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Future of Finance: Think Like a Venture Capitalist

Future of Finance: Think Like a Venture Capitalist

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The CFO’s new role in enterprise innovation

As disruptive technologies upend operating models, displace existing products and services and unlock new opportunities, a company's growth and earnings have never been more uncertain. Business leaders are now under pressure to make bigger bets on innovation and execute against them.

However, while almost all organizations are in some phase of transformation, about a third of executives say they have failed to achieve value from their initiatives, due to a lack of effective processes for managing innovation.1

Most chief financial officers (CFOs) are facing an overarching tension: How can their companies make money today while still investing appropriately in the future? How can they ensure the right investments at the right time and in the right sequence?

As the stewards of past and future earnings, CFOs will play a critical role in answering these questions. They will wear two hats: one for ensuring stability and control of the finance function and another for enabling agility and profitability in enterprise innovation.

The leading CFOs of the future will play a critical role in business strategy and innovation investment. To enable agility and profitability in enterprise innovation, CFOs will need to adopt a venture capitalist mind-set.

Wearing this second hat, the CFO must think like a venture capitalist (VC), building a strategic portfolio of investments that can be continually adapted to changing needs. This mind-set requires new approaches to budgeting, measurement, and governance of innovation investments.

From annual budgeting to dynamic funding

In a 2018 study of more than 270 global companies, conducted by Innovation Leader—an information firm that serves executives in large organizations—and sponsored by KPMG LLP, nearly 70 percent of respondents said innovation efforts are funded through an annual budgeting process.2 However, innovation leaders in the business units are often frustrated by this approach, because by the time the annual cycle rolls around, the window for competitive differentiation has closed. Moreover, the traditional annual budgeting process often favors legacy initiatives, building on the previous year's plan, versus new investments that may be seen as risky or unproven.

A more agile way to invest in enterprise innovation is through a dynamic funding process that's governed separately from annual budgeting, and the CFO—who holds the keys to the funding—is in prime position to lead it. In such a process, innovation investments are “lifted out” of annual budgeting and funded with a separate pool of resources. This kind of approach allows for small, quick, ongoing decisions that can be frequently revised—instead of large, static ones.

From dynamic funding to dynamic execution

A VC approach to innovation means enabling investment in the right project at the right time. Accordingly, savvy CFOs can advise business leaders on agile ways to deliver projects—by developing hypotheses, testing in sprints, and monitoring results. There are ways to invest a little and learn a lot.

Key questions for CFOs

Are you confident in your organization's ability to identify and prioritize signals of disruptive change in the market?

How is your organization structured to invest for future growth and relevance?

Do you feel you are investing enough to transform and meet earning-per-share goals in the next three to five years?

Have you incorporated innovation investments into your budgeting process?

What percentage of your organization's investments is consumed by legacy challenges?

Is your finance team capable of efficiently assessing investment options and allocating funds to the most promising pursuits?

Are you actively exploring emerging opportunities to build, buy, and partner to respond to market shifts?

Do you have an innovation investment portfolio, or is innovation scattered around the organization?

 

Read this whitepaper to learn more about the CFO's role in business strategy and innovation investment.

 

  1. KPMG International, Global Transformation Study 2016: Succeeding in disruptive times
  2. Innovation Leader LLC, sponsored by KPMG LLP, Benchmarking Innovation Impact 2018

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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