Ten Common Missteps of Venture & Growth Stage CFOs

Having served for 27 years as a Senior Analyst and Department Head in sell-side equity research at a bulge bracket investment bank, as Chief Financial Officer of a publicly traded Special Purpose Acquisition Company (SPAC), and most recently as a Senior Partner at an emerging venture capital firm, I have engaged with a wide range of talented CFOs across diverse industries. Successful finance leaders demonstrate certain shared characteristics. Yet, I also have encountered some consistent mistakes, typically driven by subpar application of resources and analysis to “look around corners,” thereby sacrificing both a tactical and a strategic edge. The result is more difficulty anticipating changes or problems and planning ahead. In this article, I share ten common missteps that I have observed among CFOs at venture and growth stage companies. 

1.        Murky Model Math

The financial model is a critical tool for any CFO. Internally, it helps executives to understand the nuances underlying business dynamics, quantify the impact of key events and decisions, establish realistic goals, set proper incentives, and determine the factors or actions required to convert management’s objectives into reality. Externally, the model drives alignment between company executives, employees and investors by providing a framework for a consistent and cohesive narrative.  However, the model is only as good as the underlying data and the reasonableness of assumptions that drive forecasts. As reported by CNBC on July 13, 2023, according to a study from financial modeling firm F1F9, 88% of all spreadsheets have errors in them, including those underpinning critical business decisions. 

Common modeling pitfalls for CFOs to avoid include overly simplified drivers for revenues and costs, aggressive estimates that don’t correlate with any specific addressable market analysis, projections limited to only 1-2 years out, no tie to core balance sheet or cash flow line items (let alone full statements), unrealistic tax projections once NOLs are fully utilized, and basic formulaic errors or stale figures. Where management is sensitive about providing certain information beyond the inner circle, it can be helpful to offer two separate but linked versions of the model.

2.        False Comfort

As the mathematician John Allen Paulos noted, “uncertainty is the only certainty there is.” To that end, single point forecasts, while helpful to reflect management’s thinking, are bound to be wrong and lead to a false sense of security. Scenario analysis enables the CFO to capture a much wider range of possibilities with a high degree of confidence. Yet a report by Vena Solutions on July 17, 2023 noted that 55% of companies do not employ such techniques as part of their forecasting process. Doing so would enable the finance team to consider risks to both the up-side and down-side, stress test basic assumptions, make decisions based on a broader purview, prepare for potential looming challenges, and operate dynamically as the environment changes. In short, scenario analyses serve as the fundamental bookends for insight into the company’s risk/reward spectrum.

3.        Outsourcing Quality

There is no substitute for a finance executive who has command of the numbers. That does not mean that she must be a CPA with a technical accounting background. A controller, other team member, or contracted service can play that role. But quality itself cannot be outsourced, as “the buck stops” with the CFO. Based on Deloitte's CFO Signals 1Q23 Report, which reflected a survey of large companies conducted during February 2023, 64% of CFOs noted inadequate technologies/systems and 62% cited immature capabilities as the greatest hurdle to converting data into insights. The challenge is magnified significantly for smaller firms. While they tend to be less complex, resource constraints often limit sophistication of their finance operations.

No matter the size of the company, CFOs must find ways to have the right information at the right time so that they can understand the essential dynamics impacting the financials. They must establish confidence that the numbers themselves are accurate and/or reasonably based, invest in solutions to enhance data access and reliability, and take responsibility for designing processes that are efficient as well as reflective of strong controls. They must partner with accountants and auditors without becoming overly reliant. Internally, owning the numbers and processes ensures that the CFO asks proper questions, plans appropriately, and thinks strategically. Externally, doing so enables the manager to control the narrative and respond to questions effectively, key tenets for establishing credibility. CFOs cannot know everything, but they should understand what is most important and be prepared to follow up on what they cannot answer.  

