949: Achieving a Learning Mind-Set | Davinder Athwal, CFO, Phenom

And then there was a lot of work around reconciling other people's data sets to where we are. There is some education right very early on. What I said was, look, you run your function how you want, I'm not telling you what data to use, but you're going to have to reconcile back to me because this is what's going to get reported to the C-level, to the board, to investors. And if you can't talk to these numbers, that's going to be a problem. So I think very quickly people realized that's the right data set to align around. And then there was a lot of work around reconciling other people's data sets to where we are.

Great to be here, Jack. Doing really well. I'm excited to talk to you today.

Well, you know, Jack, there's multiple pathways to becoming a CFO. If I think about my own pathway, it's probably been a combination of luck, some planning, a willingness to always go that extra mile, and just a lot of hard work. Quite frankly, if I deconstruct that journey that got me here, there's probably three key phases that I would call out, more so than a singular experience. And that first one would be a foundational stage. I began my career with PWC out in Silicon Valley in the mid-90s, dot-com boom, just a ton of excitement around IPOs, changing the world with the internet. At the time, I was lucky enough to join that business when they were at the forefront. I had a chance to work with some great companies like eBay, Yahoo, and DoubleClick, as well as a whole host of others that have since fallen by the wayside. I learned very early on how to work with high-growth, high-tech companies that were on this pathway to an IPO and beyond. That built my awareness of what finance does, the value of finance, and what the value of a good CFO is. I did that for about nine years.

And then after that, I decided I didn't want to make my lifetime there. I got to the next phase, which I'd call the branching out phase. My core domain expertise in the first nine years was really around accounting, auditing, governance. What I did next was branch out into FP&A, treasury, M&A, and all the other components that make up a well-rounded finance profile.

And then the last stage I would call the preparation stage. This is where you basically get invited into the room where decisions are being made, whether you should do an acquisition, buy versus build, lease versus buy, outsourcing. Those decisions are critical from a value creation perspective. Being invited into that room is the first step, but then finding a good CFO or CEO sponsor who is willing to take you under their wing, mentor you, and is committed to helping you become a CFO. I was able to do that. When I think about how I got here, that really was the trajectory more than any singular experience.

Yeah, you hit it on the head there, Jack. As I was winding up my time at PWC in Silicon Valley, the last few engagements I had were really forensic engagements. There were a number of companies that had gone public, flown high, and then crashed and burned. I saw that entire lifecycle, from the excitement of a new startup scaling up and going public, to how they ran aground. That gave me the sense that this might not be something I want to bank my entire career on; it had a bit of a hit-or-miss feeling. At the time, as I thought about how to make the transition into industry, it made sense to go somewhere solid and stable. IBM has one of the premier finance programs in the country, along with P&G and GE. The idea of going to a place that was really at scale, learning what good looks like, was appealing to me.

I actually ended up with IBM at the corporate headquarters in Armonk, New York. The group I went into was corporate strategy or corporate development, and they all sat in Armonk. So that brought me to the East Coast from the West Coast. It was a real cultural shock going from Silicon Valley to the Northeast, classic traditional company. But in a way, it was refreshing. It was good to see a business that is very well regarded, a great brand. The way they went about doing things was very methodical, very disciplined, unlike Silicon Valley where you tend to fail fast and try things out. The other good thing about IBM was that they had already probably tried most things out, so you got a chance to tap into that expertise and maybe 100 years' worth of experience.

Yeah, you're right about that. Even though the midsize company was outside of technology, it was in energy. I joined them late 2008. If you go back in time, you'll recall a new administration, a lot of excitement around what the energy industry could do around renewables. A number of energy companies were thinking about how to survive in this new world because they had been utilities for 50-plus years, very predictable. Now there was this ability to run business in a deregulated environment, much more entrepreneurial. So these companies were looking for folks from the tech industry because tech people know how to handle disruption and uncertainty. I joined that midsize company, a Fortune 500 but midsize, with the idea of helping them build out their portfolio of renewables.

As we look at your career years, you're someone who made an investment in Price Waterhouse, you made an investment at UGI. What kept you there? The way I looked at my career at both those places, Jack, was every year as long as I was learning and growing, I was okay staying. And when that wasn't the case, I left. If you go back and look at my career, you'll find long stints at PWC and UGI, shorter stints at Nell and IBM. The reason for that: take IBM, huge organization, trying to distinguish yourself and get to the next level. I remember having a conversation with my boss after about two or three years at IBM, asking how to get to the next level. The next level for me would have been a director, which was considered an executive rank. The response was, 'You're doing everything right, keep on doing it.' I said, 'Okay, great, for how long?' 'About five years.' I said, 'I'm a patient guy, but I'm not that patient.' So that took me to Nell. The other part of that move was trying to get different experiences. I did the startup scene in Silicon Valley, the Fortune 10 stable scene at IBM, and when I went to Nell, they were in a turnaround situation. They had five material weaknesses they were trying to clean up, so it was an opportunity to be part of that reinvention.

