The New CFO

The New CFO – 06 Learning from a winner takes all market play

This article discusses how to play a “winner takes all” strategy. Of course no recipe of success – that is depending on too many factors – but a framework. In this series, we already covered 1) capital allocation, 2) operating models, 3) time synchronicity, 4) KPIs and now talk about how skillful planning and execution against plan creates valuations that are needed to take a market quickly.

The simplest framework is this:

  1. Raise endless amounts of money at a high valuation
  2. Execute on the strategy that created that valuation

This fails for several reasons in a typical market environment.

  1. Exogenous shocks are real. Things you cannot control can kill your valuation and execution. It’s why it is called “risky” to endeavour. That is among other things why syndicate management and proper bid management is necessary to have a solid risk diversification for investors when valuation is out of their comfort zone and having a few investors in the pack that have a decent comfort zone and get the game. (See series on raising a round)
  2. Dealing with tier 2 or below investors creates a huge likehihood that their risk aversion prevents them from giving a high valuation and they also might not have the tool to judge if you deserve a high valuation. Even if you do, they might be wrong and your whole strategy might be for the toilet. You never know. Be fierche in finding the right investors with the right risk-appetite. And don’t trust your high valuation if you manage to get a good syndicate. This becomes even more likely the better you are at selling the vision and the higher the deal competition and the hotter the market you are in. It is easy to fall. So never raise more money than you know you can execute. But also never raise less money than you really need to kill competition.
  3. Lack of execution. Yes, you can have all the money in the world and the best strategy, but you may fail to execute on that strategy.

There are many more points. But let’s skip the caveats and look at the actual 4 important tasks.

  1. Have a plausible growth story to raise sufficient cash
  2. Have a superior, capital/burn extensive and hence defensible vision
  3. Learn how to de-risk the execution
  4. Know how to execute

Let’s look at this in detail.

1. Have a plausible growth story to raise sufficient cash

Let’s assume the entire world is one segment, addressable with one simple product, sellable with a simple sales process that skales, and the sales people are easy to obtain, and you produt is finished and you have proven product-segment fit and all you need is to blow a billion in sales compensation and another billion in marketing to get to 25 billion in revenues. Perfect.

But that isn’t going to be the case even if you sell caskets. Well, you continue, let’s look at several segments. You have one market, worth 50 billion in revenues and you want 5% and you have only 25 segments and you want to learn how to sell 5 segments worth 2 billion each every year. You don’t want to completely sell the entire segments, but you want to grow at 200% CAGR and start with 5 million per new segment. Do the math how fast you grow. Easy. (Well, it isn’t).

In reality, you “market” aren’t going to be 50 billion in revenue. There might be 100 markets with 250 million in revenues all occupied by different competitors and every market could be split into 20 segments.

You start to wonder: what is a market. What is a segment. And yes, that is something every company has to find out for itself. SIC, NAICS and whatever classification you use will not help.

Well, let’s look at what your company does. It sells products. Let’s say every product line is addressing the need of one market. So to address 200 markets, you either need 200 products or 200 product lines. What is that? In maths terms: this is trivial and left as an exercise for the reader.

But ever market has segments. Segments is also hard to define, but the definition in crossing the chasm is quite okay for a start. Again, reading that up is an exercise left to the reader.

The key take away here is that you 50 billion in revenue aren’t going to be won by hiring 500 salesmen and 100 marketing people and putting them in a huge box and letting them run in a Schrödinger’s cat kind of fashion. And if you are planning this way, you will not convince anyone that the capital needed for hiring 500 salesmen is rigthly allocated in your hands.

Having a detailed understanding of your markets and segments and having a year over year hiring and execution plan that resembles things that other people know work in these markets for your product does make a difference. So if you staffing and organizational planning model makes sense, that is a start. That still doesn’t tell a story on how you will execute on finding 500 sales people in 5 years time. What are your ingrediants for winning the talent war, identifying the right candidates and having them run in the right direction with the right amount of capital in their support functions and pockets.

