Posted by The Bowdoin Group on August 28th, 2018
Originally written on in partnership with Paul Manning (Managing Director, Software & Technology) on LinkedIn for The Bowdoin Group.
It’s incredible how the investment ecosystem is booming in both the venture capital and private equity industries. VC firms have invested more capital in U.S. companies in the first half of 2018 than in six of the past ten years. Although the PE market hasn’t experienced that magnitude of growth, the industry is on pace for another strong year. Deal counts may be down across VC and PE sectors, but deal sizes have exploded across all stages of growth, and exit values have skyrocketed.
This era of mega-funds and capital bounty bodes well for everyone involved, but we’ve also seen new challenges emerge. More types of deal structures, more stakeholders to satisfy, and increasing pressures around key business factors, like data privacy and protection, tax reform, and regulatory compliance have put CFOs squarely in the spotlight. Today’s VC- and PE-backed firms need strong CFOs to ensure viability and a successful exit, but they look for very different people when it’s time to hire.
The Thrill Ride of the VC-Backed CFO
VC firms invest in the earliest stages of a startup – betting on the next big thing or diving into a hot, innovative industry, like BioPharma or FinTech. They become very active partners and advisors to their startup teams, with a shared goal of rapidly growing the firm and reaching a successful exit – whether that’s IPO, acquisition, or buyout. It’s a fast-paced, high-risk environment, made riskier by the levels of capital flowing through the market today.
We’ve seen that as a startup matures, the need for an in-house CFO becomes unavoidable. The CEO needs a strong financial counterpart – a partner to help keep the company operating while growing strategically. Sometimes they’re hesitant to take this step, thinking a CFO will stifle innovation and push back against risk-taking. Yet, it’s likely the most important hire they’ll make.
VC CFOs manage the standard financial activities – reporting, budgeting, cash management, etc. But their role goes well beyond accountant or bookkeeper. They’re an additional pair of eyes and ears for the startup team – advising, coaching, and planning ahead. They play a key role in attracting and evaluating investments. They know how to use funding in the right places to manage resources and feed growth in a constantly changing environment.
We’ve seen that for their first CFO, VC-backed companies look for someone with a unique combination of skills and temperament – a person who:
- Gets their hands dirty doing whatever it takes to grow the company. Startups are bootstrapping – always trying to do more with less, so people are generalists by necessity. The CFO will also wear multiple hats, often managing other functions, like HR or IT, until the company gets larger.
- Can simultaneously keep their foot on the brake and accelerator. The goal is rapid growth, but risk is high. Successful CFOs gently temper the exuberance of others, managing risk without throttling innovation.
- Builds strong relationships based on mutual trust. The importance of the CFO’s role as advisor and coach can’t be underemphasized. They guide the startup team and partner with the VC to meet corporate and investor goals, so interpersonal skills are essential.
- Meets the expectations of their investors. The relationship between a startup and the VC can be tricky, particularly if multiple investors are involved. The CFO is a key ally to the CEO in managing and meeting expectations of the investor base.
- Can shepherd the company’s finances through each stage of growth. The CFO must have strong financial management skills, but also an ability to look forward, making investment decisions with the CEO to ensure growth and a prosperous exit.
The Strong and Steady PE-Backed CFO
Private equity firms usually invest in more mature companies, and the nature, size, and structure of these deals varies significantly. Regardless of the investment scenario, however, the goal is clear: Get the portfolio company to the desired exit strategy within a specific timeframe. While VCs are usually a minority shareholder and need to involve other firms prior to making key decisions, PE firms usually have the majority ownership. As a result, they tend to take much greater control over the financial operations than VCs.
PE investors tend to replace the portfolio company’s CFO with one of their own – recent research shows about 70% of CFOs are brought in by the PE group. The CFO most often reports directly to the CEO, with a dotted line to the PE firm. While this three-way relationship can be contentious, it ensures transparency and an ‘eye on the prize’ mentality.
We’ve seen that PE CFOs have different personalities than their VC-backed counterparts. They prefer an opportunity with a defined horizon to the more volatile, unpredictable activity involved with startup growth. They also require a set of more advanced skills due to the value of most PE investments and pressure from investors.
Exit strategy is a key consideration when hiring. If the focus is on growth, the PE firm will look for someone experienced in M&A and corporate finance. If it’s an IPO, negotiating with investment bankers and interacting with potential investors during the road show takes priority. Sometimes, that changes as the company evolves. For example, an investor planning to sell to a strategic buyer may shift to an IPO exit strategy if the company takes off, swapping out the CFO for one better suited to the new direction.
When PE firms go looking for a CFO for a portfolio company, most seek out candidates with top-level financial acumen, a strong drive for results, and key people skills – a person who:
- Has an established track record of success as a CFO. The magnitude of investment and fast pace in a PE-backed company requires stellar financial skills and the right mindset to keep the house in order and meet investor demands. We see that most PE CFOs have prior tenure in a CFO role.
- Can convey the current financial status quickly and accurately. The PE CFO must have complete control over all of the company’s finances. Reports and data must be accurate, and the CFO has to deliver them quickly, interpreting them and advising the CEO and investors as needed.
- Stays focused on results, prioritizes appropriately, and meets tight deadlines. Not all can survive the intensity of the PE CFO job. CFOs must be able to drive progress relentlessly and be ruthless at times. The first six months in the post is a telling period, and PE investors aren’t hesitant to change CFOs when it’s not working.
- Can build and lead a strong finance team. PE CFOs need backup from a capable team that can run the finance operation when the CFO has to focus on broader issues. The position of financial controller is particularly critical given investors’ insatiable appetite for data. Strong leadership skills and the ability to delegate are required to set this team up for success.
- Will establish strong relationships with many stakeholders. So many people are involved in a large PE deal – from the banks, the PEG, and the portfolio company. They all care about financial growth, so the CFO is on center stage. PE CFOs need strong communication and collaboration skills to meet their expectations.
Where do Investment Firms Find the CFOs that will Help Them Thrive?
In both VC and PE environments, the CFO role is pivotal, but it can be difficult (as always) to find the best person at the right time. The market is competitive, and the mix of skills, knowledge, and mindset needed in each particular situation is tough to find in one person and will vary from company to company. Someone with the perfect technical skills but no experience in the PE ecosystem may not be as well equipped to handle the rapid pace and pressures as a CFO with a background working for PE-backed companies. And a candidate may be highly-qualified but have no industry experience, making them less desirable in a given organization.
Investors build strong professional networks, hoping they’ll have easy access to top candidates when they’re ready to pull the trigger, but timing is everything. The strongest candidates in investors’ networks are often in the midst of an opportunity that’s headed in a positive direction. So, investment firms and portfolio companies have to find ways to go beyond their existing networks – using word of mouth, tapping passive candidates, and searching different vertical networks to find good candidates.
We partner with VC and PE investors to help them break through the gridlock and get to the right talent quickly. Not only does it speed the process, it also gives them access to broader and deeper networks and established relationships within a larger pool of potential candidates than they themselves could reach. In the long run, a successful exit is what matters most, and this is one of the most critical hires firms will make to get there.