4.        Fumbling the Narrative

Most companies are not like the “Field of Dreams”: if you build it, investors won’t necessarily come. The right narrative is crucial. An Oracle NetSuite Survey of executives and managers from companies with $250M or less in revenue found that “40% of non-finance execs and managers do not believe their company’s CFO is an expert communicator.” CFOs must take the time to hone their message and to provide investors with an investment thesis that is clear and simple.

A strong thesis can be conveyed in one sentence, supported by 3-5 bullets with more detail and relevant datapoints. Any sources of differentiation should be highlighted, and the thesis should be explained within the context of the broader macro landscape, the industry in which it participates, the addressable market opportunity as well as the firm’s own mission and strategy. Too many CFOs tell the story the way that management wants it to be heard – both in terms of the substance and the style of the presentation – rather than the way that investors prefer to digest it. Perspective matters. The CFO must establish the company’s brand by delivering the narrative in a manner that will most resonate with investors themselves. While there are important nuances in how messages are communicated to investors versus customers, the two must be fundamentally aligned. This requires a strong partnership between the CFO and the CRO/marketing team.

5. Waiting to Court

Based on an analysis of the PitchBook Data, Inc. Q2 2024 NVCA Venture Monitor, US VC fundraising declined by more than 55% in 2023, and the environment remained tight during the first half of 2024. As such, competition for capital from the highest quality partners is increasingly fierce, elevating the importance of timing (i.e., when management builds relationships with investors) as well as the size of the raise itself.

CFOs often wait to court investors until they are preparing to execute a raise. The best way to ensure a smooth process is to establish relationships on an ongoing basis. Investors who have taken the time to understand the company, the industry, the market opportunity, and the management team well in advance of a raise are more likely to participate and are best positioned to make a rapid decision. Ideally, these investors add strategic value along the way, deepening the connection with and commitment to the company. 

Management teams and existing investors may attempt to limit the size of the raise itself in order to minimize dilution, to optimize valuation over time, and to maintain discipline, all valid reasons. Nonetheless, it is prudent to balance these factors against the risk of forgoing the proverbial “bird in the hand.” Capital access could prove even more difficult later; a shifting macro landscape could derail fundamental assumptions; and additional capital could help to accelerate growth near term. Finding the right equilibrium in the size of a raise is paramount.

6. Rocking the Capital Boat

While capital stewardship has myriad angles, two stand out as particularly common challenges for CFOs: M&A and cap table management.

Execution around M&A can materially impact perceptions of company leadership. While external factors typically have an outsized influence on organic performance, management bears direct responsibility for the decision to utilize the team’s time and resources for an acquisition. An often quoted study published in the Harvard Business Review by Clayton Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck during March 2011 suggested that 70-90% of M&A transactions fail. There are a wide range of variables that impact success. Acquisitions should be relevant to the broader narrative and the company’s strategic objectives, fit with the corporate culture, integrate effectively with the core business at all levels, come with a change management plan where necessary, be reasonably priced and appropriately structured, and prove accretive over time. The definition of success should be clear, while results are easy to evaluate and measurable. Management teams should only engage M&A where they have the time, resources, discipline, strategy, insight and investor buy-in to do so.

Managing the cap table thoughtfully also is crucial for a CFO. Ideally, the cap table should include a limited group of investors who can bring diverse and relevant experiences, add strategic value as trusted advisors, serve as future customers, and/or provide ongoing capital support as the business seeks to grow. On the other hand, cap tables that come together haphazardly over time may become unwieldy, lead to “dead weight” investors, create governance challenges, and ultimately require painful restructuring. Proactively building the right investor relationships and effectively managing the cap table go hand-in-hand.

7. Hiring Dissonance

A study published in February 2022 by the National Venture Capital Association & Venture Forward in collaboration with the University of North Carolina Kenan Institute of Private Enterprise Research indicated that the VC-backed companies generated an annualized growth rate in employment of 8.2% during the 30 years ending 2020 compared to just 1.1% for total private sector employment. This differential isn’t surprising, since venture-backed businesses are heavily growth oriented. Hiring objectives must synch with both projected revenue and margin expansion plans. As noted earlier, this requires strong alignment between the CFO and the company’s CRO and/or marketing team.

