The work I do finding exceptional CFO and Board Members for my tech and life sciences clients is not exactly steeped in numbers. It is more about communication and networking. Sure, there are metrics that I use to measure my business, but they are not nearly as important as the metrics that CFOs live by as they contribute to the companies where they work, e.g. increase in company value through driving innovation and efficiencies in all aspects of the business. But as we come to the close of 2019, it struck me that there are many important numbers that reflect the work of Arnold Partners and I’d like to share them here.
10 solid years Arnold Partners has been in business! Pretty cool. In that time, we have placed 70 CFOs for technology companies who have helped their companies increase in value by over $15B. I am probably undercounting that contribution because it only is a calculation of IPOs (Market Cap) and the M&A exits that have taken place with my placed CFOs. Of the 70 CFOs I have placed 11 lead IPOs and another 18 lead M&A exits. Pretty sure the other 41 have increased the value of their companies through further fund raising or just top line growth but it is more difficult to measure. What does all of this mean? For one, the focus of placing CFOs for me is on creating value—for the enterprise that hires me, for the CEO I so closely work with, for the investors behind the enterprise, and for the CFOs themselves. 10 years also means that we have made a name for ourselves in the technology marketplace as a leading resource for top CFO talent. I am confident we will be repeating this blog on our 15th and 20th anniversaries.
That is our completion rate for the searches we have taken on in the last ten years. Why is that important? The retained search industry reports from publicly traded firms indicate their completion rate ranges from 70 to 80%. No one is in the 90% range, let alone almost 97%. This means that we complete our commitments to our clients. The large search firms charge 100% of their fees but only fill 75% of their engagements. Not here. We are in it to win it AND finish it for our clients. A related number is the “stick-rate” of our placements. Just finishing is not enough, we want to make sure the CFO we place is still on the job 1, 2, 3 years after accepting the role. And they are. Of our 70 placements, only in one case did the CFO not last. So that is a 99% stick rate.
Is it simply the economy or are we getting better? Or word of success getting around? We completed 9 CFO searches this year up from an average of 7 in years past. Our time from inception of search to completion is also improving, from 115 days in 2018 to 103 days in 2019. I suppose if the economy tanks the demand may not be as robust for search services, but we lived through big downturns before. We are going into the new year with an active search and one more agreed to kick off in January, so maybe 2010 will bring us to 10 completed searches!
On a personal note, I celebrated my 30th wedding anniversary with my wife this year. If you want to put a strain on your marriage, triple your mortgage and then tell your spouse you want to start your own business! The truth is I could not have done this without her. She is the silent partner in Arnold Partners. Well, not silent with me. She kicks my butt and keeps me going and keeps me measuring the business. If we are not getting better and faster and keeping clients happy she will let me know about it. I am blessed to have her unyielding support. She is my CFO!
That is how many people this blog is being sent to via LinkedIn. Thank you all for your support over these last few years. I could not make my world turn without all of you! I wish you all a very happy Holiday season and an exceptional 2020!
If you are looking for exception CFO or Board Members in 2020, please shoot me an email at firstname.lastname@example.org.
CFOs play a vital role in the scaling of any business. Young technology businesses however pose their own unique challenges. Coupling those challenges with hypergrowth results in extraordinary demands on the management of a company. First coined by Alexander V. Izosimov in the Harvard Business Review in 2008 Managing Hypergrowth, “hypergrowth” refers to the steep part of the S-curve, where industries and firms grow at an explosive pace. Hypergrowth businesses rapidly expand with compound annual growth rates (CAGR) that can exceed 50%, and in some cases even above 100%. This means hypergrowth companies need to insure they have the right people and systems in place to support such high velocity, so they do not go off the rails.
At the same time, the CFO role has extended its reach into every corner of a company. In most companies the CFO, more than any other executive, is a true business partner to the CEO. Therefore, as hypergrowth companies work at a frenetic pace to meet the many challenges, chances are the CFO will play a major role. So how can CFOs effectively expand their influence and add value in these hypergrowth technology focused environments?
