I recently had the pleasure of interviewing Eric Mersch, a partner at FLG Partners. His firm is the leading boutique CFO consulting organization for technology companies, the market segment that is also my bailiwick. I have known Eric for 15+ years, and we have collaborated numerous times to deliver high-value CFO leadership to CEOs and Boards.
Eric and I had a lively conversation about his new book, Hacking SaaS: An Insider’s Guide to Managing Software Success. It is based on his 10 years of experience exclusively focused on helping SaaS (Software as a Service) companies drive and measure growth. You can watch a short video of this interview at this link on my website. The video will go live on September 19th.
He and I had a lot to talk about because of our shared interest in the wonderful world of SaaS. Arnold Partners has placed CFOs at numerous SaaS companies, including Houzz, AuthID.ai, OpenGov, Talend, Adaptive Insights and Visitpay. During our talk, Eric and I discussed the nuances of SaaS – Vertical vs. Horizontal, B2B vs. B2C, Enterprise vs. SMB, etc. With this overlapping knowledge of the industry, the chat was both reaffirming and educational.
Getting down to the real nitty-gritty of SaaS
Eric’s book focuses on both technical and business aspects, equipping readers with a well-rounded understanding of what it takes to thrive in the competitive world of SaaS.
It combines practical advice, strategic insights and real-world examples to guide readers through various aspects of SaaS management, from driving sales through Go-To-Market strategies and customer engagement. It is geared to a wide range of professionals including investors, entrepreneurs and business executives working in the SaaS industry.
Key in his book is an extensive glossary of SaaS-specific terms, their meanings, how to create and calibrate the various SaaS metrics. Some will be familiar to folks outside of SaaS such as CAC (Customer Acquisition Cost), Net Retention Rate, Lifetime Contract Value, etc. But Eric goes deep on all these measurements; he shows the reader the way to implement them, their meaning and how to improve them to drive SaaS success. The book is a valuable reference resource for any finance professional.
Where to purchase Hacking SaaS: An Insider’s Guide to Managing Software Success
Hacking SaaS is available on Amazon in eBook, paperback and hardcover formats. For more information about Eric, visit: linkedin.com/in/ericmersch/
Join us October 4, 2023 for an Arnold Partners Webinar on Executive Presence
Please be on the lookout for an upcoming invitation from me to join a webinar on Executive Presence that I will be hosting with Karen Tiber Leland, founder & president of Sterling Marketing Group. It will take place October 4th at noon PDT and limited to 100 participants. If you see this note and want to be included, please email me at moc.srentrapdlonra@divad with subject line: Webinar. Thanks for your interest, looking forward to seeing you soon, Dave
There has been a sea change in the role of the CFO over the last few years. The CFO is a business partner to the entire C-suite and a co-leader of the company, leading enterprise-level change initiatives that touch on every aspect of the business. Think of systems implementations, use of AI, pricing, change of business models, etc. The CFO of today understands the vision of the founder/CEO and helps crystalize that vision into a culture and a workplace that make it a reality. The result is an enterprise that is in a stronger position to empower and enable the company to achieve its goals. As we face increasingly choppy economic waters and higher cost of capital, these are important changes that will affect both hiring and retention of CFOs.
Direct quotes from the last three Tech CEOs who engaged us to find them a new CFO: From a manufacturing company: “We need an operationally oriented CFO.” From a tech-enabled service company: “The CFO will run all the traditional finance and accounting functions, but we will also have them running our business operations unit where the majority of our headcount resides.” From a robotics company: “I need the CFO to run all the finance functions as well as Investor Relations, but just as important in need them to drive sales ops and sales support.”
Enterprise risk management under fire
CFOs are taking a leadership role in several areas not traditionally associated with finance and accounting including risk management, I/T and sales operations. One of these areas undergoing significant change is enterprise risk management. Risk is generally something that a CFO has had exclusively under their domain. However, as the definition of risk has changed, as within cyber security for example, the CFO must now take an active role with the CIO to mitigate this type of risk – and report to the Board about what actions are being taken to keep the company safe from data breaches, maintain customer information security, protect intellectual property and avoid ransomware threats.