Yeah, that's an interesting question because I'm not sure I ever really trained my sights on the role itself. I always went through my career saying, as long as I'm learning, growing, and excited about what I'm doing, I'm okay. The way it worked out for me when I went to UGI, I began to be the CFO more and more without the title, until somebody walked up and said, 'We're going to make you CFO of the international unit because you're already doing all the stuff we need.' So I almost sleepwalked into it. In retrospect, I'm not sure I would do anything differently, other than maybe accelerate a little less time at PWC, a little less time at UGI. But I think the pathway was probably the right one to get to the seat.

Yeah, yeah, yeah. So the international unit CFO was within UGI. At that point, the company had done a lot of acquisitions and grown tremendously, becoming the second largest business unit. There was a desire by the CEO and board to bring in professional management. So we hired a CEO, and they asked me to be his CFO. That's how I ended up in that role. It was always designed to be done from the US, set up in Europe, and then a local person would take over. That's exactly what happened on plan. At the end of that three-year stint, I had to ask myself, 'Do I want to stay at UGI and hang around for the number one spot, the Enterprise CFO role, or do something different?' That's where a recruiter began to reach out. There were a number of recruiters, but one in particular stood out: an opportunity to get back into technology, be an Enterprise CFO in a public company. That came together, and it felt like if I was going to leave UGI, that was the right opportunity to leave for.

Yeah, I'd love to do that. I'll start by saying all of us at Phenom are really passionate about the mission of the company. The company's mission is to help a billion people discover the right work. Most of us are here because we've had some experience when that hasn't happened, either to us directly or to people we know. This is the reason I joined this company because I saw this happen with my dad. Let me give you a bit of context. My parents immigrated to the UK from India in the late 60s. In India, my dad was in the military, trained as an engineer in an exciting emerging field at the time: electronics and communications. As he was thinking about his transition from military to civilian life, he was in hot demand in India. People were tripping over each other to hire him. He assumed that same dynamic would hold true when he went to the UK. But he gets to the UK, and unfortunately, that's not how things panned out at all. Once he got there, he couldn't even get a response to his applications. You wonder what happened. He went from a hot commodity to a non-entity. It's highly unlikely that the technology was different because all the technology he trained on was from the US or UK. More likely, employers in the UK were using proxies to assess his skills. He didn't go to a school they recognized, he hadn't worked at any brand they recognized, and probably the only Indians they knew at the time were manual factory workers with a strong accent. So he was a very unusual candidate for the jobs he was applying for. The right work for my dad at that time was to do what he was trained to do, loved to do, and had done for years at a very professional level, where people's lives depended on him doing it right. If the companies he applied to had used skill assessment tools to figure out if he was a good fit, he would have been in a very different situation, and his life could have been very different. So Phenom's mission is to change all of that. In plain English, we develop pattern recognition technology that you can use to match candidates with jobs, help employees identify their skill gaps and how to grow their careers, and help entities look at where their skills gaps are for the work they need to do. Let me double-click on that. Take any individual, for instance, me. You look at my LinkedIn profile, I probably have 15 to 20 skills listed. But in reality, I have about 100, like everybody else in my job. We just don't have the others top of mind. But those are all essential to getting the job done. Our technology is able to infer those skills. The technology takes what you do, your job title, who you did it for, how long, and a database we've been building over the last 10 years, and we can infer the balance of those 100 skills. We can do the same thing for jobs. A typical job description may have 10 requirements listed, but for a knowledge-based job, there are anywhere from 50 to 75 actual requirements to do that job proficiently. We call these inferred skill sets Talent Graphs. We pattern match the two and look for candidates that have a 75% or better match on those two graphs, and we offer them up as candidates. One thing that makes us better than anybody else is we do that at the 75% match, whereas others in the field might do it at 40%. Our technology and data are better, which allows us to do that.

Yeah, the company is about 10 years old in its prevalent incarnation. There was a prior app development company that became Phenom. But if you look at Phenom the way it's prevalently constructed, it's about 10 years old. We did a Series D round of financing in 2020. It's a very typical startup with a cap table that includes a seed investor who was the founder of a company called Connecta that sold to IBM a number of years ago. He's very big in this space. Then we had typical names in the other rounds: Sierra Ventures, and others that are more later stage. That's how we've funded the company to date.

