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
Non-existent Boards
No CFO
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.
For CFOs, Caution May Be Prudent
CFOs should be extra cautious in today’s finance and accounting job market. The valuation issues I discussed in October are still in play. If you are a CFO making a critical choice about where to spend the next several years of your life, do your due diligence to ensure the new opportunity is stronger (overall) than your current role and make this decision carefully.
The Tech Market Wins Long Term
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
But first, some thoughts on the current business environment…
For those of you who follow me closely, you will note I have not written a blog in a long time. When Covid hit, it just did not seem to be the time to promote ideas about recruiting, hiring, and all things business that I cover in my blogs. What has been shocking to me is the pace of business…it has not slowed down at all for the tech companies we at Arnold Partners supports. Honestly, this has led to some degree of thriver guilt – to see so many fellow citizens (and in many cases very good friends) struggle in this K-shaped economy we are living in. In the direct world where I focus, the demand for CFO talent has never been greater. Tech IPOs are booming, which has a direct effect on the overall CFO market. As CFOs get drafted up into IPO companies, it frequently leaves a void somewhere down the food chain of the tech continuum. This has certainly had a welcome effect on our business and frankly has kept me from taking time to blog about this or that or the other thing. But now, following a brief respite, on with the show!
Continuous learning…
It is something we all muse about in both our personal and professional lives. Some of us actually try to do a bit of it…I still take a saxophone lesson every week, even if my skills seemed to have leveled off. I was taking Spanish classes when Covid hit, but those are on hold. It is especially important for me to always be learning. Whether a new skill or tactic, or perhaps even a whole new strategy around hiring.
I had an “Aha!” moment last year as I took on a fairly early-stage client needing a CFO. One of the clear mantras of the culture in the company was around continuous learning. Everyone in the company is encouraged and engaged in learning something new all the time. It could be how to juggle or how to improve listening skills. It does not matter as long as it is something outside of work that involves learning. When I met the CEO, I knew we were simpatico on that and immediately wanted to support him in finding an excellent CFO. (Which we did, and all went well!)
Learning a whole new approach to interviewing candidates…
The prospect of a taking a new tack for interviewing candidates was an entirely different kind of challenge. I mean, come on, I have been interviewing finance pros since 1992. I think I know what I am doing! Along came another client who had a VERY specific approach to the hiring process based on a book written in 2008. When they informed me of their dedication to this technique, I quickly got the book and read it from cover to cover. Three times. I went back with a highlighter to study certain elements of the process outlined. It was exciting. Some new ideas, some GREAT ideas and as it turns out, some really interesting learnings in the actual process with CFOs. Not as expected!
First, the positives:
The book gives a particularly good template to design a job spec that actually fits what it is you want to hire for. This may sound obvious, but I will tell you from experience, most companies take a spec off the shelf and maybe customize a line or two for their needs. By really thinking about what problems, you are trying to solve at the beginning of the process, it definitely makes screening candidates against a specific wish list of skills and experience for the exact needs of the client more effective. I have written about this before in a blog, “For CEOs and CFO Candidates: The Importance of an Exacting “Spec” in Executive Recruiting,” and the authors got it right.
The real aha in the book for me was around having various members of the interview team focus on different areas of expertise and skills of the candidates during the interview process. So often after a series of interviews candidates will tell me that everyone asked them the same thing. Or that they spent the first 10 minutes of the interview talking about something completely off subject such as a hobby. If there are six people on the interview team and each one spends 10 minutes talking about the same hobby, your interview team just spent a whole hour on it – not exactly productive! The takeaway is to have people on the team with specific skills or knowledge to hone in on those areas you are seeking in the candidate. Certainly, overall impressions are still made with each interview regarding communication skills, reasoning skills, presentation, listening, etc. So even tho each interviewer had a specific task, each contributes to the overall assessment.
The authors also offer a great litmus test to getting to a “no” on a particular candidate very quickly. Focusing on what the candidate’s recent former bosses say about them early on in the first call reveals whether or not their bosses have confidence in the candidate and will stand up for him/her.
Now the negatives:
The overall arch of the first five or six meetings as outlined in the book is heavily weighted to the company who is evaluating the candidate and offers very little opportunity for the candidate to ask any questions about the company, the role, or even the people they are meeting. In practice, this was a particular turn-off to CFOs. CFOs are data driven. They want to learn about and be sold on the opportunity as much as they like to show off their abilities to ask penetrating questions. We lost some good candidates that were totally turned off by this one-way approach. I think it may have something to do with the book being written in 2008. It was a buyers’ market for talent in 2007-2009. Not anymore. Not by a long shot. (Credit – when I gave the client this feedback, we altered the process a bit to give candidates an early opportunity to learn more about the company.)