Supply chain entanglements
In the recent past, the whole area of supply chain was an afterthought and humdrum, but not anymore. A purchasing manager would likely bring issues to the CFO’s office in very rare cases. However, the supply chain issues that hit very hard year two of COVID definitively affected the role of the CFO. They are now actively dealing with suppliers and securing supply certainty. When key components cannot be acquired, or when work from home negates the ability to produce goods, the CFO is going to be front and center. This may be just a blip in time, but the importance of securing supply chains has become a more prominent bullet item on the CFO’s checklist.
A recent real-life example of this shift shared with me by a CFO client: Pre-Covid, a chip the enterprise uses in their telecom equipment was generally less than a dollar. During the height of the chip shortage, the only place they could purchase these components was on a spot market for $1500 apiece. No purchasing manager is going to make that decision! The CFO and CEO purchased the parts. Certainly, the chip market has returned to some sense of normal, but the lesson has been learned.
Accounting becoming its own beast
Another change in the CFO’s organization is the constantly demanding and shifting world of accounting and compliance. We are seeing companies hire Chief Accounting Officers much earlier in their growth cycle than ever before. Why? Because the role of the CFO is becoming more operational; Boards and CEOs do not want their CFO getting bogged down in accounting minutia. This is coupled with the growing body of compliance issues (ESG for example). The CFO now needs a really strong accounting/compliance team earlier than ever. Rule of thumb used to be a company at $1B revenue would hire a CAO; now we are seeing these roles hired in pre-public ~$100MM companies.
Employee issues exacerbated
Another expansion in the CFO role is within Human Resources. Employee issues have been exacerbated by work at home, hybrid work environments and current tech layoffs. The efforts to keep employees content, engaged and motivated to fulfill the mission of the company can no longer fall to HR alone; these efforts need to start at the top with the CEO and CFO. The CFOs I work with are constantly on the front lines of employee retention, recruitment and overall job satisfaction as well as being a standard bearer for company culture.
These are a few examples of the expansion of the influence and responsibilities CFOs are taking on. All on top of the regular finance, accounting, treasury and tax roles traditionally under the CFO’s domain, which makes for recruiting and retaining these special professionals a veritable challenge in today’s highly unpredictable marketplace. Recruiting becomes more difficult because the list of must haves just keeps growing. Retaining these folks becomes a matter of balancing a strong team to support the newly added responsibilities as to not burn out a hard to replace executive.
As always, if you have comments about this, I welcome your input. Please comment on LinkedIn or register on my website. Cheers, Dave
About Arnold Partners, LLC
Arnold Partners is a retained executive search firm specializing in the placement of CFOs and Audit Chairs. Arnold Partners serves the technology industry on a national basis, both Venture Capital-backed and publicly traded companies. With 100% success rate in completing our CFO search assignments. In addition, our placed CFOs have well beyond the average tenure in their new roles. More information can be found at: www.arnoldpartners.com.
Anyone familiar with my work may note that I recently mused in my last blog in early October about trying to read the economic tea leaves. But as we flip the calendar once again, it is already time to reevaluate the Tech CFO marketplace for the coming year.
As fast as the economy seems to shift, this may indeed become a quarterly analysis – so, many factors seem to be at work, and global, federal and local economics all seem to shift the outlook from day to day. If the CFO market had a volatility index, it would clearly indicate we are in a very volatile market.
Optimism for CFOs In The Tech Market
My overall assessment for CFOs in Tech remains very bullish. Why? For one, there are not enough CFOs to meet the demands of the marketplace. As the role of the CFO continues to become more complex and broader in scope, it only puts increased pressure on companies to attract the talent they need to execute.
Secondly, even in an uncertain macro-economic time, the need to have a solid CFO in place is clearly more important than ever. Two items in the news recently brought this point to bear. One was the sentencing of Elizabeth Holmes to Federal prison for 11 years for fraud. The second was the instantaneous meltdown of the crypto exchange FTX.
What both companies had in common:
Very poor internal controls
These may be easy outliers in the larger picture, but when A-level investors who were invested in FTX get burned, you can count on the diligence into new investments going up and the demand to have a CFO coming earlier and louder from the investment community.
The CFO is the keeper of the assets and demand will continue for this critical role. Given the large amounts of dry powder the VC community has to put to work, they will likely be coming back to the investment table – just with a higher bar for corporate integrity and compliance.
