Having CFO support is crucial for the success of your new venture. But how to overcome the resistance of a finance team, known to be more process-oriented than learning-oriented?
In order to figure this out and define some actionable tactics you could use, we hosted a discussion with Mike Joslin, Director at High Alpha Innovation, as part of Innov8rs Connect on Governance & Portfolio Management last September.
Here’s a summary of what Mike suggested.
Corporate Venture Building: a Sisyphean Task
While the strategic narrative may land emotionally with certain leaders, the vast majority of the employees in the core business are focused on today's tasks. They might see your venture as unimportant, a distraction, a resource drain, a threat. At some point in your innovation process, you will have to work with finance to build the business case and create a funding request for the CFO to review. Typically, in this moment corporate innovators pitching transformational ventures begin to feel like they’re slowly dragging an entire organization uphill, while simultaneously attempting to fend off corporate antibodies.
“Sometimes corporate venture building can feel like a Sisyphean task”
While it can be difficult for finance teams to model the transformational innovation – whether pursued organically through internal efforts or inorganically through CVC and M&A – this transformational innovation is existential and needs to be a strategic imperative at every single corporation.
Here are Mike's lessons learned and six actionable tactics to build CFO support for your new venture.
New Ventures Failures: Lessons Learned
“A lot of corporate ventures don't fail because of incompetent leaders, bad ideas, or poor execution. They fail because they can't get the rock over the hill and unlock the funding that they need for the venture”
Failing to unlock the funds for the new venture can have many second-order effects. For instance, put yourself in the shoes of a talented entrepreneurial engineer thinking about which startup company to join: would you join the startup that just announced a big funding round from a top-tier VC, or would you go to the company that just announced a round of layoffs? Here’s a summary of the main lessons Mike has learned working for some of the largest today’s companies:
· Corporations focus on capital efficiency while VCs/entrepreneurs on learning efficiency
· Disruptive/transformational innovation within corporations is incredibly hard
· Ruthless operating budget allocation can be a venture killer, plus C-suite sponsorship is a must
· Innovators often see CFOs/finance as the harbingers of doom while they can be advocates
Actionable Tactics to Build CFO Support for New Ventures
CFOs manage risk, maximize ROI, and also influence strategy. As such, CFOs have to be involved in defining corporate growth strategy because they ultimately are the ones evaluating the attractiveness of your venture from a financial perspective. At the end of the day, the secret to success is all about telling a growth story to Wall Street.
Here’s what you can do to be the winning support for CFOs.
1. Speak their language
Becoming an expert on your existing business model allows you to understand the strengths and weaknesses, where you can challenge the status quo, etc. Just acknowledging that the core business pays the bills for a lot of innovation efforts can get you credibility and can help you build relationships. Take the time to understand the CFO and the financial goals to identify opportunities to align your venture and show a clear link to the corporate growth strategy.
“You need to understand the core and respect it in order to win the right to break it or do something that you think is aligned to the growth trajectory of the company”
And once you understand the CFOs language – the why/how behind resource allocation processes, the priorities of the finance team, etc. – you can define the right narrative for your venture. For instance, 80% of the stock price is driven by EPS for most of the S&P 500 public companies. So that’s the metric most CFOs care about and will ask for you to understand what are the implications of your venture on EPS. What type of expansion will your venture have for the stock price? There can be two:
· Earnings expansion: incrementing core revenues and reducing costs.
· Multiple expansion: accelerating core growth and changing investor perceptions. If you can show that your venture may help the core business grow faster and increase the stock price, your CFO will love you.
2. Tie experiments to model inputs
Sometimes there’s a gap between the outputs of an experiment that you run and the inputs to the model that you're required to fill out. How to overcome this? First, don’t lose sight of what’s important for your CFO and design your experiments having in mind the things that may move the needle the most. Also, think about how to deliver the numbers that will give the CFO the confidence that your projections are accurate. From a projection model standpoint, tie the data that is going into those models, and make sure that the finance team has the right formula and logic.
3. Think big, start small, move fast
If your new venture won’t have the ability to influence and get the CFOs attention, they'll see it as a distraction and try to kill it. Also, another thing that is as difficult as it’s crucial is figuring out what scale you need something to get to for the CFO to care. As such, if you're looking at creating a new venture, think from the CFO’s perspective and design it in a way that has a massive potential return. It works just like in the venture capital world: if there’s no potential billion-dollar return, venture capitalists don’t invest.
“In the venture capital world, it's all about the magnitude, not the frequency, of correctness that matters”
Most of the corporate startups won't make it, but it's all about having that 4% of deals that delivers six 60% of the returns. It’s undeniable, this power law exists in the corporate world. And if you can have portfolio-level conversations versus project-level conversations, you've won half the battle.
4. Quantify the cost of the status quo
Enforcing your idea can be a difficult game. Sometimes it's a good strategy to focus on painting a dire picture of what the business looks like beyond the existing strategic planning cycle. So, for example, five years out, what are the things that would kill the core business? Show how your venture could support the resistance by contrasting the cost of the venture to that of disruption and decline.
One thing that you as an innovator can use to your advantage with the CFO is showing that the world is awash in capital and tons of startups are getting billion-dollar valuations. Frame the rise of venture capital and the amount of funding they’re getting with the underlying assumption that the startups are going faster than the corporations and disrupt the slow-moving incumbents.
“The status quo will not get us where we need to be. We're not going to get there with incremental initiatives, we need to be placing bets in the disruptive side”
5. Use the balance sheet
The balance sheet is a new kind of paradigm in the innovation world, one of the most underutilized tools by corporate innovators as they seem to prefer operating budgets. But while the latter can be a useful tool for short-term initiatives with more near-term and confident paybacks, the former – the balance sheet – can help you more with any transformational initiative. Think about how you can compete against your weighted average cost of capital (WACC) hurdle rate. If you think about what's a good use of cash, if you include that hurdle rate, the corporation can always borrow more, shore up their balance sheet.
"Operating budgets are nearly impossible to get, but balance sheet capital is infinite if it's a good use of cash”
Balance sheet capital can be a plentiful and patient source of capital, if you’re able to access it. When it comes to incremental types of growth with shorter payback and lower uncertainty, you can stick with a P&L. But if it’s something like a disruptive new business model that may steal customers or lower margins, you must have that outside the core. And if you are able to capitalize innovation and it doesn’t work out, that can be adjusted out of earnings (in most cases). Most Wall Street analysts look at adjusted EPS and take out all the non-recurring stuff. If this is a capital investment that didn't go well, and you had to write it off, that becomes a P&L expense, it's still adjusted out. And so the enterprise value of the corporation usually isn't impacted by much by a failed venture that is funded off the balance sheet.
6. Change the game
The game is often rigged and many corporations just aren't set up to truly support transformational innovation. And so you have to work hard to convince the CFO that new ventures are different – different metrics, different funding mechanisms – and need a different process. But how can you do that? Just think about how you could tell that story and change the game by asking yourself:
· Can I align and influence leaders about the vision of the future that I’m talking about?
· Where (and how) my new venture may support the business?
· (From the infrastructure standpoint) How can my new ventures be supported differently?
If it is possible to engage the CFO or the finance leaders early on in the process, that could massively increase the potential success of your venture.
Keep in mind that they tend to be more process-oriented and less learning-focused, and so you may need to go through hard conversations to get the finance team to support your new venture. Make sure you manage their time efficiently, and don't overshare all the messiness that is part of the innovation work- and you may just have won a crucial ally; someone who could make or break your efforts.