Specific to my client, the first “real” interviews between the company and the CFO candidates after passing a 30-minute screen with the CEO were conducted by a very junior person on the staff. While this staff member is really well respected within the organization, the feedback from CFOs was basically they felt insulted and a real reluctance to continue the process no matter the outcome of the meeting. CFOs were telling me that spending an hour being grilled by a person with three years’ experience out of college sent a message that the company did not know what it was doing. (Credit – after a few of these meetings, the client heard the feedback and altered the process). I have another blog to follow this one about hiring a CFO and how much weight needs to be from “the team” (code for the people who would report to the CFO), the “executives,” and the CEO/Board. Stay tuned…
Conclusion on the book:
It was well intended. As with most business books there were a few good nuggets. I did take away some good learnings, both positive and negative. But to apply it literally to each hire was misplaced. CFO hires are unique. This hiring template was unique but the two were not really compatible. Fortunately, my client was open to feedback and we were able to alter the process and ended up making a great hire. If you want more details, please reach out…good to be back. More soon, Dave.
Without exception, my conversations with executives all begin or end with, “What strange times we are living in at the moment,” or something similar. No one seems to be able to make sense of the big picture right now. From what I have read, it is because we are not conditioned to understand events that have no clear timeline to conclusion. Almost all endeavors we embark on as humans have a delineated end — this pandemic does not. We are cautiously “opening” up while new cases of the virus continue to accelerate in many states, including California. With all of this as a backdrop, it is on the surface hard to think about hiring a new CFO or VP Finance for your company. But this is the exact time you need to think contrary to the pack. Here is why.
Shelter in place creates a unique recruiting opportunity
Since early March we have seen a marked increase in the number of “confidential” searches coming into Arnold Partners. Smart companies are taking advantage of the ability to meet candidates virtually and in complete confidence during this unique moment in time. It works well for the confidential passive candidates most companies want to hire as well. They are in a great position to take meetings without the necessary excuses of where they are going or why they are not in the office. The best recruiters know and target passive candidates, and in this work from home environment, the ability to grab the attention of this passive population is uniquely available right now. The last VP Finance search we completed in 30 days because we know who to tap.
But with a recession going on and companies laying off 1000s?
The focus at Arnold Partners is technology companies of all stripes. This sector has certainly seen a number of verticals hit in the downturn — travel and some med tech companies come to mind. Early stage tech companies without ample funding may not be in the market to add executive talent either. But if you are the CEO or Board Member of a well-funded tech company, now is the time to take inventory of your C-suite and VP-level talent and decide if it is time for an upgrade. How has your CFO done throughout this pandemic? Was the company well-prepared from a cash standpoint? Was the CFO able to tap banking relationships to shore up the balance sheet?
The best time to upgrade is at the start of a recession when executives from other companies may be concerned about the future of their career in-place. Now is the time to pluck from your competitors or near competitors to strengthen your team. But you need the right help.
Partnering with the right search firm and consultant
The best search consultants will truly consult with you and your team to determine how to improve the mix of both talent and diversity in your executive ranks. Search consultants do not just “take job orders.” They help craft the specification by carefully listening to you and by gaining an in-depth understanding of the business you are in and what the road map to success looks like. But then, only the best of the best consultants can reach into the vast pool of talent to pluck out a select list of passive candidates, who will not only take the call from the consultant, but also take the meeting with the prospective new employer. This process is part science, part art, and usually a culmination of many years of hard work, and it is certainly the way Arnold Partners continues to deliver. View my video for a list of questions you may want to use when interviewing an executive search firm:
Setting the right tone for a confidential search
This all may sound a bit cloak and dagger and nefarious — sneaking around your competitors’ home offices to steal their talent away! (Although that is the nature of recruiting.) But this is the key reason why it is so important to partner with the right search firm. The connected firm can quietly target the right people without resorting to any publication of your needs. Because of long-standing, curated relationships Arnold Partners maintains with the top finance professionals, the risk of word getting out that we are working on a confidential search is almost nil. When we make those calls into our network, we set the right tone during the very first call with each prospective candidate. The efforts to upgrade your team can be achieved quickly, quietly, and effectively. It is really important in a confidential search that your company and motivations will be represented in the most ethical and accurate manner by a trusted professional like Arnold Partners.
I invite you to contact me at moc.srentrapdlonra@divad if you would like to talk about your needs and explore upgrading your team. Stay safe and healthy, David Arnold President, Arnold Partners, LLC Strategic CFO and Board Recruitment