What constantly amazes me is the level of ingenuity and reinvention in the technology field. If you sit back and look at what has happened across any element of human endeavor, you will see technology at work, constantly improving and changing the way we live and communicate.
There are big bets playing out that will either become major wins or epic failures. Twitter’s transition, for example, and Meta’s big bet on virtual reality is bold—but only time will tell on how much success they see. These companies provide a number of insights we can glean from the recent tech layoffs as well. Overall, the tech industry finds a way to reinvent itself repeatedly for the better.
And in the biotech and medical device areas, we are at the forefront of game-changing technologies that are scratching the surface of the market opportunities.
Software development is happening faster and faster and solving ever more complex problems. Tech may see some hits and the stock market has certainly seen better days, but I would not bet against the sector long-term. Bottom line? The need for CFOs will not be going away.
So, What To Do…
Many CFOs are hunkering down right now – the fear of change may be on the high side. If you receive a recruiting call, it is always my recommendation to return it or at least gather more information on the company seeking a new hire. Trust in this environment is paramount: trusting the recruiter, trusting the CEO and trusting the investors are all critical as you evaluate a possible change of seats.
Perhaps your own company is underwater on its valuation – not hard to believe when we saw private rounds priced at 100x revenue in 2021. True, these valuations will probably never come back, but that should not be the sole reason to run for the door.
Perhaps the next round will be more down-to-earth, and options will reset. We are starting to see this happening. If you are in a good place, your CEO and executive team are in good shape and have a reasonable path to success. Perhaps 2023 is just that: a time to hunker down and improve the position you have.
If you are in a VP role and hoping to find your first CFO role, perhaps it is an excellent time to take a thorough inventory of your skills and experiences and make a resolution to fill some of those gaps in 2023. My belief is that, barring some catastrophic event in 2023, the tech employment market in general-and specifically for CFOs-will be very strong by fall if not sooner. Happy New Year!
Reading the economic tea leaves and what it means for tech CEOs and CFOs
“It’s the economy, stupid.” That’s the line we always hear about elections and what matters most to the voting public. But hey, to CFOs, who are anything but stupid, it’s the economy itself that may matter most. Or does it? If the Fed continues on its rate-raising campaign, what will the impact be on the tech sector? So many things to factor in, here is my take.
Soft landing vs. recession?
Can the Fed pull off the intended soft landing they are aiming for? Or is the US economy headed for a full-on recession? From the looks of it right now, a recession next year is looking more and more likely. Europe is clearly already there, and it is going to be a long, long, cold winter with Russia squeezing the fuel lines. China is hurting in many ways, which does not help our tech sector at all. So, no matter what the Fed does, our largest trading partners across each ocean are pulling us down. Even if the Fed can pull off the softer landing, it still feels as if macro factors beyond our control will have negative effects on US growth. The rational expectation theory also comes into play. If all the business leaders say we are headed to a recession, as Jamie Dimon did this morning, it is can very well happen that it becomes a rational expectation and thus, a reality.
IPO drought, new funding and valuations in flux
The projected 74% decline in IPOs from 2022 to 2023 is testing the enthusiasm in the VC world. According to NVCA SmartBrief, There were $43 billion in venture capital startup investments in the third quarter, marking a nine-quarter low, a preview of the PitchBook-NVCA Venture Monitor report showed. Tho few VC-backed companies actually make it to that goal, the lack of a robust IPO market dampens overall funding. Talk of paring the portfolios is real, and winners and losers are certainly being chosen. While we rarely read of the start-ups on the cut list, they are out there, and layoffs will ensue. Clearly there are many private companies with valuations set in 2021 and 2022 that cannot be seen as realistic anymore. This creates a pause in the ability to raise additional equity capital for some of the unicorns that were the darlings of the pack just a few months ago. With the IPO market stuck on pause, some companies will clearly need to take down rounds to stay afloat. Almost no one wins in that scenario.