In many companies, CFOs are being called on to play a bigger role in setting strategy. The CFO’s traditional role as steward, operator and catalyst now includes a large dose of strategy in addition to the more traditional role that focuses on core competencies such as accounting, tax, financial reporting, internal controls, budgeting and forecasting, investor relations, fraud awareness and prevention, risk management and corporate governance. This was certainly the case in some of my previous roles as CFO where I was responsible for the Strategic Planning function. In order to expand their skill set, CFOs must therefore move up the value chain from being stewards of compliance to becoming strategic executives.
Developing a strategic view requires gaining a holistic understanding of a business and starts with understanding the product value proposition.
- Why are customers buying the company’s products?
- Does the company have a repeatable solution that is solving a clear pain point?
- Are the unit economics self-evident, sustainable, and based on relevant metrics?
- Where is the company in the product adoption lifecycle?
- How does the company aggressively extend its product relevance to rapidly gain share?
- How can strategic M&A further accelerate share penetration by filling in product gaps?
The most effective CFOs can serve up cogent, actionable answers to these critical questions. While this does not mean the CFO needs to be an engineer or a technology guru, it does mean the CFO should understand what is driving top line revenue, the core of any hypergrowth business. Even if there is a separate strategy function reporting into the CEO, which is not uncommon, the CFO should engage with the strategy team and understand the competitive dynamics and clear choice the company has made to either disrupt an industry with entrenched incumbents or pioneer a new market. Developing this understanding is crucial for finance leadership to play an active role in making decisions on capital allocation.
This includes a more detailed roadmap for the specific areas where the company plans to innovate and the related cost drivers. For example, with software businesses, understanding the extent of “Tech Debt” may sound at first like it is beyond the scope of finance leaders. Tech Debt is cholesterol in the arteries of startup growth: the overhead associated with previous shortcuts being taken in software development which increasingly impede future scalability efforts. This is important for the CFO to consider because it directly impacts future costs which need to be accounted for in the financial model to allow a company’s software stack to scale. High growth technology businesses need to be prepared to make significant investments in product development to continue gaining market traction. This means a willingness by CFOs to move further out on the risk curve, recommending the extent of these investments, taken in the context of the company’s life cycle, maturity, addressable market, and liquidity requirements. Not adequately funding these efforts could restrain growth and create barriers to a fast-growing company achieving the critical mass required to hit a target business model at scale.
Partner with the Business, especially the Go-To-Market side
Even when product/market fit is established, hypergrowth won’t occur without a sound go-to-market strategy and aggressive actions to gain market share. Finance leadership should therefore look to build a strong partnership with sales leaders and strategize around how the finance team can add value to furthering revenue objectives. These conversations should yield decisions around efficiently scaling the footprint of the sales organization while entering new markets and the economics behind channel partnerships. In SAAS businesses, key focus areas include for example; ARR, MRR, months to recover CAC, net and gross dollar-based retention rates, upsell trends, churn and instrumenting all of your metrics for monitoring on a daily basis. Other areas to explore are whether outsourcing customer service functions should be considered to improve velocity and customer satisfaction. A sales compensation structure that properly incentivizes over performance and attracts the best talent is key, as well as insuring the right control framework is in place to properly vet deals, while avoiding bureaucratic gridlock.
While there is certainly still an element of Finance’s old-school command and control role, modern finance leaders should always be looking for ways to step outside the confines of internal controls and policy prescriptions to leverage their analytical skills to support sound decision making. I know my team has succeeded in this regard when the functional team leaders across the business view their FP&A partner more a part of their team than the finance org. In fact, although it may seem trivial, I encourage FP&A business partners to sit with the teams they support. This creates a culture of constant interaction and collaboration, especially in open office environments. In hypergrowth, decisions are being made daily in real-time, and finance leaders can add tremendous value cross-functionally by providing clear monetary guardrails to ensure both sustainable top-line revenue growth and a path to profitability are prioritized.
