgling business that didn't require a full-time executive, the practice has become commonplace in the Valley.

"It's no longer just a stop-gap," says Brenner, who estimates that more than 50% of his company's 75 clients are Internet start-ups. "It's part of the culture."

"It's much like when Hollywood takes a hackneyed plot and throws a bunch of star power behind it," says Randy Komisar, a self-described "virtual CEO."

The advent of the Internet is accelerating the trend in two ways. Not only has the number of new companies surged, driving up demand for financial management, but the speed of the Internet is also forcing start-ups to use interim CFOs more frequently. Absent an interim CFO, VCs fear their Net start-up will fall behind the competition. Jim Breyer, managing partner of

TheStreet Recommends

Accel Partners

, a venture capital firm based in Palo Alto, Calif., says almost all of the companies in Accel's portfolio have used interim CFOs at one time or another to help them compete on Internet time.

"The intensity is largely due to the fact that companies have little time to build critical mass," says Breyer. "If we waited six to nine months for the perfect CFO we would not be building value fast enough."

The Critics Weigh In

Typically, the rent-a-CFO works with the start-up from its inception to right before it goes public, setting up accounting systems, credit lines, benefits plans and other basic financial systems. The Brenner Group charges its clients an hourly fee, and the rent-a-CFO gets a percentage of that -- usually $150 to $250 an hour.

Brenner estimates his firm takes equity stakes in 20% to 30% of his clients, but it rarely accepts equity up front. "We want their skin in the game," says Brenner. "Later in the process we may decide we'll trade cash for equity."

The practice of part-time CFOs has its share of critics. Some allege that start-ups often employ well-known interim CFOs to window-dress a lackluster business. "It's much like when Hollywood takes a hackneyed plot and throws a bunch of star power behind it," says Randy Komisar, a self-described "virtual CEO" who exchanges equity stakes in early-stage companies such as

NextCard

(NXCD)

. "We're taking a bunch of hackneyed business models."

Even the interim management firms themselves are noticing signs that the trend may be getting out of hand. The extreme shortage of full-time CFOs has forced Internet start-ups to consider using interim management during the IPO process. "We believe having interim on your road show is not a good thing," argues Brenner, who says he recommends clients find a permanent CFO before the company goes public. "If you're taking your company into Middle America, investors frown upon it. They don't quite understand the concept yet."

One recent IPO that transitioned successfully to a full-time CFO is

Marimba

(MRBA)

, an Internet software start-up. Marimba in 1997 hired Fred Gerson to become the company's full-time CFO in preparation for its April 1999 IPO.

Gerson, who took

Maxis

public in 1995, says his IPO experience was one of several key factors that led to his hire. Before Marimba hired its full-time CFO, Gerson says it had employed two interim CFOs, one of whom was Barry, who worked for a year at Marimba before handing off the financial reins to Gerson.

"A lot of the interim CFOs try to put systems in place but they don't have ownership when they go home at night," says Gerson, who has been with the company for a year and a half. "You're not going to put that person in front of investors."

Nor do companies want a CFO who will stay a while, perhaps even through the IPO, then take their money and run. "The last thing we want is to hire someone who cashes out with a quick hit and leaves the company," says Omar Amanat, president of daytrading firm

Tradescape.com

, which is considering hiring an interim CFO to help take the company public a year from now. For that reason, he says, "We may not end up doing it."

Amanat's reluctance underscores another perception of the interim management industry: that it can give way to a cut-and-run mentality. Interim management firms and CFOs bristle at that suggestion, countering that they provide a valuable service. "There are some people with short-term aspirations but I don't know what they're thinking," says Dave Fiore, a CFO consultant with the Brenner Group. "They're cutting their own throats."

Another problem: The crying need for CFO talent that created the market for rent-a-CFO in the first place is now growing so sharp that there aren't even enough interim officers. One venture capitalist says the huge demand for experienced executives has led to a decline in the quality of full-time and interim CFOs.

"It scares the hell out of me," says Roger McNamee, partner with venture capital firm

Integral Capital Partners

. "The compromises that you have to accept in order to grow on the Net are pretty huge."