Beyond the Founding Team: The Chief Financial Officer for Growth

Leadership StrategiesTechnology and InnovationIndustry TrendsDiversityLeadershipPortfolio Company LeadershipSuccession PlanningShareholder Stakeholder EngagementTechnologyVenture Capital and GrowthFinanceExecutive SearchC-Suite SuccessionDiversity, Equity, and Inclusion AdvisoryAssessment and BenchmarkingDevelopment and Transition
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August 31, 2022
12 min read
Leadership StrategiesTechnology and InnovationIndustry TrendsDiversityLeadershipPortfolio Company LeadershipSuccession PlanningShareholder Stakeholder EngagementTechnologyVenture Capital and GrowthFinanceExecutive SearchC-Suite SuccessionDiversity, Equity, and Inclusion AdvisoryAssessment and BenchmarkingDevelopment and Transition
EXECUTIVE SUMMARY
Bringing the right CFO to stabilize the foundation of well-funded growth companies is critical to long-term success.
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For well-funded growth companies to be well-positioned when the IPO market reopens, it is increasingly important to understand the profile of a tech and/or growth CFO and the differentiating characteristics that allow them to lean into profitable growth and manage public market expectations as a successful company.

 

Market experts see the IPO window opening for tech startups in the first quarter of 2023 at the earliest, with many likely appearing in the second quarter of 2023.Bringing the right finance leader to build and stabilize the organization’s foundation is critical to long-term success. To better understand CFOs at top growth companies, Russell Reynolds Associates analyzed the background, tenure, and select experiences of 81 “IPO CFOs” from tech or tech-enabled companies that were listed in the US (S-1 listings on the NYSE or NASDAQ) over the past three years, with a minimum valuation of $4 billion. For equitable comparison, organizations have been segmented into quartiles by market capitalization at time of IPO (Figure 1).

 

Figure 1. Market cap value ranges of largest, high-growth, tech-enabled companies at IPO (2017-2021), by quartiles of 19 companies

Largest high-growth, tech-enabled company IPOs

Source: RRA proprietary analysis of 81 IPO CFOs at high-growth, tech-enabled organizations (2017-21)

 

In the US, the first half of 2022 saw 122 IPOs that raised $16 billion, compared to 2021's first half of 532 offerings that raised $203 billion.2 Venture capital firms are wary of difficult market conditions, warning that raising capital will come with an evolved set of challenges. Given current market dynamics, investors and technology companies are increasingly focused on shifting growth strategies toward profitability and the Chief Financial Officer’s capability in establishing continued, profitable growth.3

Our research on growth CFOs highlights the following takeaways:

 

There is no one-size-fits-all IPO CFO, but they should be Wall-Street-ready
Read more

The type of CFO needed depends on the organization’s scale, business context, strategy, and growth stage on the road to IPO. A strategic, future-forward mindset at every stage is critical.

 

CFO appointment timing is a balancing act
Read more

The IPO CFO should be appointed close to the anticipated IPO date (ideally 18 months prior). This gives them enough time to properly transition the organization into the public environment, and it is far enough along the IPO journey to attract top talent.

 

Honing a home-grown finance leader pipeline will be a competitive advantage in the tight labor market
Read more

Unsurprisingly, organizations are looking for experienced CFOs with previous IPO and/or public company experience. This is particularly true for smaller organizations, who may not have developed a robust internal pipeline yet.

 

Women being looked over leaves a lot on the IPO table
Read more

From this cohort of CFOs at the largest high-growth, tech-enabled IPOs from the past three years, only 16% were women.

 

Within this dataset, Russell Reynolds also analyzed available data for growth one-year post IPO. In this cohort, only 37% of organizations saw an increase in market capitalization within the first year. While it is too early to extrapolate learnings from this particular group, the initial analysis highlighted that CFOs at organizations with an increase in market capitalization brought relevant CFO, IPO, and public company experience. Achieving continued and profitable growth, particularly in times of market uncertainty, requires organizations to stay informed and aligned on the CFO talent market, strategically integrating and evolving the CFO mandate into their businesses.

 


 

There is no one-size-fits-all IPO CFO, but they should be Wall-Street-ready.

At the onset of taking a company public, IPO knowledge and expertise are crucial. The organization needs a CFO who can shepherd it through the IPO process, scale with the right thesis, cultivate the business model and strategies, and lay a strong foundation. As the organization matures, the CFO role evolves, and it is important to have an executive with prior in-role and public company experience, who understands how a public company functions and can lead the organization’s transition in various areas, such as stakeholder management (e.g., investors, proxy agencies, media, employees) and information disclosure (e.g., financial statements, remuneration).

CFOs are typically the first executive hired beyond a company’s founding team; however, most are replaced before IPO. On average, the CFO who is appointed to bring the organization public is the organization’s second financial officer.

