How to score the right CFO
Recently, I was having a beer with one of my favorite CFOs; a veteran from the enterprise software and consumer internet space. This man has taken 2 well-regarded venture-backed companies public, sold another to a premier growth PE investor for a big multiple, and stayed on as CFO there. He now sits on the board of 2 large-cap NASDAQ-traded tech companies.
Once he grew tired of bashing the Mets (my team) and boasting about the Dodgers (his), we got around to talking about trends that we’re seeing in CFO hiring for both PE and VC-backed companies.
These are some of the nuances and trends in the current marketplace that you need to know about now:
CFO hiring trends in VC:
- VCs want CFOs that can make everyone in the company smarter by implementing a robust, scalable framework for risk-informed, data-driven decision support. The current trend favors the FP&A focused CFO, and not the Controller type. The assumption is that you can always hire a great Controller to partner with your strategic, business-partner type CFO.
- VCs want a CFO that can help the CEO and chief of Staff uplevel the accuracy and impact of the financial reporting of their portfolio companies, and professionalize the interactions with the Board. They also want a CFO who can run the fundraising process and manage all the G&A functions including finance, legal, IT, and sometimes HR.
- Although there is a trend amongst VC-funded startups to hire their first true CFO earlier in their journey, there is often underinvestment in G&A in the A-round, so as a result, there is a lot of foundational work to do around systems, processes, and hiring when the first CFO arrives on the scene. VCs want a CFO that can fly at 30,000 feet in one moment and be super hands-on in the next.
Stat: 7 out of 10 VC-backed companies hire their first CFO after the B round, and at sub $25M in revenue.
My advice to VCs:
Strongly consider the first-time CFO for your $0-~30M company! There are many smart, hungry, highly-motivated VPs of Finance and FP&A out there with the right kind of domain experience for your portfolio companies! Focus on finding the candidate with the most drive, and the most analogous business model experience.
Hire a CFO with a following, and the ability to hire a world-class Controller and FP&A lead, because the current market for those folks is wildly competitive.
- Most of our VC clients start out a search hoping to hire a veteran CFO who can scale their company all the way up, and lead them through an IPO when the time comes. But that makes hiring much more competitive since there’s a much smaller pool of candidates who have taken late-stage companies public. It’s very rare for the same finance person who guides a company’s sales from zero to $50 million to also be the person who takes it to $100 million-plus.
My advice to VCs: hire the person today to solve today’s problems, and if your company gets to be a legitimate IPO candidate, you’ll have the high-class problem of needing to hire an IPO-ready CFO.
CFO Hiring trends in PE
- In PE-backed companies where the CFO is the primary touchpoint for the leading financial sponsor and the internal “operational optimizer”, the bar for talent has become even higher in the last 18-24 months. There is a heightened sensitivity from investors around prior domain knowledge, relevant PE experience, scale, and a track record of driving operational excellence.
- When a PE firm makes an investment, they often “install” a new CFO that they have had some history or connection to, and who also has helped them to make money in the past.
A few stats:
-More than 75% of PE-backed companies hire CFOs that have prior PE experience.
-More than 80% of PE-backed companies hire CFOs that have seen similar or larger scale than their portfolio company.
My advice to PE investors:
In the highly competitive CFO recruiting market that we find ourselves in, over-indexing on prior PE experience and scale still makes sense, but I’d advise waiving, or de-emphasizing prior domain experience. The best CFOs continually prove their ability to nimbly move from one domain to another. Hire the best athlete!
Don’t hire a CFO that does not do a very deep dive into the financials of your portfolio company! The due diligence that they bring to the evaluation of your company, and of the opportunity overall, is a direct indicator of how diligent they will be in general. Pay attention to this.
Hire a CFO that negotiates hard on their compensation package. Every investor wants a CFO that is a savvy negotiator.
What CFOs care most about:
- CFOs have become much choosier about which company they want to join. In the VC-backed world, an “allergic reaction” to bloated valuations is becoming pervasive. It feels a bit knee-jerk, as there are some truly special unicorn companies out there, but remember, we’re talking about FINANCE people here, so being contrarian and circumspect comes with the territory!
- The primary criteria for CFOs in PE include track record of the financial sponsor, location of the company, EBITDA trajectory, and operational sophistication of the business. The best PE CFOs seem to be somewhat domain agnostic, often moving from one segment to another bringing their collective experience to bear in a wide range of industries.
- PE CFOs like operational complexity, giving them a chance to show their “stuff”, by working to improve operating efficiencies across all functions inside the company. They generally appreciate a high-level of involvement from their financial sponsors, as they enjoy being the “owner” of the numbers, reporting on the health of the business to the PE board members.
- On the other hand, VC CFOs, are somewhat wary of VC board members that are overly involved, and “in the kitchen” of their portfolio companies, indicating a lack of trust and/or confidence in the CEO, and the business. VC CFOs like to see a “balanced” board, consisting of not only VCs, but seasoned operators as well.
- In addition to a heightened sensitivity to bloated valuations, the best CFOs are increasingly reluctant to join companies with a liquidation preference stack that is “out of whack”, or with too many ratchets. The best CFOs look for a clean cap-table, straightforward preferences, and financial transparency.
- The best CFOs in PE and VC-backed companies relish the opportunity to be catalysts for growth, to be a strategic partner to the CEO, with a seat at the table “inside the tent”, where the important decisions are made.
- They want to work for a CEO that can truly leverage their toolkit, and that appreciates what a great CFO can do to take a company to the next level.
So whether you’re a VC or PE investor, hire a CFO that can be a Steward, a Catalyst, a Strategist, and an Operator. Hire the CFO that can not only keep score, but that can help your companies to score!