CFOs are facing a moment of crisis — startups can solve it
By Daniel Fraai, Kaushik Subramanian, Leila Pirbay, Marnix van der Ploeg, Alexandre Pons and Tom Mendoza
Think of the office of CFO and the word disruption is probably not the first that comes to mind. Yet that is exactly what the CFO is facing, as a moment of crisis strikes the profession. And we believe it is a once-in-a-generation moment of change: an opportunity not just to tweak but transform how the CFO operates.
Why is the CFO under siege and from what? Partly they are assailed by a fast-expanding role to which new reporting areas keep being added, such as procurement, investor relations and digital transformation. What used to be a function dominated by chartered accountants, today the CFO requires several skill sets. There is also unprecedented macroeconomic uncertainty to navigate, from inflation to interest rate volatility and the aftermath consequences of COVID-19. The range of risks to combat is constantly growing, including volatile supply chains and climbing labour costs. There has never been a harder time to be a CFO, which may explain why it is the C-suite role with the shortest average tenure.
Worse still, the CFO must carry this growing burden with one hand tied behind their back. For while the role is changing and diversifying, the technology that supports it is not. The CFO has a higher proportion of “intensive manual” work than any other leadership role. Perhaps the most complex and significant function in the business is the least well served by technology.
What explains why the CFO is facing such an onerous situation? The answer comes not by following the money, but the technology. In the early 2000s, initial efforts were made to digitise the manual functions of finance operations. ERP (Enterprise Resource Planning) systems became commonplace, as a one-stop-shop for processing data and transactions.
ERP, itself a technology dating back to the 1970s, was not designed to be user-friendly. Instead, it was meant to be the source of truth. On top of it, vertical applications were built to do what the ERP could not: be user-friendly and act as workflow tools that flowed the data back into the ERP. All this was built and designed without taking into consideration how to move the money. For that, you needed a separate set of processes to run your manual bank payment transactions. This rigidly followed and further cemented the tripartite structure of the traditional CFO office, separating Accounts Payable (AP), Accounts Receivable (AR) and Treasury.
Today’s CFO, who is dealing with a much more complicated landscape, is still living with the legacy of the choices made and architecture designed over 20 years ago. They are dealing with clunky and complex systems that are extensively intermediated, and offer outdated user experiences. As one expert we interviewed put it: “Everybody is talking about AI today, but go to an ERP conference and you will find the audience giving a standing ovation to a new dropdown field on the manual vendor onboarding.”
The rise of real-time
This status quo was always unsatisfactory and has become especially so in the light of developments over the last decade. When you are confronted with the legacy programs of the CFO office, you realise the stark misalignment in user expectations and what is currently available. In financial services, tech innovation came in the form of open banking. Opening the walled gardens of banks meant that new providers could offer banking and payment services tailored to consumers. This we saw as the first wave of open finance with companies like Plaid and Tink in banking and Volt, an EQT Ventures portfolio company, in payments. Now we are facing the second wave; where real-time payments and reconciliations integrated with software become the norm for businesses.
The previous generation of tech had to rely on intermediaries to move money. That meant that payments were processed in batches, at specified times in a day or week, and money had to sit in their accounts in between. It was slow, inefficient and added additional risk as well as KYC to the process.
But, where intermediaries were once needed, now open finance can bridge the gap between counterparties and their systems. Through a combination of supportive regulation and improved software, money can be moved and tracked in real time without the need to navigate a time-consuming mix of different protocols, data formats and permissions. The old world of data having to go from ERP to intermediary to bank to customer is akin to being carried by a wagon that keeps having to change horses, a relic of the past.
That is the potential, but the reality for most CFOs is still a long way behind. We spoke to one CFO who had stitched together their bank data sources in a PowerBI dashboard to get an overview of all account balances. That is the kind of hacky dashboard that a bootstrapped start-up might rely on, however, when it turns out that the CFO runs a multibillion-dollar enterprise the consequences of a dashboard failure become drastically more terrifying.
It could not be clearer that CFOs both want and need change. Not extra modules being tacked on to the systems they have, but for the fundamental infrastructure to be replaced by software capable of operating reliably and in real-time.
Such a shift would solve problems CFOs are currently grappling with as well as opening up opportunities they may not have considered. Imagine a world where the CFO can surface risks proactively and prevent crises instead of haphazardly trying to solve a problem post-factum. The CFO world can shift from looking at historical data to focusing on forward-looking indicators. They have been working for so long with imperfect and incomplete information that we should not underestimate the potential of equipping them with consistent real-time data and giving them much closer control of their function and the entire company.
The question is: how can that be achieved? How can the hold of legacy systems be broken, and what will emerge in their place?