Yeah, at this point, I've been appointed as the new finance leader a number of times, so there's a set of how to transition in. The first lesson I would share is to resist the temptation to move too quickly with making changes. I've seen people do that, and I've probably been guilty of that myself. You end up doing things you might regret later. So what I like to do is start with a 100-day plan. For transitioning into a new leadership role, that works for anything, but particularly for finance. I chunk it up: the first at least 30 days, dedicate that to learning the business, the people, the culture, the power structures. There's so much to learn when you come in that is not related to your own hard skills but just around the new entity. At IBM, they used to teach us that when you go into a new organization, think of yourself as a virus. Everybody else is going to attack you because you're the outside cell. So you really have to take that mindset. First 30 days, don't try to make any changes, learn about the place you're going to be in. Then at the end of that, you begin to form hypotheses about what needs to change, be it organization, process, technology. Spend the next 30 days testing those hypotheses with people. There are times when you may have a great idea, but you ask somebody why they do it the way they do, and there may be a very good reason, constraints, or they may have tried your idea. So that's a valuable way to learn what might work or not. After that, spend a couple of weeks, say 15 days, making your proposal for what changes you want to make and the execution plan. Then the last 25 to 30 days is all about selling those ideas to stakeholders. You shouldn't assume that just because you've come in as a CFO, you'll get immediate buy-in. A lot of times you don't, even though people may nod their heads. So there's a critical step to selling your ideas. I did exactly that when I got here. I've used that playbook a number of times, and I found that the structure of the organization is actually okay for where we are at this stage of our lifecycle. Where we needed to make changes is more around tethering the financial plans and numbers to the overall strategy of the business. That wasn't very clearly articulated. Also improving forecast accuracy, and finally raising the profile of finance as a true business partner. It was seen as much more of an accounting governance function, as opposed to a function that can help drive the business forward. That's kind of what I've been working on for the last 18 months or so.

Great question. In our business, we're basically enterprise software, so the key metric that really matters is customer acquisition cost. As you're aware, with these businesses, once you bring a customer in and retain them, it becomes a money-making machine. So all the effort is in acquiring that customer. What I've done since I've been here is put a huge emphasis on customer acquisition cost, and at a granular level, not just at the overall enterprise level, but by channel, by salesperson, by function within sales and marketing, just to kind

We look at it every way we can and then tie that back to lifetime value, because what you want to do is make sure that whatever you're paying out to acquire a customer, you're actually getting enough of a return on it. I'm looking for a 3 to 4X on every dollar of CAC that I'm spending. So those are the two metrics that I've really tried to expound as being critical to our success. There are a number of other things that flow from that, you might have heard things like the magic number, sales efficiency, all that kind of stuff, but ultimately they all kind of go around to that. Now the other thing I'd say along with that is that when you're trying to measure customer acquisition cost and LTV, traditional accounting measures come up short a lot of times. If I just go by gross margin, which in my case is basically 75 to 80% of what we do, I'm going to miss a lot of the cost that goes towards really serving a customer. So what I like to do is get to the cost of not just acquisition but also the cost of serving that customer. To do that, I like to build up my own set of P&Ls, starting with that gross margin which is direct cost, then taking indirect cost and finding some way of allocating all that indirect cost to each customer, almost like an activity-based accounting system, and then rank them from the most profitable to the least profitable. I do the same thing for product as well, and then you end up with this kind of double Pareto of best to worst. The insights from that are amazing. The number of times I've seen customers that people believe are profitable simply because of the brand they have or the amount of volume they're taking up, but they're never the most profitable. So one of the things we did after we set that up was we actually set up a deal desk so that as new deals come in, we can stack rank them against that double Pareto and figure out how interested we are in this work. That contribution margin around the cost-to-serve model has been a really good way for us to look at the business.

We're hitting my goals. My goal is to be plus or minus ultimately plus or minus 2%. We're probably running right now year to date at about plus or minus 5%, so we're kind of getting there. A lot of that just goes to having the right granularity of data and really comes down to assumptions. There's a tendency sometimes in finance to put the best picture on things. What I've found over time is you're better off having a bad assumption and a good outcome as opposed to the other way around where your assumption is too aggressive and you can't meet it. So it's a combination of both those things.

