From Finance to Fintech

Wall Street executives are increasingly filling the CFO seats at financial technology firms.
David McCannNovember 24, 2015

15Nov_FinTech_p28By the time Laurence Tosi left Blackstone Group in August to become finance chief of Airbnb, the home-rental startup, there had been ample chatter about the growing trend of CFOs and investment bankers leaving Wall Street for Silicon Valley. Talk usually centered on two other big names who preceded Tosi — Ruth Porat, who traded the CFO post at Morgan Stanley for the one at Google in May; and Anthony Noto, who jumped to Twitter from Goldman Sachs in mid-2014 — and the large compensation packages they received.

Three doesn’t make a trend, of course. Yet there is such a trend, although Tosi, Porat, and Noto are better described as one-offs than examples of it. Away from the spotlight focused on those executives and their household-name companies, dozens of financial technology — “fintech”— firms are springing up, offering online financial services from payments and lending to crowdfunding, digital currency, and much more. They, too, are filling their CFO seats with career investment bankers and financial services executives.

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While CFO movements from financial services to technology are nothing new, the burgeoning fintech space has driven a “significant uptick” in them over the past two years, according to John Petzold, global co-head of the financial technology practice at recruiting firm Korn Ferry. Fintech firms, he says, see the financial industry as a natural source of finance talent for their particular needs.

“Shareholders’ return is going to come from innovation, growth, and acquisition,” says Petzold. “And a person from the Street is going to [provide] access to capital and be efficient and effective in deploying it.”

15Nov_FinTech_ShahThe Power of Fun
If fintech firms are increasingly fishing for Wall Street veterans as their CFOs, such executives are more than willing to take the bait.

“If you’re in big banking today, your career is probably very different from what it would have been a few years ago,” says Suk Shah, CFO since August 2014 of Avant, an online consumer lending platform, and former finance chief of HSBC’s North American commercial banking division. “You’re heavily involved in Basel III and all the regulatory work around Dodd-Frank. There are so many rules. I felt more like a lawyer than an operational CFO, and that wasn’t where I was going to play out my career.

“What it boils down to,” Shah continues, “is that it’s just more fun being the CFO of an innovative, entrepreneurial, high-growth technology company, trying to figure out when to enter new markets and how much to invest, than spending your time with the OCC [Office of the Comptroller of the Currency] or the Federal Reserve and looking at Tier 1 capital ratios.”

Like Shah, other finance chiefs use the word “fun” to help explain why they left their former careers behind.

“I worked with some of the smartest, hardest-working people at very large organizations with fantastic platforms for a long time,” says Morgan Edwards, who joined web-based student loan provider CommonBond in June after a long career in investment banking, at firms such as Macquarie Capital, Bear Stearns, and Morgan Stanley. “Those were great jobs with good compensation, and it was really fun,” Edwards says. “But some of the fun had gone away.”

15Nov_FinTech_EdwardsThere is no reason to believe the exodus from financial services to fintech firms will abate anytime soon. For one thing, the financial services industry is not likely to become less regulated. “Everyone we meet with at financial institutions is talking about dealing with compliance and regulation,” says Joshua Wimberley, CEO of LeadChange, an executive recruiting firm for midsize companies. “Nobody’s talking about how to grow their business.”

Also, more and more fintech companies will be created in a bid to siphon off business from the traditional financial services industry, which is so huge that the potential to take even a small piece of market share can present a big business opportunity for a startup.

Edwards says it was about two years ago, while he was at Macquarie, that online lenders, most of which started out as equity-financed businesses, began seeking debt capital — and getting it. “The credit markets only finance businesses that they have a high level of confidence will succeed,” he says. “As these firms began to obtain access to debt, it was a sure sign that [online] lending was here to stay and represented the next wave of finance.”

Right Skills, Right Time
To be sure, while fintech firms are indeed subject to less regulation than depository institutions and investment banks, they are more regulated than most other industries. That’s one reason why Peter Coleman, finance chief at online mortgage lender AssetAvenue since May, thinks that when it comes to fintech CFO positions, financial services executives have a leg up on candidates with technology-industry backgrounds.

Coleman, previously an investment banking executive with Merriman Curhan Ford and Thinkequity Partners after working as an equity analyst with Charles Schwab and Montgomery Securities, got his first CFO job in the fintech field back in 2012, when there were far fewer such opportunities than there are today. The company was Loyal3, which was building a free online platform for individuals to trade stocks. The decision came down to Coleman and a longtime technology CFO who, Coleman acknowledges, probably had a better-looking résumé.

15Nov_FinTech_Coleman“I remember the CEO looking at me and saying, ‘I could hire him, but then I’d still have to hire you. Or, I could just hire you.’ He was referring to me being somebody who could figure out all the regulatory things we were about to find ourselves in the middle of,” says Coleman.