The CFO role can be thought of in three different typologies – accounting, operating, and strategic. Some CFOs may be a blend across the three typologies, though typically most will align with a certain profile.

  1. An accounting CFO brings a traditional finance perspective on budgeting, reporting, risk mitigation and compliance, working to manage business complexity while minimizing risk as the organization executes on its strategies.
  2. An operating CFO has a holistic understanding of how the organization is run and can offer a more grounded business perspective, enhancing long-term growth strategies. In addition to bringing financial expertise, the operating CFO drives efficiency and effectiveness and transforms the finance function as the organization’s business model changes.
  3. A strategic CFO not only understands the business’ financial operations and analyses, but also brings a forward-thinking perspective, providing insights around financial levers to influence long-term growth strategies. The strategic CFO may also offer the investors’ perspectives around value creation to help maximize shareholder value.

 

Figure 2: Large, high-growth, tech-enabled company CFO experience and typology, % of organizations in each quartile 

Large tech-enabled organizations value the entrepreneurial and strategically oriented CFOs when going public

Source: RRA proprietary analysis of 81 IPO CFOs at high-growth, tech-enabled organizations (2017-21)

Across the group of high-growth, tech-enabled organizations studied, there is less emphasis on the tactical remits of the role. In each quartile, approximately only 20% of CFOs are solely accounting focused. This speaks to the evolving nature of the role – CFOs are responsible for more than providing guidance on regulations and delivering financial updates. Congruent with the theme of entrepreneurial CFOs leading at the largest organizations, there is a higher demand for strategic, future-forward financial leaders who can collaborate meaningfully with the Board, CEO, and C-suite. As half of IPO CFOs at the largest organizations are first-timers in the role, previous CFO experience is not necessarily a requirement; strong candidates bring a mindset that can develop strategies for continued shareholder growth post-IPO, and offer new blueprints for financial operations, team buildout, and digital integration.

Chief Financial Officer typologies

01 Accounting CFO

  • Historical model in public companies; less common in 2022
  • Typically brings a background in public accounting and has spent time in the Controller role
  • Possesses a CPA
  • Brings detail orientation, diligence, technical skills, and principles-based leadership

Offers a risk management/ compliance perspective

 

02 Operating CFO

  • Most common in public companies
  • Comes up the FP&A/ division finance track; may also have early career CPA/Big 4 experience
  • Brings generalist financial acumen, business partnering skills, and bottom-line orientation

Offers a grounded business perspective

 

03 Strategic CFO

  • Typically began career on Wall Street
  • Comes up the banking / corporate development / M&A track
  • Possesses an MBA
  • Brings big picture orientation, investor/stakeholder value mindset

Offers the investor perspective

 


 

CFO appointment timing is a balancing act.

As organizations build the foundation for 1) their business models, 2) the anticipated IPO, and 3) continued, profitable growth, appointing the right CFO must remain a priority, with open and continuous dialogue on key experiences and competencies. Organizations should be thinking about the CFO needed for IPO as they begin to scale up, depending on their size and growth strategy (Figure 3). In general, appointing the IPO CFO 18 months pre-IPO is ideal. This gives the IPO CFO enough time to build a talented finance organization and reliable financial reporting system to properly transition the organization into the public environment, and it is far enough along the IPO journey to attract top talent.

Figure 3: Timing and hire-date revenue of organizational hires of IPO CFOs, by revenue quartiles

Organizations hire their IPO CFO at critical inflection points as they scale

Source: RRA proprietary analysis of 81 IPO CFOs at high-growth, tech-enabled organizations (2017-21)

 


 

Honing a home-grown finance leader pipeline will be a competitive advantage in the tight labor market.

The CFO talent market is tight, especially amongst public company CFOs. In 2021, the CFO turnover rate hit 18%, the highest it has been in the past few years (2021: The year of CFO turnover and strides in gender diversity). Within the IPO environment, 79% of CFOs are externally appointed (Figure 4). This is especially true for organizations with smaller market caps, who most likely do not have robust finance talent capable of leading the company through an IPO or operating at the public company level. These organizations therefore more frequently externally hire experienced CFOs with previous IPO and/or public company experience. However, given the fight for external CFO talent (Portfolio Company CFOs: Rethinking the Hiring Blueprint), this is an important time to focus on developing an internal finance leader pipeline and to reconsider “required” experiences, such as IPO or previous CFO experience.

Figure 4: Previous experience and hire-type of IPO CFOs, by revenue quartiles

Top tech-enabled IPO-ready CFOs are externally appointed

Source: RRA proprietary analysis of 81 IPO CFOs at high-growth, tech-enabled organizations (2017-21)

 


 

Women being looked over leaves a lot on the IPO table.