Actually a great question again, Jack. One of the issues that we had, not unlike many other companies I suspect of our size or maybe even much larger, was you had these silos of data and you're trying to reconcile them. You never can because they get disconnected, there are different inputs. So the first thing you got to do is get to a single source of truth, and I believe it's finance. The reason I believe it's finance is because ultimately when you're communicating to the outside world or your own investors and board, that's the only data that really counts. So very early on I said, look guys, we got to get to that. I don't care how you run your function, but you're going to have to reconcile back to me because this is what's going to get reported to the C-level, to the board, to investors. If you can't talk to these numbers, that's a different problem to deal with. So I think very quickly people realized that's the right data set to align around. There was a lot of work around reconciling other people's data sets to where we are. There is some education. People sometimes get into habits of doing things the way they like or the way that best presents what they're trying to present. I like to think of finance as being the objective, neutral arbiter. But now we're there. We're no longer, I mean six months ago we were probably having conversations about how do we reconcile from that number to this number, but now we're at a point where everybody knows that the only number that counts is finance. That's a starting point. You get into issues though. For instance, if I think about my bookings number which is a financial metric and I try to tie that back to the Salesforce number which is all based on opportunities, there's a disconnect. The sales guys need to run opportunities, but I can't do anything with opportunities, I can't report on those because most of them end up going nowhere. But we've now got a process where every month we actually do that reconciliation to make sure we can reconcile between the two. That causes other problems because if you think of our pipeline, we had many people filling our pipeline, they all had different definitions because the data they were using. We're all aligned now. So again, a very good call out on that point to get alignment across the organization.

Yeah, pretty combination. It starts with actually really understanding what expectations are of finance. What I found, if I go back to that 100-day plan, in the first 30 days I make a point of meeting with all the key stakeholders that use finance in some way and asking them: what are your expectations? What do you think finance should be doing? What would you recommend we keep doing? What do you recommend we stop doing? What would you like us to start doing? That becomes a very valuable source of that starting point of alignment. It's amazing the number of things that people think finance should be doing, and that's a great time to say, well, that's not my role, or we don't do that, or we can do that but we're not set up to do that. People just don't realize until you have that conversation about what it is you're really structured to do. People assume, oh, of course you do pricing, but we don't do pricing, we're not set up for that. But it can prompt the question about whether we should be doing it and whether we should be investing resources in it. So that's the front end of just making sure everyone's aligned on what finance should be doing. Then from that, it really does become a case of making sure we've got alignment on the data. I'm a big believer in transparency. I don't want finance to be respected or feared in the organization because I've got an information advantage over other people around the P&L. I'm a very big believer in disseminating that widely so that everybody knows exactly where the business stands and where they stand. Then it really becomes about a conversation about the interpretation. How do you use that? The way you use that then is to take the team and deploy them in a kind of more surgical fashion. One thing I really believe in is having dedicated business partners. In my business, the two key areas would be around product engineering and around sales and marketing. Having dedicated folks that actually work with them on a day-to-day basis, help them make sense of where the numbers are and where they're trending, can be very powerful.

I'd start by saying we're in that business. Phenom basically, the talent graphing that I talked about, it relies on AI. So we think that's coming. From the perspective of the CFO, Jack, I'd say there are two dimensions about how CFOs should be thinking about the impact of AI. The first dimension is the overall enterprise organization, and I think that's important for CFOs to take the lead on. Then there's the finance organization itself as well. Those are the two dimensions that need to be looked at. On the enterprise level, Morgan Stanley has actually come out with an estimate that they think 44% of all jobs in the US are going to be somehow impacted by AI, and that's just in the next three years. So if you look at their estimate and the 44%, the average wage, they come up with a number of $4.1 trillion of potential productivity gains or cost savings that are going to result from the use of AI. $4.1 trillion is about the size of the German economy, which is the fourth largest economy in the world. So what we're really looking at is growing the US economy by the size of Germany in maybe three years because of AI. The impact cannot be understated. But what does that really mean? I did some back-of-the-envelope math. If all that flowed back into the S&P 500 and companies on the stock market, what you end up with is if you got a company that today commands a superior multiple because they may be generating 25-30% operating margins, that means you're going to have to be at 50-60% plus. So if you're a 25% operating margin company, which today is fantastic and you're getting the top multiple, that's not going to be the case if you're not at 50 or 60. From a CFO perspective, making sure they're really in tune with enterprise value creation, they should be looking at that enterprise level: how do we deploy this, what does this mean to us? Taking it down a notch, if you look at it from the perspective of the finance organization, there's a huge opportunity to automate tasks and things like that that the CFO should be looking at.