Major impacts for CFOs
The first thing that comes to mind is this is indeed the most critical time for tech companies to have the utmost confidence in their CFO. To navigate macro-economic headwinds, tech-specific funding challenges and potentially demoralized employees, it is no time to have a CFO you are second guessing. The CFO and CEO need to work in lockstep to manage these forces with a well-thought-out game plan and commitment to success. When everything is moving up and to the right, even a mediocre CFO can look like a hero. It is when the going gets tough that the truly exceptional CFO will show their worth. The best CFOs are also critical in the messaging to customers, investors and employees about the financial health and stamina of their company. The CFO must engender a sense of confidence about both the short-term and long-term prospects for the enterprise.
Time for pruning and right-sizing
Sadly, some of the hiring that took place in the frenzy of the last few years was probably not all successful and may now need to be pulled back. The CEO and CFO need to take a hard look at the organization and prepare it for what will most certainly be leaner in the next few months. The best CFOs do this decisively and with compassion. While rightsizing the organization to survive and thrive in a slower economy is not as thrilling perhaps as an ever-increasing headcount, it is what needs to be done. Having seen some companies slowly react with layoffs over a long period of time, it does not seem to be the best way to do it. Better to take the lumps and move on with a decisive and carefully crafted plan.
A silver lining
The positive news for CEOs and Boards is for the first time in many years, there is a softening in the labor market. This is affecting the CFO talent pool to some degree. In some private conversations over the last few months, some CFOs have confided in me that they would be open to new opportunities precisely because of the valuation issues mentioned above. Not to say that recruiting an exceptional CFO has gotten easy, but I can say that the call-back rate is noticeably higher this fall than it was last year. While economic uncertainty can cause some folks to hunker down, others may see the opportunity to make a strategic change.
Next up, the hybrid office – or not.
If you are seeking a CFO for your VC-backed or Public company, please feel free to reach out. I also welcome your comments on my blog. Thanks, Dave
In every job description for the role of CFO I have ever written, there is a bullet point about the character of CFO as a person of “uncompromising ethics.” People may consider this a given – or just another generic job spec, but it is a core quality for a CFO. Below, I will dive into what this means. But first, let’s take a real-life example when this characteristic is put to the test. Particularly when it is challenged by the CEO!
Recently, a CFO shared with me a story about his CEO. They were in a Board meeting and the CEO was being challenged on why the revenue had been “soft” in the last quarter. This company has a high concentration of revenue from a small clutch of customers. The CEO attributed the lack of sales to a lag in product development that was slowing their ability to deliver and implement their software. Sounds feasible. But in truth, one of their largest customers was actually very unhappy with the product and had not renewed their license. The CEO was working very hard to woo the customer back, but at the time of this Board meeting that effort had not shown results. The CEO may have believed that the customer was not happy because they did not deliver the product on time, so perhaps he even felt he was telling “the Truth.” What is the CFO’s obligation at this moment? The fact at this moment is that the customer did not renew. It was a hope that the CEO could return them to the fold.
The CFO could have taken one of two approaches if the CEO was in fact aware of the real reason the client did not renew. At a break in the meeting, he could have taken the CEO aside and suggested that he take a more aligned approach of communication with the Board to set the record straight. This would not have kept the CEO from being on the spot in real time in front of the Board, but it would have given the CEO a chance to reconsider his explanation of why the revenue was soft in the quarter. This is a very tough spot to be in for everyone, CEO, CFO, Board. Another approach would seem more harsh, but equally respectable. The CFO could have said directly: “You know why that key customer did not renew. If you are not going to come clean, we can talk about my resignation after the Board meeting.”
It’s About Ethics, All the Time
Uncompromising ethics means doing the right thing when no one is looking. It also equally means doing the right thing when everyone is looking. For a CFO, this means keeping the entire enterprise on the up and up. The CFO must be the one person who keeps the mundane issues of accounting on the level. She must keep the enterprise aware of and safe from undue risk. The CFO is the one who must keep the company’s management team focused on its long-term strategy and not let a multitude of shiny objects distract from what is really important. The CFO must be the keeper of the truth.
