Ed Montoya – Partner, Calibre One
As a CFO recruiter, I love the puzzle of working with management teams and Boards to recruit game-changing financial officers for their burgeoning companies. With over a decade and 100 searches worth of experience working with CEO’s, Boards and Chief People Officers on the puzzle of CFO recruiting, I thought I would share a few lessons learned, and invite others to weigh in on this important topic. After all, whether you are fast-growing (but money losing) unicorn, or profitable (but growth challenged) enterprise, or anything in between, hiring a great CFO will increase value.
Today’s CFO is asked to balance many competing priorities, ensure rock solid accounting and reporting, and frame and execute on the company’s value creation strategy. No wonder compensation has steadily increased for this function over the last 10 years, and is now often the 2nd most highly compensated executive position. Accompanying higher compensation are added stress and demands of the role, which has added to increased turnover. I have also seen a growing number of proven high-profile CFO’s hang up their cleats (at least temporarily), in favor of joining multiple Boards and serving as informal advisors. I playfully call this club the “CFO whisperers”, and they are doing great work advising many first time CEO’s on what is often their most important executive hire. Members of this select group, many of whom have taken companies public, are often the first calls on a prominent CFO search. The reality is that the same set of 25 or so CFO’s are contacted for the majority of hot unicorn and public technology positions, which creates a supply-demand imbalance in favor of the “proven” executives.
So, how do you go about hiring a “great” CFO?
Pattern match what you want in your CFO, versus your business and industry fundamentals.
- As a CEO or investor/board member, appreciate your business for what it is today, and have a view of how you’d like a CFO to help chart and execute on your strategy to increase shareholder value. If your strategy is to “go for it” and drive for growth at the expense of near term margin, then you might be better served targeting CFO’s with a more natural “growth mindset”. Executives with that mindset are most prominent in software, SaaS, bio-technology and e-commerce companies. Board members and CEO’s have remarked that CFO’s from this camp are especially good at working with the sales and marketing organization to model out customer acquisition costs and think about the life-time value of customers, which can be valuable in a land-grab growth strategy. Churn is obviously a big consideration in any LTV calculation, and you will find the better growth CFO’s are often walking the halls with the customer success teams figuring out how to help improve customer retention. On balance, the growth-oriented CFOs tend to see the role as more of an enabler to sales growth, are more comfortable risk-takers, and more creative in their ability to partner with the business. That is not to say that they don’t look at costs, rather these are “attribute spikes” that characterize this prototype of CFO in my experience.
- What if your business has more modest growth, or is in turn-around mode? In these cases, clients have found that an “Efficiency Mindset” may be the better CFO prototype to consider. This group tends to focus on where organizations can cut cost and waste, automate inefficient processes, and may be more inclined to benchmark off measures like EBITDA or cash flow, rather than user/revenue growth. As a general rule, our research shows that many of these CFO’s started their careers at larger companies (often Fortune 500) where executives were trained on ways to systematically reduce waste, shorten the close cycle, and leverage data and insights to impact the business in a given quarter. CFO’s from more cyclical businesses like industrial, semiconductors, energy, and the more mature segments of high technology, tend to be particularly good at increasing utilization of expensive equipment, manufacturing sites, managing supply chain, and optimizing the cash conversion cycle.
Don’t let the perfect be the enemy of the good; and know what pains you today.
- The perfect candidate probably does not exist, and the sooner you realize that then the faster you will be able to define what is most critical to solve for. One thought exercise is to ask yourself where are my biggest problems/pains today? Don’t look to hire a “Wall Street/IPO CFO”, if your biggest challenges are getting your accounting in order, filing audited financials and upgrading your ERP system. If an IPO is realistically 3-5 years out you might not get the proven public CFO, so think about targeting a really strong VP Finance, or “unproven” but super talented first-time CFO. On the other end of the spectrum, if you are a public company dealing with activist investors and considering M&A options, then a first-time CFO is probably too risky of a hire, so stay focused on candidates who have been on the firing lines with investors that can help you manage an important stakeholder base while you focus on the business and broader agenda. In this case you might consider the banker-trained CFO, and augment his/her lack of in-depth accounting experience with a strong corporate controller. It may sound obvious, but rare is the CFO who is equally strong across the accounting/controls side of the business, and capital markets/strategy/M&A. Know the candidate trade-offs and optimize for the most important capabilities in the hire, then give them the resources and flexibility to augment his/her team.
- It’s okay (and candidly pretty normal) to think about up-leveling your CFO as the company scales, enters new markets, and expands its capital base. The average CFO tenure is about 4 years, so trust me your CFO is probably also thinking about what might be next. So, don’t try and solve for the CFO who can grow with you from $10M to $2B in revenues. We have analyzed hundreds of technology CF0’s in the last decade and have learned that there are natural break-points for when companies tend to up-level this role. We identified three natural leadership transition points based on company revenues, with some broad characterizations about the optimal CFO’s for each phase of growth.
Start-Up VP Finance / Controller (pre-revenue to $15M): Typically a director of accounting with an early foundation in public accounting. Tend to have worked with lots of small companies/start-ups, and not offended by taking a secondary role to product/engineering (i.e., more back office in scope to be candid). More tactical than strategic.
Early Growth CFO ($25 to $75M +): Typically a VP Finance or “Unproven” CFO from a larger company. Often has worked at companies that have scaled past $100M and brings a more robust view on process, controls and systems. At this point many companies demand much more from their CFO around extracting insights from the financial data, partnering with sales to drive revenue, and raising capital to support the cash flow needs of the business. These CFO’s tend to be strong player-coaches; able to set a direction for the organization and lead by example. They are never too far removed from the details of finance and accounting and can still go deep.
IPO CFO ($100M + >>): The sweet spot of CFO opportunities, and arguably most coveted for some CFO’s. The company is scaling 50%+ year-on-year and is already beyond $100M-200M in revenues. At this point the company has already been courted by every bulge bracket investment bank to take you public. However, you believe, as does your Board, you have line of sight to being a $1Bn company, and you want to go for it. The combination of scaling global operations during rapid growth, a global customer base, and the strong attention of both industry and wall street analysts, means your CFO will find themselves managing his/her time across both internal and external stakeholders, in sometimes competing fashion…much more so than when you were content to be private. The “external demands” of the CFO have intensified, and at this point you need a CFO with public company experience and enough “persona” to be the chief financial spokesperson for your company.