With the era of low-cost money in the rearview mirror, investors are increasingly counseling their portfolio companies to be judicious with investments and to focus more heavily on profitable growth 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.
For example, last year, 140 venture capitalist (VC) and VC-backed businesses filed for bankruptcy. This new economic reality highlights the importance for company 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.
The Changing Role of the CFO - Why It Drives Profitable Growth
The CFO role has expanded significantly over the past decade and is pivotal to driving profitable growth in modern organizations.
In a survey conducted by Egon Zehnder, we found that 82% of CFOs have taken on additional responsibilities in the past two years alone (e.g., environmental, social, and governance; mergers and acquisitions; and corporate development duties).
This role extension goes far beyond traditional financial oversight, embedding CFOs deeply into strategic planning and execution. Here are a few key reasons this evolving role is crucial for sustainable, profitable business expansion:
- Strategic Integration: CFOs are increasingly involved in shaping strategic decisions that directly impact the company's growth trajectory. By integrating financial expertise with broader business strategy, CFOs ensure that financial metrics align with corporate goals, facilitating more informed and effective decision making.
- Risk Management: With their comprehensive oversight of company finances, CFOs are uniquely positioned to identify potential risks and implement mitigation strategies. This proactive approach protects assets and ensures financial stability, contributing directly to sustained profitability.
- Operational Efficiency: Modern CFOs play a crucial role in streamlining operations and improving efficiency. They help optimize resource allocation and expenditure, reducing waste and enhancing operational agility, which is critical for maintaining competitive advantage.
- Technology and Innovation: As technology continues to reshape business landscapes, CFOs are at the forefront of adopting and implementing new financial technologies that enhance analytics, forecasting, and data-driven decision making. This improves accuracy while unlocking new avenues for revenue generation.
- Stakeholder Communication: By effectively communicating financial strategy and company performance to stakeholders, CFOs build trust and secure investor confidence, which is essential to securing funding and supporting ambitious growth initiatives.
The expanded role of the CFO is a testament to their position within the leadership team, driving not just financial management but overall corporate strategy that leads to profitable growth.
To learn more about this role expansion and what’s driving it, please check out The Super CFO study.
The Correlation of a Strong Finance Function with Profitable Growth
In analyzing the finance teams of 150 venture-backed businesses we discovered a correlation between profitable growth outcomes and investment in the finance function. Strong finance leadership plays a key role when brought into the fold early to serve as a guardian of systems, processes, and controls while driving strategy and culture.
The relationship between the existence of an established finance function and better business outcomes was noticeable in our first cohort – unicorn companies minted between March 2020 and March 2022 that have gone on to be successful.
Of a group of 30 VC-backed companies that raised a $1 billion valuation during this time and continued to post sustained growth, only three lack a history of investing in the finance function.
More than half of that group already had a CFO in place, with the remainder led by a strong VP or SVP Finance, underscoring a tight 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 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 CFO.
Companies Without Profitable Growth Goals Backed by Strong Finance Leadership Tend to Fail
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 place in the 12 months prior to failure and, of those, 30 percent had been in the role for less than 18 months.
This environment will only boost demand for support from the finance function.
Yes, CFOs Drive Profitable Growth – But Never Alone
Clearly no CFO, however strategic, can single-handedly 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.
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.
This is also where a neutral party comes in – at Egon Zehnder, we excel in taking an objective view of our client’s current financial function capabilities and identifying opportunities for growth.
To learn more about our support capabilities for companies looking to grow their finance function and achieve profitable growth, visit the services section of our website.
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