Why Zendesk’s Former CFO Says Being Predictable Is One Key to a Successful IPO
Wall Street craves stability from businesses. Being predictable is at the heart of long-term success when a company plans to go public, former Zendesk CFO Alan Black says. Get there by applying a strategic approach to forecasting, encouraging a culture of learning, and building trusting relationships across the organization.
Alan Black had a front-row seat to one of the most exciting events in a business’s lifecycle: going public.
As the CFO when Zendesk IPO’d, he and the company’s leadership team championed one of the least exciting-sounding strategies for a business: being predictable.
But being financially predictable is far from dull, setting your company up for long-term success with public investors. From his seat in the finance department, Black worked with leaders across the business who were committed to data-driven decision-making that facilitated the company being predictable operationally and financially in the critical first years as a public company.
Black was at Zendesk, an omnichannel CRM platform specializing in customer service, from its early growth days in 2011 through its IPO in 2014 and continued leading the finance organization for two years after going public. Since 2017, he’s advised tech companies on their journey toward liquidity events via either an IPO or M&A.
In Black’s experience, one of the keys to successfully operating a public company is being financially predictable through a companywide, disciplined approach to business results—both before and after the IPO.
Become Predictable Sooner Rather Than Later
When your business reaches the level of maturity where it’s possible to move from a private entity to a public company, Black says being financially predictable is imperative.
“A predictable business model allows you to develop your guidance for Wall Street with confidence that you're going to be able to deliver what Wall Street expects,” Black said.
Your financial world is transformed in the years post-IPO when control of the business moves from management and VCs to a constituency of institutional investors. Public shareholders expect you to earn their trust quarter in and quarter out by meeting or exceeding the plans you laid out. That’s really difficult to do, Black says, if your business is not financially predictable.
“It's all about, from the CFO’s chair, building a discipline of being really good in your forecasting for those that you ultimately work for … the public investors.”
Being predictable is a muscle that businesses need to develop. Starting long before going public gives them more time to strengthen that muscle. The earlier a business creates a dependable system for forecasting and analysis, Black says, the better it is for long-term success.
Create a Disciplined Approach to Financial Forecasting
Being a predictable business starts with accurate financial forecasting, including tracking key operational and financial metrics. Create a disciplined system that lets your team—and organization—establish the a solid financial model, track against the right data, and follow up on the results. “Inspect what you expect,” Black said, quoting a well-worn phrase, then added, “And translate it.”
“In the end, it's about being able to explain why something is happening, not just what happened — because what happened is not super useful in and of itself.”
The leadership team at Zendesk had these principles in mind before Black even joined the company. And according to Black, that existing foundation made it easier to focus on four critical steps to building a predictable business in the runup to IPO:
1. Establish business systems.
Your company has big goals for growth—but before it can meet them, it needs effective business systems in place. Business systems like your ERP, CRM, HRIS, and payment systems collect data points that capture your company’s performance. The right business systems let you gather a complete dataset, whether you’ll be looking at targets like profitability or efficiency with your capital.
2. Determine the right metrics.
Choose your targets and operational and financial metrics carefully. What KPIs actually give you the insight you need to monitor your business’s performance? There’s not a one-size-fits-all roster of the targets you should use. The metrics that matter vary from company to company, so invest the time to figure out which ones are the most valuable for your organization to track.
3. Report against your targets.
It’s time to inspect. It starts with reporting the company's results against the established targets and metrics, like sales efficiency versus plan or profitability versus expectation. But tempting as it is to share the facts of performance and move on, the process doesn’t end here.
4. Analyze performance.
“You've got a report, but it's why the results were what they were that really matters,” Black said. Leaders and teams need to build in the time to analyze and explain the business results in their reporting. It’s not enough to say that sales were up or down 5%. Everyone in the company should get in the habit of explaining why results were better or worse than expected. Those learnings are essential for future decisions and (of course) predictability.
“You create a culture of learning in a business so that you can plan more precisely for the future and be more predictable in the future,” Black said, “both internally as well as to external stakeholders.”
These steps may start in the finance organization under the CFO’s purview. But it takes level-setting, buy-in, and cooperation across the entire organization to create long-term predictability. To get that, leaders need to build reporting, analysis, and learning into the business’s culture.
Build a Companywide Culture That Supports Predictability
Company culture builds over time, and it reflects the processes and behaviors in place across the organization. And it doesn’t just come from a charismatic CEO or policies in the company handbook.
“The role of finance is to contribute to creating the culture in the company,” Black said. “Do you have a culture that's transparent — or not?”
Transparency, communication, and learning start with business leaders across departments. Well-run companies like Zendesk have all of them on board with the process of reporting and analyzing results to create the predictability for a financially stable company.
“It's really not possible, long-term, for a finance organization to be the sole custodian of predictability in the business. Responsibility needs to be shared.”
“It's got to become systemic in the DNA of the entire leadership of the company, in each of them understanding that they have their role to play” in financial predictability, Black said. Finance’s role then becomes to help the leaders learn from what happened—without pointing fingers or feeling attacked.
Ensuring that kind of positive experience when talking about results, especially ones that didn’t go to plan, starts with building collaborative, cross-functional relationships and trust with colleagues.
“At a cultural level, the more that you're supporting the non-finance-department, functional organizations and their leaders through the planning process ... it ultimately leads to a more disciplined organization, where the result is predictable and consistent results against plan,” Black said.
Be the Trusted Partner Your Organization Needs
Helping leaders across the organization was a critical part of building the culture of financial predictability at Zendesk. Building those relationships meant he and the finance team could better bolster the organization, and creating trust was an essential part of that process. For Black and his team, that meant being visible, engaged partners for other business units.
For example, long before Zendesk went public, Black made a point of connecting with the sales team informally every day. Connecting with sales in person helped create a foundation of trust between the two teams. For a product-led business that didn’t even have a sales team until Zendesk reached more than 10,000 customers, that relationship between sales and finance was crucial.
“The whole benefit is to remove what might otherwise be some level of trepidation of the interaction between sales and finance. … We worked to remove barriers to closing business as much as we could to ultimately help them get deals across the line while protecting the business model.”
Post-IPO, the Zendesk finance team continued to watch out for the rest of the business. Not long after going public, a tough sales quarter had Zendeskers wringing their hands. The team was pleasantly surprised when analysts and investors were pleased with the quarter’s results. The positive reception was thanks to Zendesk’s long-standing reputation as a predictable business and the company’s guidance for shareholders that focused on longer-term modeling, inputs, and expectations.
“There's also the role, in terms of being predictable, of protecting the business and making sure that you don't get ahead of your headlights,” Black said. “We took a path of relying on the guidance that we had developed long-term and not letting past over-achievement ripple through unreasonably into the new guidance.”
The way Black built relationships across the organization increased transparency with the finance team at Zendesk. That kind of open, trusting communication and culture of learning drove Zendesk's success as it transitioned from operating as a private company to operating as a public company. That’s what gave Zendesk a reputation on Wall Street for being well-managed. And it’s what can make the CFO the silent hero of a business.
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