The trick is to have achievable goals in your fundraising journey and have the goals actually achieved. And the goal is to unlock as many markets and segments as possible with the money you have raised. If that entails blowing 10 million in marketing budget, cool. It will be factored into your equity ticket and your valuation. But please also plan for the marketing and sales organization and product development that is required to get ROI on 10 millions blown on marketing. 1 marketing VP and 2 sales people in your staffing plan will not execute on the reach you generate with 10 million in ad spending.

Sorry for not laying this out plainly, but some homework is to be made to translate this into good fundraising. But yes, experience in organizational design around the globe, having a product that quickly validates market demand and a way to build validate and execute on a sales process is certainly a value add here to raise capital.

2. Have a superior capital/burn extensive strategy that is defensive

If you want to become a billion dollar company, you have to win really big sales and partnership tickets. The only way you are going to do that is to offer a really big value add for your partners and buyers. And usually that requires a lot of up front R&D expenses AND marketing expenses that generates leads that your partners can handle. Nobody expects you to win a 100 million per year partnership opportunity with a billion dollar company if you are spending 5 million on R&D. And nobody expects you to win over 50 large reseler and distributor contracts if you spent 1 million on marketing and brand building. Think big here!

But then again, thinking big is great. But if you are planning a 50 million R&D operation – and yes, if this is big data extensive, these costs aren’t unrealistic – for your seed round requires a bit more “insight” on how to execute this plan than “oh, I need 20 million for infrastructure services, 10 million for developers, and I want to do this in Kasachstan.

The same goes for marketing. What you realize quickly in sales is that segmenting your markets and marketing the segments within these markets is what neither research, nor your investors nor your competitors can tell you. Understanding the market microstructure that you play against very well and learning how to market and sell that microstructure is key to winning against your competition even with superior budget. You can easily blow millions of dollars marketing the wrong people when your sales channels aren’t in place, your solutions and value propositions are weak, etc.

You should have a decent understanding of the roles requires to build the teams that execute on such an R&D or marketing effort and you should be able to answer how you will achieve the headcount. Yes, having 2-3 VPs of engineering from Google on your “almost safe” payroll once you raise money and being close to where the people is is a step. And that is the R&D story. Having tier 1 marketing organization staffed with tier 1 local experts is another. Are you going to hunt at the right place and attract them to the place you are located at or are you going local and build sales and marketing organizations close to the regions and markets you are adressing?

Having a few more well-know researchers and strong ties with the valley, boulder, tel aviv and beijing might help you even more for R&D. Managing 60 small local/focused marketing agencies instead of one massive centralized hub might be more beneficial. That is all defind by the attractiveness of your brand, you culture, your execution and success rate, your target markets/Segments microstructure and so forth.

And also planning for project managers and having a culture and human resource process in place that is plausibly attracting and retaining the engineers needed is a plus. So your core profit centers also must rely on very fine tuned cost centers. So many things to consider. And the truth is, nobody in your network will know. You must know. And you will also know less than you need and it will be risky everywhere down the line.

But again, start small. If your R&D roadmap is split into true value add milestones that can be parcelled into 2 month deliverables that already create value with little engineers, that is even better. That shows you know something about managing a development process.

And again, if you don’t know all this, chances are you aren’t really bold enough to plan for it. And if you don’t plan for it, you are not getting the money for it. And hence your valuation will be lower and the cash raised will be lower. Why? Because you are clueless and your billion dollar revenue in year 5 is a dillusional goal.

3. De-Risk the situation

When it comes to de-risking, it all comes to plausibility, insight and attainability of goals.

Let’s say you want 20 million in sales in 3 years with 2 sales guys. Not possible. Nobody makes 5 million in sales on his own. You have to plan the entire organization correctly. And you need to know the profiles of the right people. And you need to identify and get the right people. And you need to empower and support the right people. All things you just don’t know if you are not prepared and don’t have a tier 1 team in every aspects. This includes talent access, support function (IT systems, processes, people) risks.

