2 kinds of people, analyst edition

In an earlier post, I suggested that there are 2 kinds of people in business, those who have the money and those who need the money. I stand by this oversimplification. To it, I added another about accounting people vs. finance people.  I stand by this one too.

Let me add another: analysts and operators.

Generally, operators make things happen in the present, and analysts look at the past in an effort to predict the future.  Analysts often say they are really “operators at heart”, which might be true, but they almost never are operators in practice.  Operators know how to get sales comp plans published, manage a hiring funnel, place ads on the MBTA, use LTV/CAC to make marketing decisions today, implement a travel policy, blow out a pipeline to make a quarter when it’s desperately needed, perfect a cash conversion cycle, time product introductions, make a hire when no one else can recruit… you name it.

Analysts can’t do many of these things.  What they can do is look at a dizzying array of data on the business and figure out what is really going on, and what that suggests about what might happen in the future.  Most importantly, they how to tell the story, and because they are not in the weeds about, say, comp plans, they can stay big picture and compare the right broad metrics across companies, or industries.  The part they play is not more important – but as a company gets bigger, it becomes at least as important.  It is challenging to be a very effective operator and a good analyst at the same time.

Over a drink many years ago, a colleague I respect suggested that I had to choose between being an analyst (which I think I was then) and an operator (which I think I am now).  I like to work with build stage companies where making things happen is valued over broad-based analytics, so this suits me well.  In raising money, you need just enough analyst so that you can point to broad metrics, but much of attracting and closing captial is about managing a process and a pipeline.  I still have some of this DNA as well even if I don’t work these muscles as often as I could.

In a few of the companies I work with, I collaborate with Board members or advisors.  In almost all cases, they like to say that they are entrepreneurs or operators at heart.  (Note: maybe they are, but if you’re a venture capitalist and not a founder of your firm, almost by definition you are not an operator.  Self-awareness is important).  The best ones collaborate by providing a view across similar businesses or industries using data that the management team already has.

Put another way: effective (and self-aware) analysts paired with effective (and self-aware) operators make a great combination.

Re-trading the job offer

In many of the companies I work with, I sign candidate offer letters.  This isn’t always something a CFO does, but if possible, I prefer that I (or the CEO) am the final check on this particular business process.  One obvious reason is that I know what’s in the budget for a given position.  One less obvious one is someone with a touch of OCD will find errors – incorrect years, language from an old template that doesn’t belong in this particular letter – that someone else might not.
Another reason is that recently for somewhat junior positions, I am seeing a lot of negotiating by candidates who have received a verbal offer, accepted it, and now wants to re-trade.  It’s hard for a hiring manager to resist this.  With rare exceptions, I always do.
A candidate who has accepted verbally a salary of $100, but then when they get the letter and ask for $105, is setting him or herself up for failure.  He’s now signaled that either (a) everything is going to be a negotiation, (b) I can’t necessarily trust him to keep commitments or (c) my offer is the stalking horse for another one.  In my experience, most often it is (c), but (a) and (b) do also come into play.
I have sales managers tell me that this is just someone who is valuable in the market negotiating hard for themselves.  I don’t see it that way.  Maybe I am biased because credibility is my only product.  In my view, once the parties agree, a negotiation is done.  If someone really is a superstar, we’re going to find that out and likely make an adjustment upward anyway.  Or if they have variable comp, they’re going to crush their numbers anyway so the base salary doesn’t really matter.  Needless to say, it’s nearly impossible to adjust down.
Because I work with build stage companies, the hiring managers often are young and haven’t had the scars yet of candidates re-trading their job offers because what they really want is more money to stay where they are. My advice is to resist.

Bcc:

As a CFO, I’m often included on cc:lists. Because I started my career in larger companies, I get why people cc: a lot of people on messages even though I try to limit this myself. And CFO’s often need to know when something is happening: a major contract negotiation, a sales discussion about an important customer, HR matters, you name it. It’s a core part of the job to be the second pair of eyes on something.

One thing I never do, however, is use bcc:

In my experience, it rarely does any good, and almost always causes issues. Example: someone who is bcc’d does a reflexive ‘reply all’ with a salty response instead of just to the person who bcc’d him. I once had a CEO who was bcc’d commit this sin and it was, to put it mildly, a problem.

