Capital Allocation for CEOs
By George Dobbins
Considerations for the Founder-CEO
The changing economic conditions have sent shockwaves through the VC ecosystem and there has been what some have described as a paradigm shift for early venture businesses. Raising interest rates and inflation has caused turmoil in public technology markets with well-documented share plunges and consequential staff lay-offs. Valuations within private markets have deflated from all time highs (possibly to normal levels), and that has undoubtedly created a change in the accessibility to capital. Various VC’s we have been speaking with have confirmed what all the memes have been saying – things pretty much changed overnight. Founders, barely free from resolving the challenges of the pandemic, are now reassessing their path to profitability. Over dinner with the CEO for one of our VC clients, we came on to the topic of the Founder-CEO and how this recent paradigm shift within the VC ecosystem is likely to impact early-stage Founders. Here are the major takeaways for Founder-CEOs.
Many Founder-CEOs will be all too familiar with being generally an all-rounder. For a technology start-up they must often be a visionary – highly charismatic, influential, persuasive and charming in equal measures. They must be commercially sharp, excellent with clients, investors and employees, and usually they work most hours available to them. But one major difference between the role in the last few years compared to the next few years – and something that will likely determine the success of many early start-ups – will be the ability to effectively and efficiently allocate capital. Sure, this was always important, but looking forward, companies are likely to raise less in funding rounds than previous and the increase in competition for funding will mean that there’s less opportunity to raise further financing without having achieved the objectives set out for the previous round. Before, there was always more capital around the corner, but over the next few years that may not be the case. Founder-CEO’s business acumen and decision-making is about to be truly tested and they must be prepared for this change in emphasis.
What can they do?
One solution that we explored was the appointment of a commercially minded CFO. Someone that the CEO can rely upon to run the numbers, understand the financial business case behind decisions and provide an experienced, well-grounded perspective to the CEO to support their decision-making. They will be able to consider the road to profitability and provide balance to decisions. From the work with our clients, few early-stage founder teams possess strong financial acumen or backgrounds and this can certainly be an opportunity for them to explore. Beyond impact on decision-making, this individual is likely to support in cash-management – which can also have great success in lengthening cash-runway – and will provide investors with greater confidence in the investments they’re making, which could make a big difference for future funding rounds. In some situations, well stocked portfolio management teams will be able to provide this guidance but, for those without this, a sharpening on financial perspectives should be a priority.
This financial support and experience with capital allocation can come in many forms. For many, hiring a dedicated FD to do this role will not be feasible, and in those situations there are many opportunities to benefit from part-time resource through strategic advisors. At the beginning of 2021 we launched an Advisor Network called Beta, which aims to connect Founders with Strategic Advisors that will take their businesses forward. Throughout 2021 and early 2022, the main skillset sought from members have been sales and growth, particularly at an enterprise level. But in the past two months, we have seen a dramatic increase in the need for ‘floating FDs’ that can support on financial decision-making and capital allocation.
The final observation was the need for Founder-CEOs to consider using a leadership coach who can challenge the CEO’s instincts and refine their decision-making process. Someone who can ensure a CEO seeks the right advice, knows the consequences of actions, and understands more clearly the opportunities presented to them. Not to mention, they will support CEO’s with the tremendous pressure that ramps up on them during the timeline of a start-up.
For us as an executive search company, many of our clients have had their hiring processes sharpened into focus. No client ever wants to make mis-hires and in an environment where capital allocation has become even more important, we have responded by launching our new assessment solution that uses a scientifically validated multi-selection process to dramatically increase the accuracy of hiring decisions, which are based in the context of current skills, competencies and team-fit. We’re excited to continue offering this as a cost-effective solution to existing and new clients to ensure that hiring is as effective as possible.
Overall, Founder-CEO’s are some of the most adaptable and agile business leaders around. Adapting is their strength, and through a combination of full-time CFO, strategic advisors, coaching and improved hiring processes, they’ll continue to flourish and change the world.
About Beaumont Bailey
Beaumont Bailey is an executive search and leadership advisory business with the mission “Building the Leadership of Tomorrow”. Backed by VC’s, their dedicated technology team has supported some of the leading European technology businesses to scale.
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