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CFOs Edge Cautiously into Startup Posts

Finance chiefs are looking to move to new tech companies they wouldn't have given a second look to a few years back. But their standards are good d...
Lisa YoonApril 1, 2005

In a way, being chief financial officer of a young technology startup during the late-1990s, early-2000s boom was like dating someone much too young. Often, the company was overly focused on image and at on hiring “charismatic” executives, who could play fast and loose with cash and lose track of the goal of long-term profits.

It was a heady time. But many CFOs burned by a relationship with a startup remember it as a time of red ink, underwater options, and looming bankruptcy. Most competent CFOs moved on to more mature companies, and tech hiring dried up.

Well, the once-immature old flame is back. In a January special report, BusinessWeek proclaimed in a headline, “Tech Hiring: An Oxymoron No More.” Other publications have repeated the projection. But now that tech is beckoning again, are CFOs willing to give the industry another chance?

Yes, according to recruiting experts. “CFOs are taking careful looks at opportunities that two or three years ago they either wouldn’t be getting calls for or that they would outright dismiss because of the risk,” observes John Wilson, chief executive officer of the San Francisco-based CFO search firm J.C. Wilson and Associates.

Larry Ormsby of the San Francisco office of search firm Korn/Ferry says he’s getting more calls to find CFOs for IPO-bound companies. He has three assignments at the moment, which he calls “a lot.”

“There was a point where, when you said you had an IPO story, it was almost tongue-in-cheek because you didn’t know if [the company] was really going to go out or not,” says Ormsby. “Now, candidates are taking the opportunities more seriously.”

But not, both recruiters note, without their eyes wide open. “Everyone is trying to keep excitement and emotions in check right now,” says Wilson. “And if [a tech employer] is remotely flaky, very few CFOs will have any interest whatsoever.”

Finance chiefs are more particular now, says Sharon Wienbar, a managing director of Bank of America’s BA Venture Partners. “If you come in and your books are in disarray, you’re not sure if the sales people are on the up-an-up, [and] auditors [are] screaming ‘material weakness’ – you don’t want to get boxed into that.”

Marcus Smith, who recently joined FaceTime Inc., a network-security startup, as CFO, wouldn’t join just any new tech company. When evaluating a newly launched employer, he mulls such things as its investors, how much they’re investing, the amount of cash on hand, and its directors and managers. Smith’s previous jobs include vice president of finance at NetScreen, and CFO of consumer-electronics company SonicBlue. Before that, as controller of Storm Technology, he worked on the company’s IPO.

For his part, Matt Petzold, who recently became finance chief of Motricity Inc., a wireless-software developer founded in May 2001, did so because he “wanted to get back to the excitement of growing a small business.” His last stint was as CFO of Verestar, a $250 million satellite-services provider. Before that, he was CFO of Internet service provider UUNet, a young startup when he joined.

Petzold says he chose Durham, North Carolina-based Motricity because of what he sees as the high demand for the company’s product, its impressive investor roster, and a customer roster that includes Cingular, which recently merged with AT&T Wireless to become the No. 1 wireless provider. He also took a keen interest in making sure he would mesh well with Motricity’s management, board, and company culture.

To get him to work for such a young company a few years ago, Petzold says, “would have taken a lot more convincing.” Even now, with things looking up, finance chiefs are “absolutely being more selective about joining tech startups,” he maintains.

For some CFOs, a key criterion of potential startup employers is what investors think of them. When Gary Acord, who joined Patchlink Inc. in January, talks, the phrase “Wall Street” comes up often. Patchlink, which distributes devices that scan and remedy network-security holes caused by hackers with worms, is very conducive to a subscription business model, he notes, and “Wall Street loves subscription models.”

The Street also loves strong revenue growth, another feature that attracted Acord to Patchlink, which is based in Scottsdale, Arizona. In fact, it seems that what Wall Street wants, Acord wants in a venture-backed company. Five years ago, finance chiefs’ criteria for joining a tech startup was not so stringent: “Revenue growth and profitability were not so important,” he says. Today, companies without a definitive plan including both “would not even get a second look from me,” says Acord, who previously was the CFO at Musicmatch, an online music provider that Acord sold to Yahoo! for $160 million.

CFOs aren’t the only ones chastened by experience in the tech sector. Employers, too, are keen to find a high-quality CFO to take young companies to the next level. A February research report from Stanford Graduate School of Business says startups that set up accounting systems early on showed higher growth rates in terms of revenues and head count.

Moreover, their valuations rose higher and quicker at successive rounds of venture funding. What was a key factor in implementing accounting discipline? Hiring a CFO, naturally. “Bringing on a senior financial officer typically fast-tracks establishing financial planning and monitoring systems,” say professors Antonio Davila and George Foster in a release announcing the report.

There’s at least anecdotal evidence that young companies have learned that lesson. FaceTime’s Smith says he observed during his job search that “young companies were hiring CFOs earlier.”

The definition of a high-quality CFO has always been the same, says venture capitalist Wienbar. But “in a gold rush, that definition gets compromised a little,” she adds. Today’s startups are less willing to compromise. FaceTime’s Smith notes that while he’s always thought that a personal recommendation is the best way to get a foot in an employer’s door, “today, even with that, there’s still screening for past experience and expertise.”

Further, accounting expertise counts more now, adds Petzold. In the late 1990s, he explains, employers sought out finance chiefs who had the ability to sell a company’s story. “There’s a greater emphasis now on being able to build a company [financially]. That’s really a change from the late ’90s,” he says.