With the era of low-cost money in the rearview mirror, investors are increasingly counseling their portfolio companies to be judicious in terms of investment and to focus more heavily on path to profitability vs. growth at all costs. Companies that have long espoused a strategy of capital efficiency are lauded as the new unicorns, and those that lack financial discipline are simply running out of cash. This year, over 20 U.S.-based VC-backed businesses have filed for bankruptcy, and another 150+ have sold for sub-$10 million or a discouraging “unannounced” amount.
Given this new economic reality, it is important for Founders to build a culture of data driven decision making that prioritizes responsible, sustainable, and most importantly profitable growth. One key factor for success: the support and guidance of a strong Chief Financial Officer.
Egon Zehnder analyzed the finance teams of 150 venture-backed business. We discovered there is a correlation between outcomes and investment in the finance function. Strong finance leadership can play a key role, not just as a guardian of systems, processes, and controls, but also as a driver of strategy and an important influence on culture.
The relationship between the existence of an established finance function and business outcome was noticeable in our first cohort – unicorns minted during the March 2020 through March 2022 timeframe that have gone on to be successful.
Of a group of 30 VC-backed companies that raised at a $1 billion valuation during this time and have continued to post sustained growth, only three lack a history of investing in the finance function. More than half of the group already has a CFO in place; the remainder are led by a strong VP or SVP Finance, underscoring a strong correlation between company valuation and the seniority of the finance leader. Companies with a CFO leading the finance function have, on average, a 20 percent higher valuation when compared to those with a VP or SVP Finance. However, it is important to note that this premium cannot necessarily be ascribed to the actions of the CFO. In fact, our data shows that CFOs tend to join companies at a later stage, once the business has gained some traction and after the early fundamental work has been done by the VP or SVP level leader. On average, CFOs were later to join than VPs or SVPs by about 25 percent. Additionally, the average tenure of CFOs in our dataset is two years, compared to two years for VP and SVPs Finance.
One key factor for success: the support and guidance of a strong Chief Financial Officer.
Conversely, when we looked at the 100+ companies that failed, even having raised at least $50 million in funding, it was clear: few showed a history of consistently investing in finance. Where there was evidence of an early commitment to finance for many of these businesses, they frequently de-prioritized the function as they grew – for example, failing to replace a departing CFO or VP Finance. Overall, only around half of the companies in this dataset had a CFO or VP Finance in seat in the twelve months prior to failure and, of those, 30 percent had been in role for less than 18 months.
The need to maintain fiscal focus will only increase in the near term. The outlook by Coatue Management shows Founders face a “year of efficiency.” Already, they point out, high profile Founders have pivoted away from pushing growth. Twitter has shed staff. Meta embraced a “flatter and leaner” operations strategy. Going forward, the Founder mantra will be efficiency and scale, Coatue predicts.
This environment will only boost demand for support from the finance function.
Clearly no CFO, however strategic, can singlehandedly take responsibility for the success of a business. There are many factors in play including product market fit, competitive environment, strength of the board and effectiveness of the rest of the ELT. However, the data does tend to support the advice we give to many of our Founder-led clients: invest early in finance, ensure that your hire is appropriate for the stage of your business and give that person a seat at the table in terms of setting strategy and building culture. Technology and Product are - and will always be - key functions for a growth stage business. But particularly in a market where capital is both scarce and discerning, a culture of strong analytics, smart capital allocation and financial discipline can differentiate you from the crowd.