Another CFO told me a story of how his CEO went around him on an important contract negotiation and talked with the Controller about how to book the deal. This booking would have been outside GAAP. This was a private company in the most stringent of definitions. The company had no outside investors and a Board of the CEO’s picking, but none the less it was a sizable company with ambitions to be a public company one day. The CFO actually called me about what to do. Flattered to be of council, but also uncompromising, I told him that if the CEO were to complete a transaction that was neither GAAP acceptable nor ethically palatable, the only thing to do was to resign. For me, the market would find out about this eventually; perhaps a year down the line when the S-1 was being drafted or even sooner when the company’s annual audit was conducted. What outcome would that have for the CFO? Clearly the CFO would be thrown under the bus for accepting a deal that was not above board. Going along with a wrong is a wrong in itself, particularly for the Keeper of the Truth.
Shades of Gray
Hey, there are hundreds of gray areas in business. I am not naive. But when it comes to doing the right thing, the CFO needs to be the person in the room above all who stands up for what is right. Right? I’d love to hear from CFOs who have been faced with these sorts of dilemmas and learn how you handled them. Perhaps my suggestions are too draconian. My sense is we are headed to a tougher financing environment and an economic slowdown (my next blog!), which will only put more pressure on CFOs to bend the truth. Let’s team up to make sure that does not happen. Shoot me an email at moc.srentrapdlonra@divad and we will get the conversation going, or leave a comment here on LinkedIn or both.
Dave Arnold President, Arnold Partners, LLC Strategic CFO and Board Recruitment
There has been a lot of talk in recent years about using artificial intelligence and machine learning in technology. In fact, many of our clients at Arnold Partners in Silicon Valley and beyond employ these tools in a variety of applications to help their customers outsmart the competition. Within the recruitment industry, there has been talk of AI and ML potentially replacing recruiters all together. I am happy to report that AI is being deployed by Arnold Partners as an enhancement to our recruitment services – not a replacement. How so?
One cool thing about being in Silicon Valley and serving tech clients is the exposure we gain to cutting-edge technologies. We make it our practice to keep abreast of what’s coming down the pike and applying technologies that are applicable to the recruiting industry. For one, we added AI capabilities to help uncover talent for our clients. This will help us continue to win the battle with the Goliaths of the recruiting industry: Spencer, Heidrick, Russell, Egon and Korn aka SHREK and will clearly separate us from other boutique firms who do not embrace technology platforms to enhance their client interface. (I did not coin this acronym; my long-time, friendly competitor Cliff Scheffel was the first person to share it with me.)
Powering up with AI
Utilizing the amazing powers imbedded in the AI tool provides unprecedented efficiencies in uncovering passive and hidden talent. This means more refined and targeted prospect lists and potentially much faster turnaround times for our clients. However, it does not translate into the irreplaceable human process of turning a prospect into a candidate!
In the last two searches we have completed, the art of getting a CFO to the client meeting has been on full display. Through deep listening to the candidate and shaping the client opportunities appropriately we were able to get the meetings initiated. There are a whole lot of “no’s” we hear as recruiters. “No, I’m not interested in making a change right now” is the most common thing we hear; I would say we hear 20 “no’s” for every “yes” or “maybe.” But what, if through a bit more dialogue we could get those “no’s” to a “maybe” or a “I’ll take a look”? There is no software out there that can do that. I further posit that getting a CFO candidate to “take a look” is even more difficult than getting the C-suite to do so.
Delicate art of persuasion
By combining the cutting-edge abilities of AI and ML with the decades of experience in the delicate art of persuasion, we are not only keeping up with the SHREKs, we are winning. Just like David took down Goliath by being more nimble and by utilizing the right tools, we are doing the same by integrating the right technology into a well-honed recruitment process for success. Our tool was developed at Stanford and the company is still in stealth mode. As an early adopter of their solutions, I will be placed at the front of the line as new tweaks and improvements are made to the platform, further enhancing our competitive advantage.
It is an exciting time to be in the recruitment business. Things are changing; some things will stay the same. But, as I wrote in my last blog, we have to constantly be learning. While there is a steep learning curve with this new tool (it could still use a lot of work on user interface). But for me personally, by mastering and utilizing this new software, I am confident it will add another arrow in our quiver to stay one step ahead of SHREK and perhaps even other boutique recruitment houses who do not adopt and learn in the fast-changing world we all operate in.
No way am I going the way of the dinosaurs!
If you would like to learn more, shoot me an email. In meantime, happy recruiting! Dave