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Once Burned, Twice Shy

Five years after the Internet bust, tech start-ups are still wooing CFOs. But CFOs have higher standards now.

1May

For many CFOs, joining a technology start-up during the Internet boom was like eloping with a flashy teenager. Such companies were often run by image-conscious executives long on vision but short on operating experience. Metrics like eyeballs and market share were hyped at the expense of cash flow and profits. As burn rates soared and the stock market plummeted, the start-ups fell apart, and their CFOs took their worthless options and moved on—sadder but presumably wiser.


Today, the dot-com rubble has been cleared away. Although technology initial public offerings (IPOs) have slowed since last year (and significantly since 1999), tech start-ups are continuing to woo CFOs. But are CFOs willing to give them another chance?


Yes, say recruiting experts. "CFOs are taking careful looks at opportunities that, two or three years ago, they either wouldn't be getting calls for or would outright dismiss because of the risk," reports John Wilson, CEO of J.C. Wilson Associates, a San Francisco­based headhunter.


Larry Ormsby, a partner in the San Francisco office of search firm Korn/Ferry, says he's getting more calls to find CFOs for IPO-bound companies. Ormsby has three assignments at the moment, which he calls "a lot." "There was a point where, when you said you had an IPO story, it was almost tongue-in-cheek because you didn't know if [the company] was really going to go out or not," says Ormsby. "Now, candidates are taking the opportunities more seriously."


But this time around, they are doing better due diligence on prospective employers. "Everyone is trying to keep excitement and emotions in check right now," says Wilson. "And if [a tech employer] is remotely flaky, very few CFOs will have any interest whatsoever."


Finance chiefs are more particular now, agrees Sharon Wienbar, a managing director at Bank of America's BA Venture Partners. "If you come in and the books are in disarray, you're not sure if the salespeople are on the up-and-up, [and] auditors [are] screaming 'material weakness'—you don't want to get boxed into that," she says.



Back To The Excitement


One choosy new tech CFO is Matthew Petzold, who recently joined Motricity Inc., a four-year-old wireless-software developer in Durham, North Carolina. Petzold says he did so in part because he "wanted to get back to the excitement of growing a small business." Not that his two previous stints were dull: he was CFO at Verestar Inc., a satellite-services provider that went bankrupt in 2003 and was subsequently sold; and at UUNet, the Internet service provider division of WorldCom (now MCI).


Petzold also says he joined Motricity because of what he sees as the high demand for the company's product, its impressive investor roster, and a customer base that includes Cingular, the nation's largest wireless provider. He made sure he would mesh well with Motricity's management, board, and company culture. And the timing was right, adds Petzold; to persuade him to work for such a young company a few years ago "would have taken a lot more convincing." Even five years after the Internet bust, CFOs are "absolutely being more selective about joining tech start-ups," he says.


Another selective finance executive is Marcus Smith, who recently became CFO of FaceTime Inc., a Foster City, California-based network-security start-up. Smith's previous jobs included vice president of finance at NetScreen Technologies, which went public in December 2001 and was later bought by Juniper Networks; CFO of SONICblue, a consumer-electronics company; and corporate controller of Storm Technology, where he worked on the company's IPO. Before signing up with a start-up company, Smith recommends doing as he always does: namely, find out who the company's investors are and how much they are investing, what experience its managers and directors have, and how much cash it has on hand.


Above all, a tech company's business model should pass muster with would-be CFOs. Five years ago, "revenue growth and profitability were not so important" to the decision of whether to join a tech start-up, says Gary Acord, CFO of Patchlink Corp. But now, he says, a company without detailed plans for both criteria "would not even get a second look from me."


Patchlink did, and Acord joined the Scottsdale, Arizona-based network-security company in January. Previously, Acord was CFO of Musicmatch, an online music provider that Yahoo Inc. bought in 2004 for $160 million. Privately held Patchlink was founded in 1991, but it grew primarily through bootstrapping and angel investments until last year, when it received a round of venture capital from BA Venture Partners and other venture-capital firms.


Patchlink now sells software that finds and plugs security holes in computer networks. Acord says the software is very conducive to a subscription business model—and "Wall Street loves subscription models," he notes. BA's Wienbar adds that the company isn't planning an IPO at the moment, "but it's thinking about it."



Builders, Not Sellers


CFOs aren't the only ones chastened by experience in the tech sector. Venture-capital firms increasingly want the companies they back to hire experienced financial executives (see "Capital Without the Venture," February 2004).


And many start-ups are keen to find seasoned financial managers who can take them to the next level—who can install financial systems and controls, for starters. A recent study of 78 start-up companies by two professors at the Stanford Graduate School of Business confirms the wisdom of doing so. According to Antonio Davila and George Foster, start-ups that set up management accounting systems early on showed higher growth rates in terms of revenue and head count. Moreover, their valuations rose higher and quicker at successive rounds of venture funding. "Bringing on a senior financial officer typically fast tracks establishing financial planning and monitoring systems," commented Foster last February.


There's at least anecdotal evidence that young companies have learned that lesson. FaceTime's Smith says he observed during his job search that "young companies were hiring CFOs earlier." And if CFOs want better-quality start-ups to join, so do start-ups want a higher caliber of financial manager.


The definition of a high-quality CFO has always been the same, says Wienbar. But "in a gold rush, that definition gets compromised a little," she adds. Today's start-ups are less willing to compromise. Smith notes that while he has always thought that a personal recommendation is the best way to get a foot in an employer's door, "today, even with that, there's still screening for past experience and expertise."


And accounting expertise counts for more now, adds Petzold. During the late 1990s, he says, employers sought out CFOs who had the ability to sell a company's story. Today, "there's a greater emphasis...on being able to build a company."



Lisa Yoon is an assistant editor of CFO.com.

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