As startups grow and scale, the responsibilities of the CFO and the finance team becomes far more complex. Many firms seek to hire a candidate with experience dealing with investors and lenders and taking companies to public status. In addition, they should have knowledge of technical regulations and best accounting practices. The finance leader needs to have the backbone to endure intense hours looking after a cash-burning machine.
So why do tech giants prize great finance leaders? Well, for venture-backed companies especially, they’re the glue that binds the businesses. When they’re not sparring with and grounding the CEO, they’re helping you understand your gross margins. As well as helping you avoid signing bad deals. And, when they’re not doing that, they’re managing your cash flow and capital, parlaying with HR & Legal, and impressing the board with relevant metrics and grounded, tactical projections.
Here’s the thing: according to finance data house PitchBook, out of 180 U.S. unicorns, 71% had CFOs. However, just 64% of startups with valuations of between $500 million and $1 billion had a finance chief.
When an organization’s financial controls become more sophisticated with the added factors of venture capital and public offerings, the scarcity intensifies. This means that desirable, qualified CFOs for major tech companies have become an endangered species.
Spend With Why
According to the Aspen Institute, the most critical skills for a CFO today are general management (27%) and creative strategy (26%). This finding emphasizes the notion we’ve heard for years now. That is that success in today’s technological economy is determined by creative and strategic leaders. These leaders can best understand integrating innovative technology and agile organizational frameworks.
Gone are the days where the mark of a great CFO is measured by tracking performance and efficiency. Now, it’s a much more strategic role. The expectation has evolved into counseling businesses on innovative approaches for creating value.
This also means there’s an added responsibility to emphasize the “why” when it comes to spend, and to decentralize it from just one senior finance position in particular. We’re used to assessing the why in its relation to brand identity and as a marketing differentiator, but it’s imperative in justifying the resources, services and tools you’re spending money on, too.
Simon Sinek’s classic Start With Why outlines this succinctly: “Why” is the reason to buy and the “Whats” merely represent the tangible products as a proof of that belief. In an organization’s spend, this is another primary focus for the CFO and other members of the finance and operations teams. It’s not just figuring out what to burn cash on, but being able to understand why, qualifying every spending event as an investment that will eventually correlate to ROI and growth.
The Agile Way
You can achieve this simply by tweaking your organization’s approach to processes and tools. Instead of operating on the traditional model companies could instead follow a more Agile operation. This enables finance staff and CFOs alike to pivot and switch to pressing issues by priority.
By shifting the focus from ad hoc analysis to primarily on stakeholders, your finance operation can respond much more efficiently. Especially to the rapidly changing external factors in your business. Enable this with a suite of financial tools. For instance, QuickBooks Online and Procurify, which automate and sync data between your purchasing and requisition processes.
As far as processes go, assembling your finance function in focused project based teams is essential. Professionals with cross functional skills will thrive as they tackle a single project at a time and well defined accountabilities. Conduct non-transactional tasks in sprints, just like agile development programs. This makes it much easier for organizations to iterate on and adjust budgets to changing conditions.
A New Frontier
With everybody wanting a CFO and the well being bone-dry for high growth startups, the demand is only going to stimulate more CFOs to stretch their wealth of knowledge and experience across all the projects they can for a pretty penny. It’s also going to stimulate more strategic thinkers and various rungs of the finance and operations ladders in software organizations.
This has been the impetus of a new trend amongst CFOs who understand both their leverage in the ecosystem, and the rise of the freelance consulting marketplace. CFOs have taken it upon themselves to invent their own services and reconsider their capacity altogether with the rise of consultancy and the advent of the interim CFO. This of course wouldn’t be ideal for the aforementioned unicorns. But for high-growth tech companies with specific hurdles and fires to extinguish, hiring an interim CFO to fix the immediate issues and put your company on the right track can be extremely valuable.
“There are three main areas where CFO has responsibility. It’s the strategic leader, the protector, and the accountant. And when a business has enough moving parts where a professional can add topline value, think that’s when they need to consider a CFO hire.” says Jim Gellas, the VP Finance at Kruze Consulting, and former head of finance at Xero, in an episode of the Spend Culture Stories Podcast.
“The role of a CEO is to have boundless optimism about what their company can do, and be, and achieve. And the CFO’s role on some levels is to act as a counterbalance to that by asking the right questions to make sure that the CEO doesn’t bring the organization out past its keys.
So, a CEO has a vision of we can go do this, and this and that. The CFO has to ask the questions. For example, how do we do that with the resources that we have?” Jim adds.
Another advent has been CFOs who are leading their companies to direct listing. Right now, there are only two of them. Spotify’s chief financial officer Barry McCarthy was the pioneer for the direct listing in tech, and even went as far to say that following the IPO models of Microsoft or Apple are “moronic”.
Slack’s CFO Allen Shim consulted with Barry and subsequently followed in Spotify’s footsteps. Slack followed suit with their own DPO. While fundraising mechanics for businesses have dramatically evolved in the last 20 years, IPOs haven’t really changed much at all. They are less suitable for businesses who want an easier, cheaper, and more fruitful route ahead. While direct listings aren’t new, for the high growth tech companies in question, they allow for even more control over the process to the company and its founders.
The verdict is still out on whether or not DPOs are the way of the future or some contemporary experiment that will go sideways. Currently, all signs point to this being a success for both Spotify and Slack. While these two unicorns continue to soak in the spotlight, the risks that led them to this stage were undoubtedly at the hands of the rare, endangered, technical and dynamic CFOs.
What we can glean from the software finance leader’s various decisions? Every approach is unique to the company, and the attribution of ROI is rationed differently depending on growth stages. What’s clearer now is the more spend analytics and SaaS enablement at your disposal, the better you’ll be for it.