Drive Strategic Business Planning
Once a finance leader begins to develop a more holistic view of a business then they are in a position to more fully participate with the CEO and the rest of the management team in aggressively scaling a company. It is surprising to me how many high growth companies with substantial scale ($100M+) do not have a developed planning process. In fact, the CFO is in an ideal position to drive the bigger picture of hypergrowth strategy and the financial implications. This requires a shift away from just prioritizing short-term gains to insure there is a proper balanced with long-term value creation.
A well-designed planning process starts with the development of a Long-Term Strategic Plan, which sets the foundation for investment decisions that drive the product road map, global expansion and investments across every functional area, leading ultimately to next year’s operating plan. Whether the planning horizon selected is 3 years (my preference) or up to 5 years, the Strategic Plan sets the Longer-Term Strategic Goals and Key Results, and the resulting Financial Model Targets by year. A longer-term view is important because it provides context for investments made and decisions/trade-offs in the current year – that is, without a longer-term view, a short-term focus may lead to poor choices.
Communicating the results of this process to employees is just as important as the process itself. Employees need to understand where a company is heading, the priorities, key objectives over both the next several years and those tied to next year’s operating plan that everyone will be held accountable to deliver on. This is normally augmented with a Quarterly Review Process to assess progress against objectives, which is particularly impactful in hypergrowth companies as they iterate so rapidly. The necessary real-time course-corrections required to achieve escape velocity for technology startups places pressure on the CFO to manage a constantly evolving view of the future.
Invest in People
Scaling in virtually all cases means hypergrowth companies are growing headcount very rapidly. After operating in hypergrowth environments in which headcount grew from a few hundred to a few thousand employees in 24 months, I saw firsthand the many challenges across multiple dimensions this creates. Others have written extensively on effectively scaling headcount in hypergrowth environments. Claire Hughes Johnson, the COO of Stripe wrote a great article on how Stripe met these challenges, which I highly recommend To Grow Faster, Hit Pause. However, there are a few important points that CFO’s should consider.
First, the CHRO is a key relationship for every CFO, since people-related costs typically represent the most significant cost element in a technology business. Second, the CFO needs to weigh in on a plan for a cohesive organizational structure and strong leadership for functional groups, starting at the C suite level, cascading down through the director and manager level, in order to absorb and integrate new employees efficiently. It is not unusual to find employees thrust into positions managing big teams with little to no management experience. Finance leaders therefore need to recognize that resources are not only required for talent acquisition, but organizational development. It is easy to cut spending in this area in the capital allocation process. However, dismissing the need for these investments results in hidden costs by way of poor management, which can be significant, since issues get magnified when growing at high velocity. Third, preservation of the company culture is one of the largest challenges when adding people quickly, since new employees import values from their previous experience. Your culture therefore can be easily diluted without a deliberate effort to define your operating principles, and incorporating those principles into the hiring, onboarding and performance review processes. Getting this right directly impacts the operating performance of a hypergrowth company and its ability to hit financial targets and other milestones outlined in the company’s business plan.
Focus on scaling IT Systems and Processes
Proper scaling of a company’s IT infrastructure and business systems is of high relevance for finance leadership. Upgrading a company’s business systems, a non-trivial task, is very typical in a rapidly growing business. Smaller companies do not have the scale to justify these investments. IT plays a pivotal role in ensuring that management is receiving accurate data through business intelligence systems and that there is one source of truth. There is no worse feeling than flying blind when you are in hypergrowth mode. Inaccurate data prevents management from understanding the changing dynamics in a business, which can lead to significant issues not being surfaced and poor decision making. This in turn can lead to restrictions on growth and financial exposure to lower performance. These investments can be large and therefore they represent another area in the capital allocation process that finance leadership should weigh in on.
Operate Like a Public Company, even if you are not sure of your exit strategy
While many executives may complain about the rigors that get imposed on a business operating as a public company, these rigors allow management to more effectively run a business and the CFO must lead the charge. A strong internal control framework, and documented business processes are needed regardless of whether a company is planning an IPO or not, and are especially important if a company is in hypergrowth mode. In fact, when I look to build my teams, I always lean toward candidates who have operated in larger public companies, and have demonstrated an ability to think outside the box, because they have already learned the many disciplines required and have overcome challenges in creative ways. When in hypergrowth mode, I over-hire, projecting where I think the company will be 3 or 4 years down the road. Having the benefit of operating at larger scale results in being able to articulate a clearer roadmap for how to get there. With high growth companies, there is no time for learning on the job.