For me, Jack, it's probably actually when I joined Phenom. If you think about my transition into the company, I accepted a job and decided to come here when the software companies were having a moment. There was just no multiple that was too high, there was no end to funding, you could happily run a company with cash flow negative or cash flow burn. Within the first few months of getting here, the whole world changed. Those multiples crashed, rates started to go up, so it became a very different world. The finance moment for me was coming to terms with: do we assume that this is going to be a temporary dislocation in the markets and things will go back to the way they were in 2021, because that had happened multiple times since 2008, or is this a fundamentally different place we're in? Typical finance guy decided to prepare for the worst and hope for the best. Preparing for the worst meant we had to get this company to cash flow break even. The company had never been cash flow break even in its history before then. I had a very strong fundamental belief that the only way to survive and go through this period of uncertainty is if we control our own destiny. You don't want to have to raise money when the markets are frozen or there's a lack of availability of credit or capital, and you don't want to do a down round. The only way to go through unscathed is to control your own destiny. So we set about putting the company on a path to cash flow break even. There are a number of things we had to do around that, but I'm happy to say if we sit here today, I'm very confident we're going to be at least cash flow break even, if not cash flow positive, by the end of the year.

Probably a mindset issue, Jack. Looking back to that first time, it's okay to fail. Just because you're the CFO doesn't mean you have to succeed at everything every time. In fact, if you're not taking calculated risks and failing, you're not pushing hard enough against the constraints. You're playing it safe. You're also missing out on the opportunity to learn from very valuable lessons, because it's through failure that you learn some of the most valuable things. Related to that, I would also say it's important not to assume that you're the problem. Things will go wrong, they'll go off the rails. Finance people tend to be introspective by nature, they think about what could I have done differently, what does this mean? Because of that mindset, we tend to shoulder blame unnecessarily. There are other functions that are very good at either having a blind spot around their own shortcomings or projecting onto others. We can become the brunt of that. So if I could go back, I'd tell myself, just make sure you look out for where the problem is and don't be afraid to speak up.

Okay, you know what, I think most people, actually all people that know me today would think that I'm very comfortable being around people and doing public speaking and just being extroverted. I've actually had clinical executive assessments done where I've come up the charts as extroverted. Growing up, I was super, super shy, and I still have that. There are moments where people don't see that I need to go back and recharge. There's a part of me that needs to go back and recharge so I can go back out into the world and do what I do.

It probably was like that 10 to 15 year range, it's pretty gradual. I don't think it was like I woke up one day and suddenly I changed. It was a combination of basically over time seeing situations play out and knowing in your mind how you feel about them. Over time, you get enough of those experiences where you think, I was right about that, I should have spoken up. You get that confidence to say, you know what, I've got a 90% success rate here, I think I'm okay. The other part was quite frankly being around people that were more senior to me doing the kind of jobs that I thought were very high, and saying, I can do that, what do they have that I don't have? So it's the combination of those two things. At some point I decided I don't want to live my life in fear, I want to take some risks, I'm going to speak up. What's the worst that can happen? When I began to do that, good things happened as opposed to bad things, and that becomes a very addictive thing in its own way. So that's been that journey.

I wrote a book called 'The Happiness Hypothesis' by a gentleman named Jonathan Haidt. He's a psychologist if you will. The book is all about how do you find happiness, what is happiness, how do you find it, where is it. It was quite eye-opening for me in a number of ways. No real earth-shattering wisdom, but it's kind of a confirmation of a lot of things that you suspect in life but you just need to read it. Enjoying your day more, just living in the present, it boils down to living in the present. I do think a lot of times we tend to get caught up in where do I want to go, where do I want to take my career, where do I want to take the company, and you get hung up on all that stuff and forget to enjoy today. Well said another way, the real excitement and the real fun is the journey, not the destination. He's got a lot of really good ideas about how to stay present. One of the tips I picked up was just feel your toes, make a conscious effort to feel your toes, it brings you right back to the present when you find yourself drifting away. So that's a great personal book. On the other side, from a professional perspective, there are probably a couple of books I would recommend to anyone aspiring to the role. One is for your left brain, the hard skills one: a book by McKinsey called 'Value: The Four Cornerstones of Value Creation' really helps you understand how value is created, how you conserve it, how you grow it. Great ideas for how to do all that stuff. The other one is a book by a couple of Wharton professors called 'The Art of Woo'. This book is all about persuasion, selling your ideas to stakeholders. I think of those as companion volumes. One gives you great ideas and insights about how to run the business, but that's not enough, you got to then go sell those to people that it matters to. Together, that's a great combination.

You asked about capital structure at the beginning of the call, Jack. I think the next capital event for us would be an IPO, sometime away yet. But my job is going to be to get the company ready as an IPO candidate. There's a lot of work that goes into that. It's a good 18 to 24 month process, whether it's around governance, better predictability, being able to describe the business. So a big part of what I'll be focused on is that IPO readiness, making sure we're ready to go as soon as the window opens up.

My pleasure, nice to be here.