On one hand, revenue growth forecasts that run too far ahead of salesforce and marketing spend can prove to be unrealistic and recipes for underperforming expectations. The ramp in implementation and customer success staff also is critical for complex, technology-oriented businesses. On the other hand, it is a balance. Getting too far ahead in hiring can exacerbate cash burn and hinder margins. While all this may sound obvious, hiring plans and the outlook for the customer pipeline as well as revenues are not always appropriately linked.

8. Losing Fundamental Balance

Investing bubbles tend to occur during periods of outsized demand for high growth stories, resulting in valuations that become difficult to justify versus fundamentals. They may last for a long time, but when investor appetites change course, the reversal is rapid and severe, leaving a trail of tears in their wake. The internet bubble of the early 2000s and the “venture growth” bubble of 2021 are prime examples. Based on an analysis of the PitchBook Data, Inc. 2023 Annual VC Valuations Report, the median pre-money valuation for venture growth stage transactions soared 138% in 2021 and then plunged by 65% over the ensuing 2 years. This shift in valuation, and hence investor sentiment, has been accompanied by an increasing thirst for profitability among later stage firms.

Growth companies that ramp spending on development aggressively or reinvest profits to accelerate their top line risk a perceived imbalance between revenues and net income. The path to profitability must be front and center in the CFO’s mind. The use of lower cost “centers of excellence” or contract resources are not just fodder for further in the company’s life cycle. Building the business with a keen focus on cost structure from the very beginning is the appropriate discipline. CFOs also should have a “plan B,” a series of actions to which the business could pivot in order to hasten the path to profitability if circumstances required. This is particularly important when access to capital becomes constrained.

9. Taking Eyes Off the Team

Especially at firms that are earlier in their life cycle, it is easy to become focused on product development and customer pipelines at the expense of developing the team. However, this can be a mistake. The same Oracle NetSuite Survey highlighted above suggests that 35% of non-finance leaders don’t see team management as a strong point for their CFO. With a variety of moving parts, insufficient attention to the team can lead to errors and poor control over processes. When individuals don’t feel like they’re learning, growing, and an integral part of the broader mission, turnover becomes more likely, which can prove deleterious for the business as well.

While the best CFOs don’t micromanage, they do care about training and developing talent, retaining a strong pulse on processes and ensuring that the finance team fits well into the culture of the organization. At the same time, it is imperative to lead by example, particularly with respect to a focus on execution, accountability, character, and integrity. This includes conveying to staff a commitment to escalate problems quickly with an eye toward solutions.

10. Underplaying the Long Game

As Robert Burns would say, “The best laid plans of mice and men often go awry.” But that doesn’t mean one shouldn’t have any plan at all! In an article published in Benzinga on September 14, 2023, Caleb Naysmith argues that: “on average, it takes between seven and ten years from founding for a startup to reach an IPO or exit.” During that period, it helps for CFOs to establish a guiding light in conjunction with the firm’s leadership, a definition of success for the longer term. Whether it is an exit strategy or something more fundamental (e.g., share of wallet), this north star enables financial executives to consider what they must have to achieve their goals financially and to plan ahead – from capital requirements to hiring needs, resource demands, vendor essentials, and beyond. Robert Burns likely would remind us that the future is impossible to predict over a 10-year period. With that in mind, the guiding light should be re-evaluated carefully and consistently over time.

CFOs intersect with most key parts of the organization: senior leadership, operations, human resources, engineering/product development, sales and marketing, and investors. It is this very central nature of the function that makes it so crucial to the company’s success. Avoiding the ten pitfalls above not only ameliorates the contribution of the finance executive, doing so also elevates the performance of the entire team.