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

Dave Arnold
david@arnoldpartners.com