Operating like a public company also extends to other areas of corporate governance, such as the audit committee. Chris Paisley, the former CFO of 3Com and one of the more prominent audit committee chairs in Silicon Valley (including my audit chair at Fitbit), shared with me that as a CFO he viewed the audit committee as his board of directors. Frequent interaction between the CFO and the audit committee, especially the audit chair, results in strong governance and avoids surprises. Even though I am the audit chair of a public company, I always look to bounce ideas and ask for advice from my audit chair where I am the CFO. We are all constantly learning, and many audit chairs, especially those who sit on multiple boards, have a wealth of experience from other businesses that could potentially be applied to help a sitting CFO deal with challenges. When a company is moving at breakneck speed, executives need all the help and advice they can get, and the CFO is no exception, regardless of experience level.
Recognize hypergrowth and optimization can be conflicting goals
It can be very challenging to grow quickly and optimize at the same time. This can be frustrating for finance leaders, since optimization and efficiency are typically in our blood. When a business is already at a reasonable level of scale ($100M+) and growing at 50-100% a year, there are times that management needs to deliberately slow down and take a step back. Executives need to understand how the company is set up to scale a function or enter a particular market well before the sheer momentum of the business drags everyone along. The CFO can play a pivotal role by providing this insight along the way. Much of this relates to how ingrained the company’s operating principles are with the scaling of the organization. Are decisions being made consistent with those principles and are managers being thoughtful about consuming resources? While mid-course corrections are typically needed to tune an organization along the way that is growing very quickly, the CFO should recognize that trade-offs must be made, and that additional optimization may become a future focus when the business reaches more maturity.
Own the Path to Profitability
An enterprise is valued based on the discounted value of future cash flows. Taking ownership in the path to profitability falls on the shoulders of finance leadership. While it is expected that hypergrowth companies need to make large investments and will generate losses on the way towards a target business model, Wall Street has recently provided a wake-up call. Companies generating enormous losses that recently went public either entered the public markets at lower than expected valuations, or in some cases failed to do so at all. This is a signal to Silicon Valley companies that more financial discipline is needed and that the public markets will not blindly fund large losses without a proven business model featuring strong unit economics, and a clear path to sustainable profitability. Investors are particularly focused on unit economics and the resulting gross margin. A rapidly scaling top line is great, but strong gross margins reflect the strength of the customer value proposition and are highly correlated to valuation metrics. There is no level of growth that can overcome inherently poor unit economics. I have never believed that “growth at all costs” is justified, and in fact fast-growth companies that enter the public markets with either marginal losses or already generating some profit are handsomely rewarded.
When we took Fitbit public in 2015, we were marginally profitable and in our first full year as a public company our Adjusted EBITDA was just shy of $400 million. That was the result of a deliberate focus on scaling the bottom line along with the top line. In fact, Fitbit grew revenues to $1 billion on $22 million of invested capital, unprecedented for a consumer tech product company. Establishing that discipline early on creates a company culture that acknowledges financial performance should be a core focus for a business. That said, supporting the right investments is critical because building for the long term is the path to generating significant shareholder value. Installing business processes to properly review and scrutinize discretionary spending and investment sends a message across a business that management takes this responsibility seriously and will not be frivolous with financial resources. In all my CFO roles at late stage companies that were scaling, I personally reviewed in a weekly meeting discretionary spending above a certain level, which changed over time as the company grew. This gave me and my team great insight into company spending patterns and allowed us to ingrain a discipline around spending and investment decisions as we grew our Opex envelope.
While in this article I have covered the salient points that in my experience enable CFOs to step up and play a vital role in scaling a hypergrowth business, there are a litany of details below the surface in the actual execution. I have been privileged to work alongside phenomenal teams, and have learned many lessons along the way that allowed me to operate more effectively in the future, and I continue to learn. High velocity in a company can be both exhausting and exhilarating at the same time. Hypergrowth technology companies are disrupting industries around the world and changing the way we live. More than ever, CFOs can play a leading role in helping these companies achieve their potential.