Women comprised 32% of new CFO appointments among S&P 500 companies in 2021, almost double the previous year’s rate,5 however, of this cohort of the largest high-growth, tech-enabled IPOs from the past three years, only 16% were women (on par with the S&P 500 average), and 77% of those women were appointed in 2021 (Figure 5). There is no significant difference between women CFOs and the overall cohort in terms of CFO experience, appointment type, and archetype orientation. With increasing scrutiny on gender diversity in public companies, future organizations will need to strongly consider gender diversity as they plan for their IPO CFO.

Figure 5. Overview of tech-enabled IPO CFOs

Overview of women tech-enabled IPO CFOs

Source: RRA proprietary analysis of 13 women IPO CFOs at high-growth, tech-enabled organizations (2017-21)

 


 

Looking ahead

To ensure that they are well-positioned to attract the right IPO CFO, high-growth companies should:

  • Stay informed and aligned on the CFO talent market: It is never too early to engage in a conversation around the IPO CFO, as this will help align stakeholders on what is needed and where the gaps are. Having multiple, continuous discussions in line with growth and scaling milestones will give the organization time to understand how to navigate the CFO market, and have a pulse on both internal and external talent options, especially as organizations become increasingly open to first-time CFOs. In addition, this provides an opportunity for the CFO role to evolve and transform alongside the business as it develops and matures. A CFO who is placed too early may bring a misaligned archetype, precipitating a rushed replacement; a CFO placed immediately before the IPO date without thoughtful buy-in from stakeholders may deter the IPO process.
  • Strategically integrate a “Wall Street ready” CFO mandate: As the organization’s business matures, the CFO mandate needs to shift accordingly. Once the organization has fully transitioned into the public environment, the CFO will need to implement the right structures and rigor to support continued, profitable growth, cultivate a new culture, and build out the finance team. These initiatives should not happen in a silo, but in connection with the broader business. Not only should discussions revolve around which archetype, competencies, and experiences are key for the IPO CFO, but they should also consider how the CFO can focus on durable and profitable growth strategies. Managing public market expectations as a successful company will become more challenging as market conditions become tougher, and companies will need to tweak the skillsets of CFOs to be able to continuously grow their businesses, even amidst a downturn.

Appointing an IPO CFO who understands the market landscape, the evolving business model, and the growth playbook is critical to a successful IPO journey. Having a Wall Street-ready CFO is even more important now, as high-growth companies present their stories to both private and public investors. By strategically interacting with the CFO talent pool, aligning stakeholders to both the business and CFO mandates, and discerning between CFO archetypes, high-growth companies will be better prepared to recruit the right IPO CFO, at the right time, and execute a successful IPO.

 

 

Methodology

Russell Reynolds Associates identified 81 CFOs in seat at time of IPO from recently public, high-growth tech companies:

  • Tech or tech-enabled companies that have been listed in the US (i.e. NYSE or NASDAQ) in the past 5 years (2017-2021)
  • Largest IPOs, according to valuation at time of deal (post-valuation defined as the value of the company after a capital injection/financing event, i.e. IPO); minimum valuation of $4B at time of IPO
  • Companies are segmented into quartiles by market capitalization


Related Reading

 

Beyond The Founding Team: Growth Company Leadership Timeline

Russell Reynolds Associates has researched 40 of the Americas and EMEA’s most successful, high-growth tech companies to understand the patterns of best-in-class executive leadership appointments over time.

Read more

 


 

 

Portfolio Company CFOs: Rethinking the Hiring Blueprint

In an increasingly competitive CFO market, PE firms must think holistically about their portfolio company finance teams to unlock new talent.

Read more

 


 

 

Five differentiators of high growth technology CPOs from Fortune 500 CHROs

Growth firms tend to “over hire” when it comes to leaders, particularly in HR. RRA examined what makes high growth chief people officers unique.

Read more

 


 

Additional Authors

  • Robert Alexander is a member of Russell Reynolds Associates’ Technology Knowledge team. He is based in New York City.
  • Catherine Schroeder is a member of Russell Reynolds Associates’ Financial Officers Knowledge team. She is based in Toronto.
  • Joy Tan is a member of Russell Reynolds Associates’ Center for Leadership Insight. She is based in New York City.
     

 

References

  1. Russell Reynolds Associates Pitchbook IPO Analysis, July 22 2022.
  2. What Lies Ahead for the IPO Market? Parameshwaran, Shankar. Knowledge at Wharton, April 12, 2022.
  3. How Bad is Big Tech’s Hiring Freeze? Lee, Dave. Financial Times, June 10, 2022.
  4. IPOs are a Year Away for Tech Startups, KKR Deal-Makers Say. Heeter, Maria. The Information, July 25, 2022.
  5. 2021: The Year of CFO Turnover and Strides in Gender Diversity. Fisher, Jenna, Jim Lawson, Rose Mistri Somers, Catherine Schroeder. Russell Reynolds Associates, November 29, 2021.