Let’s say you need a massive amount of AI researchers – since everyone claims to do AI nowadays. You need deep domain knowledge to know what kind of AI you need. You need to know in which ecosystems they are. You need to know the talent density and competition in that area or how to bring people into that area. If you have them, you need to have the right people to guide the right people to do the right things. And your organizational model must have the transfer. This includes talent access, regional expansion planning risks.

Also, being able to implement measurement systems to understand performance and being able to react against performance is crucial. If you are unable to measure contributions to performance by dollar spent, you  have no view on what is going on. If you have full view on bad headcount being hired or IT systems being underdefined, you might still be unable to heal and de-risk as you have already executed the best possible way under reasonable discretion on business decision. Reasonably discretion meaning yo cannot simply add five local offices to resolve talent access and you can’t offer unlimited equity and benefits to have people move to you. Understanding the risk of capex planning – which includes regional office establishment – on talent access and execution is a key planning issue. And having eyes and ears on the market before you raise and deploy capital under budget is crucial.

Another risk is legacy investors. If you want to attract a tier 1 syndicate with a tier 1 plan that is beyond the intellectual capacity of the current shareholders, you might get no go for proposing such plans or you have to fight very hard for it. Without lead investor or shareholder support, it will be heart winning the minds and hearts of new investors. So legacy failure always promotes future failure. Wrong prior syndicate implies risk of new investor syndicate being suboptimal for the company. ALso creating a risk.

Plausible incentive systems and in that context both dilution and structure of shareholder and investment agreements can also kill a good deal. If you are raising your Series B and you didn’t negotiate a strong ESOP plan in Seed and A series, your bargaining chances for getting this in in a new round is getting harder. With that, you are killing the equity based compensation incentive of the organizatin. And so forth. Investment structure is also a risk factor that tier 1 companies will scrutinize from this ancle, while tier 2 and 3 will more look on how it reflects on their own story to their LPs rather than how it reflects on the success story of the business. But in the end tier 1 wants 20x returns on 100 million tickets and don’t not maximum participation in a 2X round with 10 to 20 million tickets. It makes no sense from a capital deployment or a IRR and return on carried interest perspective competing with better structured organizations.

4. Execution

Last but not least, even the perfect plan and perfect measurement structures to react quickly to bad patterns will automatically generate perfect execution against plan. That requires good management skills, very high commitment and willingness as well as ableness from all resources and a very fine tuned direction of the company as it evolves.

Writing about execution is an own area of study and it is where the entire executive and the CEO come into play. While the CFO in his planning must adjust his optimism to the realities of the general executive teams ability to execute against a plan – his goal being providing best capital allocation with highest ROI on cash deployed under reasonable assumptions on what is possibly achieved. So execution is a executive team effort, the correct assessment of execution is CFO stuff.


With this final article in the new CFO series, we covered a lot of ground. The key dichotomy between the CEO and the CFO is that the CFO must be information system that decides on capital allocation and is ultimately responsible for correctly projecting and ensuring projections are met. A key advisor to the CEO.

The CEO job is to empower the CFO to be the advisor he should be and to be the magic element that translates the vision into realization of that vision.

Of course, the CFO could be in rivalry with the COO on the operational efficiency and execution part, but the COO will not be focused on the shareholder value impact of his activity but will be driven by operational metrics. The CFO could be in rivalry with the CIO on information systems design and processing, but in the end it is the CFO that has to provide the decisions and guidance on using the information provided from the COO.
The CPO could be the key invididual knowing the direction of the product and hence the guiding figure in leading the organization towards product-market fit, but he has to deliver the execution on his insight on the budget and with the resources allocated to him. Etc.

In the end, a highly functional organization still takes the new CFO has a key resources next to the CEO. Rightly empowered and not undersood as an accounting officer. But as the key internal investor of company resources to achieve its success. And as a key bonding member that translates the vision and activitiy into the investor story that creates the value for the organization.

I hope the series was helpful.



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