This is why someone bcc’s me, I immediately ask them not to do it again. If they really want me to see something without having their recipient know it, then just forward it to me after the fact. This happens sometimes in sensitive situations where someone is on a performance plan and whoever put them there wants me to know. Even more reason not to do it via bcc:.

I mention this in a blog post about build stage companies because these tend to be populated by dreamers, which by extension means people who are young and inexperienced. You need some element of youth and inexperience to believe you can change the world. It’s not required but it helps.

So to those of you lucky enough to have these traits going for you, I’ll just say that this is an experiment I can save you the trouble from running. Just say no to bcc:.

Payroll

I had a TechCXO partner meeting last week.  I always learn a lot at these and this session was no exception.

One of my colleagues who is a long-time CFO told us about a rule he had in his companies about people who see payroll data.  Which is: you cannot get another job here that doesn’t involve payroll.  Once you see how much everyone makes, you either stay in that role, or you have to leave the company.

This seemed extreme when I first heard it.  But the more I consider it, the more sense it makes.

In truth, many build stage companies trust this extremely confidential information in the hands of office managers who double as the people who “do” HR, which includes running payroll.  Few of these people have bad intentions.  Many are inexperienced.  And not many things blow up culture faster than exposing this information in the wrong way.   Once that toothpaste is out, you cannot put it back in the tube, and it is very difficult to clean up.

So, today I plan to have a reminder conversation with everyone who works with me and handles payroll data.  Not because I don’t trust them – mostly because once you’ve seen this information a thousand times, you can lose sight of how sensitive it really is and how important it is to keep it confidential.

On a related note – another build-stage company payroll risk I frequently see is the “single press of a button” problem.  Meaning, one person can both enter payroll and submit it without an approval step.  I understand why this is tempting in the early stages, and yet: it is a really terrible idea.  (The same goes for bill pay and especially wires, by the way).

Systems like TriNet and ADP actually make it hard to do an approval step in their PEO implementations, which I don’t really understand.  That said – always put in a second pair of eyes on this.  That pair of eyes too is probably bound by the same rule that my partner puts in place: once you see payroll, you can never go back.

It’s strategic

A sentence that usually sets off alarm bells for CFO’s is “It’s strategic”.  This is usually code for a decision that seems to make no economic sense, but is so important to the business, the company “has to” do it anyway.  Examples of this include, but are not limited to (1) an acquisition that the numbers don’t really justify, (2) launching a new product line that’s not correlated with the current one, (3) geographic expansion to a far corner of the world, (4) overpaying for a certain employee, and (5) going all-in on a particular trade show exhibit or booth construction.

Mainly, I have 2 issues with this approach.

First of all, most things that management teams call “strategic” are actually tactical.  M&A is a tactic.  It should get you into a market segment, a geography, a product category, and be tied to a broader strategy.  In theory, your company will have done a build/buy/partner analysis against that strategy and decided that M&A is the tactic that best gets you there.  Even in build stage companies, where deals are often opportunistic buys of smaller or faltering competitors, it’s only a tactic.  If you’re chasing a deal because it’s “strategic”, something has gone awry already.

Second and maybe more importantly, a major decision that cannot be grounded in numbers of any kind is almost certainly going to go badly.  For example: an acquisition that is dilutive on its face should get to being accretive because it helps you raise prices, lower costs, increase sales volume, cut G&A, something that has an economic return.  This return should be based an assumption that an investor can see clearly and question, including seeing the sensitivity analysis around it.  After all, it is their capital or stock you are proposing to use.

If an acquisition does none of these ‘strategic’ things, and is still dilutive except with heroic assumptions, it doesn’t make sense.  Full stop.

Trade shows are trickier.  I shiver a bit when I hear that a particularly splashy trade show presence for a build-stage company is necessary because I know from experience that nine times out of 10, it leads to heartache and lost ROI.  I shiver even more when I hear that it’s for “brand building”.  Brand building is a very expensive game.  And, if we’re spending a lot to build our brand at a trade-show, I would advocate that this needs to be part of a broader strategy including customer service, how we package and deliver our products, fit and finish, you name it.  You can’t overspend at CES and make these other things go away.

