Recently my friendly competitor and colleague Cliff Scheffel published a white paper titled, “When is the right time for a tech startup to hire a CFO?” What I really liked about his report, which was co-written by Jeff Epstein of Bessemer Ventures, is that it gives analytical support to what all three of us have experienced as search executives and as investors. It provides a CEO, board, or founder with specific metrics that signal it’s time to hire a CFO. The key markers cited are 100 employees, $25MM in revenue, and/or revenue growth of 100+%.
The report was well done. Let me know if I can send you a copy.
I got thinking about a related question: what factors or changes call for changing the CFO? I believe that in some cases, the first CFO, perhaps at the stage of company that Cliff and Jeff outlined above, can grow his/her skills along with the growth of the company. In other cases, a change in CFO is needed as the company changes.
It’s common for companies to contemplate a change in CFO when they start to seriously look at an IPO. In a VC-backed company, the investors are always looking for ways to minimize risks in their portfolio. If the CEO doesn’t have previous public company experience, the investors will almost certainly want an experienced hand in the CFO. If the incumbent CFO can demonstrate the ability to communicate the story to investors, they may be considered a candidate, but this situation will frequently prompt a CFO change.
Pre-Revenue to Commercial Stage
What about a company that goes from pre-revenue to commercial stage? This too can prompt a CFO change. We see this in the Life Science sector of our technology practice at Arnold Partners. If a bio or pharma company is successful in getting a drug approved, they have a major decision to make about bringing that drug to market. If they plan to build out a commercial organization, the role of the CFO changes materially. I actually had a CFO tell me a few weeks ago, just as his organization with going through this change, that he wanted no part of being in charge of a revenue-producing company!
Beyond IPO and Commercialization
Beyond IPO and commercialization, other change in a company can prompt a CFO change as well. For many tech companies, international expansion is happening earlier and faster than ever before as tech goes to the cloud. In the med-tech side of things, sometimes getting a CE mark of approval is a better strategy to prove product acceptance than trying to fund a US-based study for FDA approval. These considerations affect the role and requirements for the CFO big time.
In an earlier blog, I wrote about how most CFOs get their first chance in the seat through a battlefield promotion. This can be a big break for a Controller or VP Finance that significantly changes the trajectory of their career. However, CEOs need to be careful in making a choice out of convenience over careful consideration of a slate of curated candidates while also considering the company’s stage of growth. Running a search process in parallel to a temporary promotion of a number two can pay dividends for all the parties: the CEO, the board, and the person in the seat. It can provide an objective test of the market to make sure the right person is running the show and that careful consideration is taken for all parties.
In only a few occasions have I seen a CFO go from pre-public company CFO to passing $1B in sales. It’s rare. CEOs need to be diligent to make sure they have the right CFO partner as their companies evolve in complexity and size. If you would like a consultative review, please contact me at email@example.com or call 408-205-7373. As a corollary to this subject, my next blog will be about the importance of agreeing upon a good position specification when starting a search, “The Spec!” Stay tuned.