Bill Zerella is an accomplished financial executive and business partner with over 30 years of results-oriented leadership and broad-based experience in both public and privately held, venture-backed software and hardware global technology businesses.
Bill is highly experienced in building teams and scaling hypergrowth businesses through an IPO and beyond, has raised over $2.5 Billion in capital and been part of teams that have created billions in shareholder value.
I had the good fortune of being raised in a family that put a high value on educating the whole person. What I mean by that is that academics were really important, but more important was instilling a sense of curiosity about all things surrounding us: culture, spirituality, community, art, knowledge, and athletics—not as a viewer but as a participant. My parents were not focused on getting their nine children (of which I was number nine) into the most prestigious colleges, they were focused on educating the whole person and getting us ready for the excitement and vagaries of the world. To this end, my dad pulled off a great barter trade with the Woodside Priory School; he taught first period algebra in turn for our attendance at the Benedictine College Prep School. The school’s philosophy dove-tailed perfectly with that of my parents. We received an exceptional gift of a great education and a true head start in life.
Lessons learned from the Benedictine Monks
The school was founded by Benedictine monks who had emigrated from Hungry to escape the communist takeover of that country following WWII. We learned a great deal about all world religions at the Priory. Included in our education was some exposure to The Rule of St. Benedict, which in fact is sort of a playbook on how 8th century monks should go about their lives. St. Benedict was the founding father of the Benedictine order and had numerous rules for his followers, many of which still have practical applications today. One has stuck with me in business and life: To always “listen with the ear of the heart.” There are complete books written about what this means, but in my world, I apply it to serving my clients and candidates in the best possible way.
Non-listening Consultant Gets Shown the Door
I met with a new CEO client a couple of months ago who had recently engaged a retained search for a CIO. I asked him what he liked and disliked about that process. I was somewhat shocked by what he said. He told me the search consultant asked a lot of good questions of him, but the search consultant seemingly did not listen to any of the answers and direction given. For example, the CEO wanted the consultant to find a fresh slate of candidates for his company needs, not just re-use his existing candidates who were not hired in his last search. But this was exactly what the consultant did. Huh? The CEO decided to part ways with the consultant.
Listening with the Ear of the Heart
As a CFO and Audit Committee Member search consultant, I would argue that listening effectively to our clients and candidates is the most important thing a search consultant does. Second only to asking incisive questions so we can gather the truth and make excellent lasting matches. This all starts in my mind with “listening with the ear of the Heart.” I do not mean this in a religious way, rather just opening yourself up to the person speaking, having both empathy and sometimes sympathy for their words and experiences. It is not just taking notes and deciding what they really mean based on assumption. It is not just hearing and writing, it is looking for the meaning behind the words they choose. It is feeding back their words to make sure you really understand what they said.
During our discovery interviews with clients when kicking off a Board recruitment process or CFO search process we receive a lot of information. We circle back with the CEO after meeting her team or get back with the Chairman after meeting board members to make sure we listened deeply and understand clearly what the client needs and wants. Of course, we also chime in and offer guidance where there may be confusion or differences of opinion.
The CEO client I referred to earlier has an affinity for vocabulary and etymology, which I share. We got into some pretty funny discussions about words, where they come from, and the importance of choosing words thoughtfully when explaining ourselves and our companies. In writing the CFO specification for this client I was very careful to use many of the exact words he used in describing what he wanted in a CFO and how he characterized his company culture. This is listening with the ear of the Heart—listening and understanding the words and applying them to make a match between the management’s intentions and the intentions of prospective executive hire.
Making Matches that Last
Some of my recruiting friends say what I do must get boring, just placing CFOs and Audit Committee members. Au contraire. No two CEOs are the same, no two CFOs are the same. It is all in the subtlety of language, both verbal and non-verbal. The only way to make a good match is to really, really listen. Then take those words to heart and re-use them not only in writing a specification but in interviewing and presenting. This will result in a match that will last. I would argue that the only way to do that is to listen with the ear of the heart. Thanks Dad, thanks Priory, and thanks St. Benedict; our placed CFOs have an average tenure over five years! Now that is making matches that last.
