Your Questions Answered: CFO’s Strategies to Fight Market Downturns

Late June of this year, three best-in-class CFOs joined forces to shed some light on the question everyone was asking themselves:

“How on earth do you emerge successfully from uncertain times and economic turmoil, as a Finance leader?”

Ajay Vashee (General Partner at IVP & ex-CFO at Dropbox), Tomasz Marcinkowski (CFO at Discord), and Praveer Melwani (CFO at Figma) answered this question and more during our webinar, CFOs’ Strategies to Fight Market Downturns.

The action-packed webinar featured 60 minutes of insights, advice, and shared experiences from leaders who have steered the company through good times and bad. During the event, attendees were given the opportunity to have their most urgent questions answered by our expert guests.

If your question was unanswered, worry not! We’ve compiled some key audience questions with answers to deliver further insight into critical topics. Before you start reading, go through this recap of the webinar.

Is the market downturn an opportunity for a build and buy strategy?

The market downturn of 2022 has led to much lower valuations than the previous high of 2021. As such, these lower valuations are indeed an opportunity to grow revenue and margins by executing a build and buy strategy.

A build and buy strategy refers to companies that acquire another company to expand its own expertise and reach. Although it may seem counterintuitive to expand the business during a downturn, you have a unique opportunity to take action when your competitors are less likely to do so.

Downturns do not necessarily mean a pause on growth. What's changed is the increased focus on making data-driven decisions with timely and accurate data. Avoid costly mistakes by evaluating risks, scenario planning, and investing in the right tech & data.

How do you calculate ROI for support functions (HR, IT, Finance)?

To calculate the ROI of traditional cost centers such as Human Resources, IT, or Finance, the first step is understanding how these functions ultimately support revenue generation. Once you’re established this principle, identify several key metrics that quantify the ROI contributed by support functions:

Revenue per Employee
Net Dollar Retention
Net Promoter Score
ARR Growth Percentage

This approach will align teams to the overall company goals, while acknowledging the contributions to success and the inherent value of these teams. For more specific ROI metrics by team, try:

IT: Latency, Product Usage, and Product Adoption
Finance: Cash Flow, Efficiency, Risk, Profitability
HR: Employee Turnaround, Employee Wellness, Contribution % of HR assets to the bottom line

Are there any silver linings to the market downturns?

There are always multiple ways to view a problem. As an effect of the market downturns, people (and especially investors) have much more stringent expectations. However, if risk aversion is considered a default, it gives companies clarity on where to focus their efforts on.

For example, while preparing for the next board meeting or preparing to approach investors, it’s a best practice to have your story in shape. This means heightened due diligence where your story is purely based on what data can show.

It’s a silver lining in the sense that this revitalized focus on due diligence pushes companies to prioritize efficiency and ROI, two building blocks of success in the path to profitability.

How can leadership stay on top of financial metrics?

Involve your executives in your financial metrics by packaging the data to highlight its direct impact. Understand that your audience generally retains only about 20% of your presentations, and use this statistic to feed bite-sized yet impactful insights for leadership to act upon.

Build and share an early warning system to avoid unpleasant surprises. Deliver proactive insights to make a bigger impact on strategic decisions and build the Finance team to be business partners.

For the company as a whole, make sure teams are aligned and collaborating on meeting high level goals that then narrow down into role-specific goals.

A shared strategic vision is the best way to use metrics, rather than tracking irrelevant data for the sake of it.

Do CFOs track metrics outside of traditional financial statements?

Everyday, CFOs leverage metrics beyond the Finance department and financial statements. These metrics include:

Customer attrition
Churn signals extracted from customer conversations
Product or feature adoption
Customer satisfaction
SaaS metrics such as ARR, NDR, CAC, and LTV

The main goal for Finance leaders to go beyond financial statements is to gain a holistic view of the company’s performance in line with its objectives. As Finance moves towards strategic business partnership, it is important for FP&A teams to upskill past number crunching into operating as a well-oiled, efficient machine.

Should you choose between growth and profitability in a downturn?

Yes, companies tend to choose a direction that prioritizes profitability during economic downturns. However, a downturn represents the need to alter your mindset, rather than strictly choosing between growth and profitability.

Rather, pay attention to the granular details of costs incurred and cultivate a company-wide awareness of the need to ration spending. Work towards every dollar spent generating 3x returns and maintain strong unit economics.

Should private companies initiate an off-cycle 409A valuation?

35% of executives surveyed in a study by Founders Circle Capital are considering a 409A/FMV repricing, while 47% are undecided. By H2 2022, private companies could start feeling the impact of the downturns on their 409A valuations.

However, before initiating an off-cycle valuation, make sure your valuation provider thoroughly weighs the market volatility and factors in any recent funding or whether you are hitting all your milestones. Consult your advisors and board. As an alternative to repricing, consider issuing RSUs instead, which are lower risk.