The Cloud

Damn the Profits, Full Speed Ahead

For the new CFO of a financial-software vendor, the entire mission is about growth, even 10 years after the company’s debut.
David McCannJanuary 14, 2013

Among young and youngish software companies, the march toward profitability can stretch out like Lewis & Clark’s stroll to the West Coast. The incubation period can actually last a decade or more, even as the “start-up” continues to score new venture funding.

Such is the case at Adaptive Planning, a supplier of cloud-based corporate performance management (CPM) and business-intelligence software. The company was launched in 2003, and in the middle of last year it picked up its latest venture cash, $22 million from Norwest Venture Partners, in its fifth round of such funding.

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In Silicon Valley, for all but mature companies, the importance assigned to the bottom line is generally pale in comparison with that of growth. Especially dizzying growth. Adaptive Planning says its revenue bookings grew by 90% in 2012, and that it now has 1,500-plus customers across 65 countries. That’s why investors are still ponying up.

The company’s new finance chief, David Pefley, says excitement over that kind of growth was a major reason he agreed in late December to become the company’s second-ever CFO. He took the reins from Rob Hull, a company co-founder who, in addition to leading finance, was and still is Adaptive Planning’s president.

“I really enjoy addressing the challenges and opportunities of fast-growth technology companies,” says Pefley, who’s spent his entire career in the tech business. “I’ve led finance teams at both start-ups and Fortune 500 companies, and while Adaptive Planning is at the smaller end of that range, I saw a great opportunity to scale it to the next level through further international expansion and continuing to build out our network of channel partners.”

For the time being, though, profitability is not in the company’s plans. It did, according to Pefley, achieve cash-flow-positive status before 2012. Then, however, the company decided to invest more in its effort to accelerate growth. “Additional funding has been brought in for the purposes of product expansion and scaling sales and marketing, not for the short-term goal of achieving profitability,” he says.

There could be opportunities other than managing growth, though, suggested by the fact that since 2000, Pefley has been helping lead his employers to being acquired successfully by those with deeper pockets.

He most recently was CFO at Virtutech, a virtualization software company that was purchased by Intel. Before that he was finance chief at yield-management software company Yield Dynamics, where he helped engineer an acquisition by MKS Instruments. And before that he was vice president of finance at Aspect Development, a publicly held supplier of supply-chain e-commerce software that was sold to i2 Technologies.

So, it’s easy to imagine that Pefley was brought in to help sell the company. But for his part, Pefley states, “We are building the company to go public. We have no short-term desire to sell the company, and in fact we are scaling at a rate that could easily lead to an IPO.”

He does, though, observe that suppliers of traditional on-premises software installations have bought up a number of cloud vendors over the past couple of years. He declines to name names, but Oracle, SAP, and IBM are three players that fit the description. By common wisdom, their acquisitions were motivated by customers’ increasing attraction to cloud products, compared with the installed ones that made the two companies household names.

Adaptive Planning could indeed be an attractive acquisition target, says Christopher Iervolino, a CPM analyst for Gartner. “There is a lot of momentum in the [cloud-based CPM] market, and Adaptive Planning is capitalizing well on it, just as Host Analytics is,” says Iervolino, referring to a major cloud-based competitor that he characterizes as having a somewhat broader product lineup.

About a year ago, he says, most of the inquiries Gartner was getting from companies about the CPM space were along the lines of “what are these cloud products, how good are they, and are they going to be around for a while? But in the past six to nine months, the calls have changed; now [the callers] are looking only for cloud solutions.”

SAP, Oracle, and IBM, the largest players in the CPM market with their installed solutions, have been releasing their own cloud-based software over the past year, Iervolino notes. But such products are largely “on-premises code on a third-party cloud platform,” he adds. For a cloud product, using code that was written for the cloud to begin with may work better.

Iervolino also notes that Adaptive Planning gets high marks for customer service. That could become an issue if the company were acquired: when large technology companies buy small software vendors, customers frequently cite concerns that service levels will drop.

Meanwhile, besides the allure of fast growth, Pefley likes the role of CFO at a company that aims its products at CFOs: “I understand our customers’ pain very personally. I’m in position to help finance executives get beyond tedious and tactical tasks and be more informed, strategic, and predictive in their jobs.”

He also weighs in on the seemingly endless debate over the transferability of CFO skills across industries or the lack thereof. “Some may say that dollars are dollars. But while I may be biased, I think it may be easier to move from technology to another industry than vice versa,” he tells CFO.

Technology investors, less patient than others, want CFOs with experience managing for high growth. Second, in technology the management of product development is vital, as products are constantly expanded, revised, and improved to continue satisfying customers. “There are simply more factors to balance in technology, and on a more compressed time scale,” Pefley says.

Another challenge is getting the attention of larger companies. Like most cloud software makers, Adaptive Planning established its presence first among small and midsize companies that simply couldn’t afford to pay for the computer servers and IT staff needed to run big, on-premises installations.

The company also has a significant relationship with NetSuite, which so far has found its strongest foothold in the midsize market. NetSuite includes Adaptive Planning’s corporate planning software in its financial-applications menu under the name NetSuite Planning.

But also like many other cloud players, Adaptive Planning is now getting its toe in the door of the large-enterprise market. It counts Coca-Cola and Toyota among its clients. “It’s not like our software doesn’t scale,” Pefley says. “We have customers with thousands of seat licenses.”

Gartner’s Iervolino notes that to the extent Adaptive Planning and many other cloud vendors are in the large-company market, most often it’s individual departments or units, rather than the corporate finance organization, that use the products.

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