A CFO with experience taking a company public is in the catbird seat these days. As part of the same equation, it’s gut-check time for venture capital investors looking to hire a full-fledged finance chief a year or two before an anticipated IPO.
The boon or bane, depending on where one sits, is a result of that most basic of economic principles: the tension between supply and demand. Both of the past two years brought the most U.S. IPOs since 2000 (222 in 2013, then 273 in 2014), according to Renaissance Capital. The pace cooled off considerably in the first quarter of this year, with just 34 offerings, but 122 were in the pipeline by the end of March and the IPO research firm expected activity to pick up.
Demand for CFOs of pre-IPO companies is particularly strong for those who have previously taken a company public. Todd Ford, finance chief at Coupa Software, says he gets about two to three calls per week from recruiters and investors trying to convince him to go through the process again with a different company. In fact, when he was interviewed for this article, Ford was at security firm MobileIron, which he took public in June 2014. Coupa, which Ford joined on June 3, recently announced an $80 million funding round and is presumably on a path to its own IPO.
The supply of CFOs with IPO experience lags demand in part because of the relative sparseness of IPO activity for much of the last 15 years. Among companies that went public in the U.S. from 2012 through 2014, when offerings rebounded, only 18% had such a person at the finance helm, according to executive recruiting firm Korn Ferry.
Another reason for the shortage, says Ford, is that for many of his counterparts, “it’s one and done, then they ride off into the sunset or do something else.” Indeed, for the most part, IPO-experienced CFOs are not primed to take another dip in the pool, says Mike Brown, general partner of Bowery Capital, an early-stage investment firm. “They’re generally happy with their jobs, and no manner of compensation or equity is going to get them to move,” he says.
There are a couple of plain reasons for that: they may have made a fair amount of money the first time around, and taking a company public is an arduous task, to say the least. “The problem with these guys is not that you can’t find them,” says Paul Holland, general partner at Foundation Capital. “It’s getting them closed, because they know what they’d be signing up for.”
That may be especially so for someone who took a big-name company public and got rich doing it. Says Chris Cantarella, a Korn Ferry recruiter who has found many finance chiefs on behalf of venture investors: “The concern is, is that person going to be willing to do the pizza-and-beer, all-night thing with everyone else? Or will he go out on his yacht and say ‘Call me when you need me’? That might be a slight exaggeration, but we constantly hear from clients about this concern.”
It’s not uncommon, says Holland, for it to take several months to execute on a high-quality CFO hire. The ideal time frame in which to make that hire is 12 to 18 months before the IPO, Holland and other observers note. With less than a year to go, anxiety begins to rise. “In those situations, when you walk into a board meeting the first topic is, ‘How are we doing with the CFO search?’” says Holland.
Given the lack of IPO-savvy finance chiefs available, companies intent on going public will settle for substitutes. Recently, for example, a number of pre-IPO companies have hired investment bankers or financial consultants to fill the CFO role, says Cliff Scheffel, senior partner at KarrScheffelSullinger, a boutique recruiting firm that specializes in placing CFOs at Silicon Valley startups.
Often, a company and its investors are forced to drop items from their wish lists of CFO characteristics. Ford, who has been a venture investor between his CFO roles, says the first thing he would sacrifice would be technical credentials. It’s much easier to find a strong controller to cover the backward-looking, nitty-gritty aspects of financial reporting, he says. “The hardest parts of being a CFO at an early-stage company are forecasting results and investing capital,” he says. “To do that you really need to understand how all the pieces of the business work together, which usually takes a good one to two years.”
The largest, best-known VC firms have a somewhat easier time getting a finance chief who is close to fitting the bill, Cantarella says. Other firms are more willing to overlook the lack of IPO or CFO experience in a person who has led significant growth, has an entrepreneurial bent, and has the right personality.
The number-two finance person or a divisional CFO from a large, well-respected public company is often the first choice. For some pre-IPO firms, the leader of a function like investor relations, tax, or internal audit might fit the bill, says Brown. Such a person probably has been with the larger organization for a number of years, during which he or she has had several roles, and knows how to use technology.
Either way, for the person making the move there’s a compromise: trading down to a smaller organization in exchange for getting to be its finance chief. “They’re going to do a lot of due diligence, so the business model better be sharp,” says Cantarella. “But if it’s something really cool they may say, ‘You know what? This is my shot. The CFO in front of me is not going anywhere, so I’ll take this equity stake [in the startup], it might be a big play, and now I’m in the CFO club.’ That’s fire in the belly.”
Holland of Foundation Capital, however, dislikes poaching talent from a big company. “Someone from a large organization is used to a lot of structure, whereas coming into a smaller organization the problem they’re there to solve is a lack of structure,” he says. “That can be a volatile mix, and as a consequence we tend not to go down that path.”
Qualities That Count
For Bowery Capital, which invests in business-to-business software companies, successful CFO candidates have to be IT savvy. “We meet a lot of senior-level finance people who don’t understand that the accounting and billing systems at these [early-stage] organizations are very basic and cheap,” says Brown, “and that they will need to move to much more complex, regulatory-specific, scalable products and services that involve a fair amount of migration.”
Brown also values agility in a CFO, as the pre-IPO environment is fast-paced and the role likely will morph to something different in short order. “They need to be agile in thinking about the role in a way that isn’t narrow and focused just on managing up to the CEO and board and down to the finance organization. It will be a lot more collaborative—they will have a lot of interaction with different business units.”