If you are seeking a financially minded Board Member or CFO who listens deeply and delivers lasting results, thanks for reaching out to me at email@example.com.
Last week I had the privilege of attending a panel discussion about Corporate Board recruitment and strategies for securing a Board seat put on by the Bay Area HR Executives Council, a SHRM affiliate. The event was well attended and the panel, comprised of two CHROs and an executive search consultant, was lively and informative. Here are some of my takeaways for those CFOs wanting to gain a Board seat and for companies thinking about recruiting Board members.
Considerations for Board Seat Seekers
First off, it was pointed out that there is a great deal of information available in the public domain about corporate governance and educating oneself on what it means to serve on a Board. I meet a lot of CFOs who want to be on Boards, but the panel wisely pointed out that careful consideration should be taken before committing oneself to a Board whether it be public or private. Basic questions to consider: Why do you want to be on a Board? What are the liabilities? What is the time commitment? What do you stand to gain? What do you have to offer? How long of a commitment are you signing up for?
A couple of resources were mentioned by the panel to help address these questions; shoot me an email at firstname.lastname@example.org and I will share them with you.
Trends in Board Composition
One of the interesting trends taking place within public company Board recruitment is not only gender diversification (I wrote about this topic in a previous blog, “Gender Diversity on your Board of Directors and California SB826“), but also the diversification of professional backgrounds making up public Board seats. It used to be that Boards were made up almost entirely of current and former CEOs, but this is no longer the case. According to a report issued by Spencer Stuart, former and current CFOs made up just 12% of Board composition in 2017. The need for gender diversification today is hand-in-hand with the recruitment of more CFOs, CIOs, CMOs, and CHROs on to Boards as the issues public companies face become more complex and nuanced. The need for experts in a variety of subjects is now more important than ever before. One of the most talked about issues at Board meetings was the topic of “financial talent succession planning.”
So, this sounds like good news if you are a CFO wanting to join a Board, right? Well, the truth is, it is not easy. For one, there are only about half the number of public companies in the US today as there were in 1996. (According to the WSJ, in 1996 there were 7,322 domestic public companies and in 2017 there were only 3,671). Also, as the Baby Boomers go from being active C-suite employees to wanting to sit on Boards, the sheer size of that generation has created the largest number of competitors for those fewer seats. People currently sitting on Boards are generally loath to leave them for better or worse, making turnover rare. While some strategic and legislated elements are creating more demand for diversity of Board membership, clearly the demographic winds are not in a first-time Board member’s favor.
Are Companies Seeking a Purple Squirrel?
From the viewpoint of a consultative executive recruiter and Board of Directors recruitment firm, there is also more at play. When we partner with a Board and CEO to help attract a new member, the diligence process is very deep. We really need to understand the Board dynamics and what are the missing pieces to complement existing members. From there we reconcile with the Board and strategize on industry factors, competitors, foreseeable changes in the technical landscape in terms of bringing in fresh perspectives. We collaborate and determine a list of possible target executives on whom we should concentrate our efforts. Many times, this brings into play a “Moonshot” approach to attracting / recruiting Board members. My point is when we conduct a Board search, while there may be many prospective people who “want to be on a Board,” there are typically very few candidates who will meet all the criteria the client and I have laid out for the role. We are not, in the words of one panelist, seeking a “Purple Squirrel” but rather a candidate that meets a bar that is just high, specific, and written with purpose and thought, which limits the number of appropriate candidates.
Suggestions for Board Seekers
I am not trying to douse your dreams of being on a Board. The panel had some very good advice and insights on some practical ways to make yourself more attractive. One thing you can do is to seek an unpaid ‘Board Advisory” role. An incubator would be a good place to look for these roles. If you can land some Advisory roles they may grow into a more full-time Board role if the company is able to get off the ground. Another idea is to be an Angel investor; nascent stage companies might add you as a Board member/investor. Finally, look for those companies that may be a bit damaged or lacking in some k