Infrastructure first
At a time when CFOs are frustrated with the solutions available to them, willing to invest in software, and facing more demands than ever on their time, the opportunity for startups building in this space could not be greater.
Historically, finance software has addressed the top of the workflow. The focus has been on building applications for the end-user that address their needs in a particular vertical. In parallel, the behind-the-scenes transactions and reconciliations have remained reliant on legacy technology and a complex chain of counterparties.
Now, with open finance and APIs, there is an opportunity to tackle the problem from the opposite end. Startups can focus on the infrastructure layer, optimising the connection between the customer and their bank, and facilitating real-time functionality and visibility. We are starting to see companies emerge in the US like Modern Treasury and Atlar in Sweden. Data can flow in a straight line via an API, rather than having to move inefficiently through multiple systems and protocols.
And the end user can be effectively plugged directly into the source of truth about their transactions and cash position. They can issue instructions and receive confirmations, updates and reconciliations in real time. Batch processing will become a thing of the past, and CFOs will be able to understand their money movement minute-by-minute.
The technology underpinning this shift may be intricate, but the philosophy behind it is simple. For too long, finance professionals have been too distant from the source of truth about cash flow and transactions — the lifeblood of the businesses they are helping to run. It is only a matter of time before the emerging generation of startups, harnessing the power of open finance, closes that distance and gives CFOs — for the first time — full visibility and control over their work.
Change from the ground up
This kind of connectivity will be more than a quality-of-life improvement for CFOs. Real-time visibility and functionality will make their job easier and more efficient, but the change will not stop there as connectivity might unlock the rise of horizontal financial software.
If we take a step back, we can see that the structure of the office of the CFO, and the technology that currently supports it, exists more out of necessity than preference. The silos of AP, AR and Treasury were built for convenience. In the end, they share the same goal: to move money as quickly and reliably as possible and to maintain close visibility. With better, more responsive technology, CFOs will have the opportunity to reinvent their role and redesign their teams according to their needs, rather than in line with the structures they inherited.
This will also have a bearing effect on the kind of startups that emerge to supply the office of the CFO. While it is still early in the evolution, we believe that horizontal solutions will have an important role to play in an environment where we can expect the legacy structures of the CFO office to break down, and where there will be an appetite to simplify and consolidate software investments.
The probability that horizontal players will come to the fore is relevant across enterprise, midmarket as well as SMBs. Historically SMBs have been significantly underserved by the current generation of financial software. Across the world startups are addressing this segment, Datarails in Israel, ScaleUp Finance in Denmark and Fincent in India. Most businesses of this size run their finances on Excel, only around a third use an ERP, and just 9% are able to access financial services such as payment processing and foreign exchange through their existing software providers, though most would like to. A horizontal solution serving a wide range of industries would be ideal for the SMB market.
For startups building in this space, the opportunity is huge and multi-faceted. In SMBs, they have a huge, relatively unpenetrated market to aim at, while in the enterprise they have a customer frustrated by their current options, to whom they can offer an unprecedented level of functionality and flexibility.
The race to redefine financial management is underway led by startups like Juni, an EQT Ventures portfolio company. Starting out by solving the business accounts for digital businesses, they are now rapidly expanding to cover the workflow stack of any business that is AP, Accounting automation and working capital. Driven by customer demand, Juni can become the horizontal workflow company solving the financial needs for the CFO.
An infrastructure-led approach to equip CFOs with real-time information and capabilities should only be the beginning. The foundation established by startups will soon enable the office of the CFO to take bolder steps into areas such as AI and automation. Startups like Nominal, Pigment and Black Ore are all building their products to be AI-first. 40% of finance activities can be fully automated, and another 17% can be mostly automated, but as we have seen, the work of finance leaders remains predominantly manual. The office of the CFO is beholden to traditional structures and limited by legacy technology. One of the most significant parts of the shift to an open finance approach and real-time capabilities is that it will free up time for CFOs to consider how they can not just optimise but transform the way they work.
That is why we believe the office of the CFO is a once-in-a-generation moment of change.As technology moves them closer to the source of truth and equips them with more ability to work in real-time, CFOs will be better able to manage their core functions, to oversee their new responsibilities, and to pursue previously unrecognised opportunities.
Some of that change we can predict, other elements will only be discovered as the new generation of companies grows. The most exciting thing about this trend is that today’s startups have the chance not just to seize a market opportunity, but to reinvent how finance is managed for generations to come.
For the disruptors and pioneers building the future of the CFO office, we’re here to support, and partner. If you see the world differently and are driven by innovation in fintech, please reach out to fintech@eqtventures.com.