As CFO, you have to keep your eye on what matters.  In my experience, something that is truly strategic will show up in the numbers.

 

 

 

Who CFO’s report to

Not long ago I had a Board member of a company where I am the CFO inform me that I work for the Board, not for the CEO.  My impression is that it’s somewhat more common in larger companies to have the CFO report to both the Board (in particular, to the head of the Audit Committee) and the CEO.  I think it’s rare in build-stage businesses.

I am not a fan of this kind of reporting either.  I think the CFO should report to the CEO and only the CEO, full stop.

First of all, I am a believer that in a company, there are 2 kinds of people: the CEO and everyone else.  Others can skip the holiday party, not be on the phone with the most important client, ignore unflattering press mentions, not attend Board meetings.  The CEO cannot do any of these things.  Their jobs are demanding in a way that no others are.  So, they need to trust their teams implicitly.  It is much more difficult to do this when reporting structures are unclear.

Relatedly, the CFO role is challenging for a number of reasons I’ve outlined in other posts.  For one: you’re often held responsible for the numbers but don’t sell, develop products, handle customer service or make ad buy decisions.  It’s hard enough without serving 2 masters.  I have been in situations before where Board members, usually inexperienced ones, will approach the CFO to provide numbers to them without letting the CEO know.  I have made this mistake before and will never do it again.  The damage this does to trust all around is not worth the seeming expediency of getting certain information.  Transparency and trust are everything.

In a similar vein, I want members of my team to feel like they work for me.  There is formal reporting and there is how it feels, which are not always the same.

When they have a question, CEOs frequently go directly to the person with the answer.  I give them a lot of latitude to do this, because as mentioned above, their jobs are hard enough (see above).  However, when this inevitably happens with someone in the G&A structure, I’d hope that they would let me know, and the CEO would know that they were going to let me know.  It is more difficult to insist on this as CFO when your own reporting structure is vague.

In some cases, the investors in my companies have wanted to make a change at CEO and involve me in the process without letting him (it’s been a “him” each time) know.  This is  governance at its worst and I will never do this.  My response is always that if they are looking for a CEO exit and want my help during a transition, operationally or otherwise, first make the change and then we’ll discuss how I can help.  Until then, I work for the CEO and that’s it.  Under no circumstances do I ever want a CEO looking over their shoulder at the CFO wondering what he and the Board are up to.  Once that trust is violated, it is nearly impossible to get it back.

I’ve been fortunate not to have worked as CFO in companies where the CEO has committed some kind of fraud.  My main deliverable is integrity, so if that’s being violated by doctoring results, I’d probably react badly.  Short of that though, this rule of thumb on reporting has always served me well, and I plan to stick with it.

 

Radical Acceptance

There is a concept in Buddhism called ‘radical acceptance’, where you accept something as it really is without struggling against it. For example: you realize that you are running late for a meeting and further that you can’t do anything about it. The next thing that usually happens is stress, which is a useful input but not particularly helpful. Better to accept that you are going to be late, not worry about something you can’t change, and then act appropriately.

I bring this up in a blog about build stage companies because recently I have seen a lot of struggle against things that would be better accepted. As a CFO, I get a fair amount of ‘can we make the numbers say X?’ I resist this every time because sometimes, accepting that the forecast isn’t that good is the first step in making change. The corollary to this, which I have also seen, is the investor who doesn’t quite believe the numbers and wants to triple-check them because they show less cash, sales or progress than expected. Sometimes the results say that performance isn’t good. Accept it, and then help the team figure out what to do about it.

Often I help manage the HR function. Another example of where startups rarely exhibit radical acceptance is in how they deal with underperforming employees or those who can’t keep up with the role they need to play as the company evolves. Procter and Gamble can survive this. Your build stage startup cannot. It hurts to realize that a member of your team is not working out. This is painful – but pain is a helpful stimulus. What is unhelpful is suffering, which is self-inflicted. Keeping an underperforming member of the team in a critical role – and in build stage companies, every role is critical – causes suffering for everyone.

My apologies to the true Buddhists out there as I’m sure I’ve butchered this teaching somewhat. I accept that.