The ability to manage complex relationships, especially with the investment community, is a key differentiator between a good CFO and a great one, according to Scheffel. That’s true at mature companies as well as startups, but “when a company is young and technology-oriented, the people in and around the CEO role, the board, and the investor community have more variance in their views of the world than would be the case with the same group of people at IBM.”
Cantarella looks for what he calls a “hybrid CFO” — someone able to deal with Wall Street and tell the company’s story, run anything having to do with capital deployment, and be hands-on with details. “If they haven’t done an IPO before, there is risk here,” he says. “We know this person is strategic, but is he or she going to want an entourage to get these things done?”
The equation is straightforward for Holland: Is a candidate someone who can manage the business through the chaos and the IPO and handle all the finance, compliance, operational, and HR responsibilities that fall on the CFO position? On the other hand, experience in a company’s industry or segment isn’t necessary. For example, when Holland was looking to hire a CFO for online educational services firm Chegg in advance of its 2013 IPO, he brought in Andrew Brown, who had been a highly regarded finance chief at Palm, the former PDA maker.
“We were very excited about his temperament, charisma, personality, and how we felt he would mesh with the team at Chegg,” Holland says. “He didn’t have any background in digital education, and not much of a background in Internet commerce, but he had broad general experience and was the kind of person who could be part of a highly scalable public company.”
If hiring a CFO too late is a problem for an IPO-bound company, so is doing so too early — and it’s a much more common occurrence, says Scheffel. One issue is that a company is unlikely to induce a high-quality CFO to come aboard more than two years before going public. And even in a rare case where that’s achieved, if the company doesn’t sustain a high growth rate, “that person is going to be highly recruitable to the next hot company and will leave,” he says.
But pinpointing the optimal time for the hire can be tricky. What if a company is prudently waiting when sales take off faster than expected? “You may have been comfortable with the dynamic, with your controller in place but not ready for a prime-time CFO, and all of a sudden instead of being four years away from liquidity you’re 18 months away,” says Holland. “Now all of your systems are under pressure, you’re behind on your audit, you’ve got client issues, and HR is a problem. The situation screams for a more seasoned executive to come in.”
When a Controller Will Do
Still, there is general agreement that in a company’s very early stages, it’s wiser to have a controller than a CFO. “Most of the headaches and challenges you have early on relate to tactical issues,” says Brown of Bowery Capital.
In particular, at that point in time, product development is front and center. It’s not until the company has auditable financials and is ready to drive toward an outcome that a CFO is necessary, observes Holland. “We make every investment with the notion that the company is going to be successful, but half of the time it doesn’t succeed at all, and only 15% to 20% of the time will it be a big success,” Holland says. “So we don’t kill ourselves to find the public-ready CFO at that point. That person is not going to take the job anyway.”
When the company is very small, with, say, 10 to 20 clients, it’s pretty easy for a controller to get his or her arms around billing, collections, and data analysis, says David Blanke, newly hired as general manager of start-up artificial intelligence company Clarifai, after spending the prior three years as CFO and chief operating officer of another early-stage company, Sailthru.
“It’s when you get to 50 or 60 clients that you need a stronger, more reliable reporting environment,” Blanke says. “You need to establish a regular monthly close process. And maybe you don’t have accounts payable or payroll set up in a scalable way, and billings and collections are all over the place. That’s what a controller is for. But then, if you’re raising debt, or doing anything strategic like international expansion, or the CEO needs a close adviser, the company may need a CFO.”
Company founders frequently make the mistake, however, of assuming that the controller they hired can grow with the company into the CFO role. Brown says Bowery Capital lets them know right away that such a scenario is typically unrealistic. “They don’t have years and years for that person to develop into a CFO,” he says. “Venture-backed companies tend to go from tiny and simple to highly complex in a short span of time, call it five years.”
For those seeking to hire a finance chief for a pre-IPO company, Cantarella offers a final piece of sage advice. That is, most of his clients start out wanting someone from top brand-name companies and top schools, but taking that stance unhelpfully winnows the field of candidates. “Frankly, we often remind clients that some of the most successful people in industry came from places where they had to run really hard and were tested in the crucible, places where they had to do a turnaround,” Cantarella says. “The key is, how does this person think?”
David McCann is a deputy editor of CFO.
Up Next, Yext
The career path of a pre-IPO CFO
If a company needs a finance chief with serious IPO chops, chances are Steven Cakebread is a wish-list candidate. In 2004, he took salesforce.com public. Seven years later he presided over Pandora Media’s IPO. After that came a stint with D-Wave Systems, a quantum computing company, although it did not go (and has not yet gone) public.
Now Cakebread is CFO of Yext, a nine-year-old provider of so-called digital-presence management software, which enables companies to manage their location information on multiple websites. A common thread of his last three jobs has been cloud computing: “Each time I’ve had to come in and say, we’re not closing the books in five to seven days, we don’t really do good forecasting, nobody’s approving anything, and the only way to change all that at a rapidly growing company is through cloud technology.”
Cakebread views his job as getting the financial operations of a company up to speed, not preparing it for an IPO per se. “The reality is that you’re putting in the processes to run a $100 million or $200 million business,” he says. “The consequence of doing that right is that you’re ready to go public at some point.”
Not that his services are the perfect fit for just any young company. Cakebread says he gets calls all the time from potential employers, but for the most part he points them in a different direction. For example, he says, a friend is running a startup that’s doing interesting things with drones. “He said he’s doing about $10 million [in revenue], so it’s time to hire a CFO. I told him to hire a good accounting person to put in infrastructure systems that will last until he gets to a half-billion.”