Coleman, who had a background in analyzing software companies, was attracted by the idea of working for one and had been looking to get out of financial services for some time. “It was harder than you’d think, having had that many years in a specific industry,” he says. “But today, the growth in fintech is providing an opportunity that just wasn’t there before. Many people are finding they have just the right skill set at a very interesting time.”

Because of regulation, Coleman observes, a fintech firm has to have an operating infrastructure and customer-facing processes that are much stronger than is the case for, say, a nonfinancial e-commerce company. “Everything comes with a heightened level of scrutiny, so you have to be better at it,” he says.

“Fintech CFOs have to be much more operationally driven. It’s not just an advisory role where you tell people how you see things through a financial lens. That’s why these opportunities work so well for people with my background — we come from a world where we had to operate at that level of scrutiny and accuracy.”

Cause for Pause
On the other hand, some financial services executives may face significant challenges in moving to the technology industry, cautions Wimberley. The pace of decision making is necessarily faster, so not just anyone can make the switch. CFOs “have to be nimble,” he says. “It’s very much a change from what they’re used to.”

Another potential problem area is that many financial services professionals do not have accounting backgrounds, of particular concern if the company is public or expects to be. True, some technology CEOs don’t think accounting expertise is very important for a CFO, because what they want is someone with a strategic bent, notes Cliff Scheffel, managing partner of KarrScheffelSullinger, a recruiting firm that specializes in placing CFOs at Silicon Valley startups.

15Nov_FinTech_p30“They hire from investment banking because people there are broad in vision, and someone coming out of an operating company may not have that attribute,” Scheffel says. “But the bulk of their time won’t be spent on strategy. It’ll be spent on operations, financial planning, reporting, and if they’re public, SEC issues. Some of these companies should be more concerned about that, and some of the CFOs should be more concerned about the liabilities they’re taking on. When a person in that position says they’ll depend on somebody else to handle that, that scares me.”

The Lure of Equity
Leaving Wall Street for a startup fintech firm is something of a leap of faith when it comes to compensation. Most often the pitch stresses that candidates should be motivated by equity. While pay levels in the financial services are down from the giddy heights reached before the recession, cash compensation for someone making the move might be half of what they’re accustomed to, or less.

But of course, the reality is that the equity may not materialize at all. “Usually the people who are motivated by equity will leave the sure thing because they want autonomy, ownership, and the opportunity to create value,” says Wimberley. “Even if they have a big role in a division of a global bank that’s bringing in [hundreds of millions of dollars], they’re not moving the needle.”

A question that has to be considered before making the move is whether the outsized valuations many technology firms are getting these days are realistic. The valuations certainly appear to suggest that joining one offers a good opportunity, notes Larry Ormsby, a partner in recruiting firm ON Partners, which places CFOs with technology companies.

“There is so much money knocking on the door to invest in these companies that they are raising funds without giving away control or board seats,” Ormsby says. “Some of it is just the times we’re in, with so many new technologies creating opportunities. Do they deserve their valuations? Maybe, because of the upside potential. But some of it is just because there is a lot of money out there looking for places to go.”

David McCann is a deputy editor at CFO.

“Something with Meaning”

CFOs of financial startups may be motivated by more than money.

Yes, financial services executives are taking technology CFO jobs because they are tired of regulatory handcuffs, they want to do something more entrepreneurial and fun, and the prospect of a huge equity cash-out is alluring. But there may be another motive at play: the desire to foster positive change in the world.

15Nov_FinTech_p32Really? The bottom-line guys want to do good? Yes, says Larry Ormsby, a veteran executive recruiter with ON Partners who specializes in placing CFOs with technology companies.

“There’s a broad trend of people trying to find more meaning in their work,” says Ormsby. “My office is in a shared work area, and I talk to a lot of younger people who are doing different things. Most of them are trying to develop apps or companies that somehow or other will change the world for the better. It’s not about being rich. It’s about doing something cool, which is defined as something with meaning.”

That mind-set may be moving up the age spectrum. Take Laurence Tosi, 47, the former Blackstone CFO whom Ormsby recruited to Airbnb. “He tossed a lot of money aside,” Ormsby says. “He made a bet on a long-term financial return that would help catch him up, but it would be a real stretch to say he did it for the money.” (Tosi declined CFO’s request for an interview.)

Of course, there is a low-end compensation threshold for someone like Tosi. Airbnb wouldn’t have been able to afford him had its valuation been, say, $1 billion rather than the $25.5 billion it was valued at shortly before hiring Tosi, Ormsby acknowledges. “But for him, [the job switch] had a lot more to do with being part of something exciting and feeling like he was doing something good. The technology world allows you to feel like that.” —D.M.