The startup CIO’s guide to formalizing IT for liquidity events

CIO turned VC Brian Hoyt draws on his experience prepping companies for IPO and other liquidity events, including his own, to outline a playbook for crossing the start-up to scale-up chasm.

Suppose you lead IT at a VC-backed startup. It just crossed $100M in revenue and is approaching a major liquidity event, such as an IPO. It’s exciting stuff. But as you speak with an expanding cadre of lawyers, accountants, and bankers, you start to appreciate what such an event means for your department.

You start to see the cracks in its foundation. You see the data by which Wall Street will judge your business is scattered across the company, stored and formatted unsystematically. You see the systems that must be repaired (or built) if the firm is to comply with SOX. You even acknowledge that IT has been kept afloat by managed service providers and fractional employees. All of this, you realize, must change. You’ve reached a tipping point at which your IT capabilities must be formalized, but you don’t know where to start.

Fortunately, Brian Hoyt does — and he’s been there, having served as CIO of real-time 3D content creator Unity Technologies, for which he prepared the IT department for IPO in 2020. Today he serves as partner and chief operating officer of Parkway Venture Capital, which invests in software and AI/ML companies across various sectors. He helps the firm’s portfolio companies tackle the intricacies of crossing the start-up to scale-up chasm.

Here, Hoyt shares what he’s learned from scaling IT in rapid-growth companies, both as a CIO and an investor, and what should be considered by digital and technology leaders whose firms are heading for major liquidity events — how they might structure their departments so that the company can weather that liquidity milestone and the S-curves in the years that follow.

When you should step up your IT game

There are no exact thresholds for formalizing your IT capabilities, including hiring or promoting a CIO, says Hoyt, but there is one important sign: talk among your colleagues about redoing the company’s ERP system.

“I think people usually go QuickBooks, NetSuite, then onto something else, or they redo NetSuite. And often your accounting team had to implement NetSuite without IT’s support,” he says. “It works for their purposes for the time, but when it needs to be refashioned so that it can scale, that’s the time to bring in someone with some seniority, someone who’s been through it, because it’s really hard.”

Why does an ERP redo or implementation present such a great opportunity to evolve your IT organization? A couple of reasons. First because, as Hoyt observes, ERP implementations are notoriously difficult. Few leaders will volunteer to drive the work and often it will fall to the accounting team. “In many cases that won’t work out,” he says, “because the accounting team must devote themselves to their principal work, which is critical, and because they have lives and implementing ERP software sucks.”

But also, ERP systems rely heavily on IT-supported capabilities, so any work necessary to implement one will likely involve your team anyway. You might as well be the one to command that work; as a tech leader, you’re especially well suited to it, and doing so will give you reason to acquire resources that lend themselves to causes beyond those related to ERP. In other words, remodeling your ERP can afford the chance to remodel your department — to effectively say, “If we’re going to do this, I’ll need the following.”

Of course, the ERP sign is only a rough guide, says Hoyt. The right time depends on your business and industry; the more regulated it is, the sooner you should start. He uses selling into enterprise software as an example. “If you’re going through a lot of security reviews, plan on hiring a CIO earlier. My first question [to entrepreneurs in that space] is: How are you getting through security reviews? And they all groan. The people who have a clear answer are going to do better.”

Whom you’ll need as you prepare

As it happens, regulation — or compliance — is another area for which you’ll need to hire or promote a leader. Although Hoyt stresses he isn’t one to “insist that you hire from outside,” here you likely need to.

“You need someone who knows the territory, who knows Sarbanes-Oxley and the language of the auditor and preferably someone who’s even worked at your auditor’s firm and can speak their language and prepare everything,” he says. “Otherwise [the auditors] will grind you into a fine powder because they have an endless bench of people to schedule meetings and ask that processes be explained.”

There are plenty of candidates for this role, Hoyt says, but you might need to look outside the box. “They might not be in a job called ‘Head of Compliance.’ It might be ‘IT auditor,’ and they’re tired of flying between Nebraska and New York every week. And I think this has been a huge part of what I’ve done in the past, is finding this person.”

You’ll also need someone to lead infrastructure and ops, which rarely gets the attention it deserves when the firm’s still young and focused on core products and the viability of its business model. Often by the time the firm’s leaders start talking about going public or agreeing to sell, the firm’s foundational technologies may be in need of a closer look. A major piece of this domain is security, which Hoyt says can roll up to the infrastructure and ops lead at first but must eventually become a separate function.

“As your firm grows and starts looking to go public and becomes a bigger topic, you become a bigger target,” he says. “Some attacks from sophisticated bad actors are unavoidable, but you at least want to ensure that you don’t leave yourself vulnerable to avoidable slips.”

Finally, you need someone to lead your financial and business systems. “I love accountants interested in systems,” says Hoyt. “They’re often perfect to lead this area, and a lot of modern CIOs need technically minded leaders that they can trust to know whether a system is out of whack or a piece of work can be executed.”

Why is thisleader so vital? Largely, Hoyt says, because of the projects you’ll have to undertake to prepare for your liquidity event.

What you must do to prepare

Hoyt suggests that CIOs can learn much about the projects they’ll have to drive for a liquidity event from the focus of Wall Street earnings calls.

“They’re all about financial predictability and accuracy. Your firm’s viability as a financial asset largely comes down to investors asking, ‘Can we trust this company’s numbers? Will they be delivered on time?’ And if you get your numbers wrong, or they’re late, you can’t fix things by saying, ‘Well, you know, my IT person didn’t come through,’” he says. “And you can’t continue to spend 90 minutes in exec meetings arguing about whether the data you’re all looking at is right or how it’s defined. If those conversations are still going on, then you know there’s work to be done and that you need to start it as soon as possible.”

Getting the numbers right may sound simple, but it’s grueling work, Hoyt says, starting with getting your data right at the source.

“You have to stop fixing problems in the data layer, relying on data scientists to cobble together the numbers you need. And if continuing that approach is advocated by the executives you work with, if it’s considered ‘good enough,’ quit,” he says. “Getting the numbers right at the source requires that you straighten out not only the systems that hold the data, all those pipelines of information, but also the processes whereby that data is captured and managed. No tool will ever entirely erase the friction of getting people to enter their data in a CRM.”

The second piece to getting the numbers right comes at the end: closing the books. While this process is a near ubiquitous struggle for all growing companies, Hoyt offers two points of optimism. “First,” he explains, “many teams struggle to close the books simply because the company hasn’t invested in the proper tools. They’ve kicked the can down the street. And second, you have a clear metric of improvement: the number of days taken to close.” Hoyt suggests investing in the proper tools and then trying to shave the days-to-close each quarter.

Get your numbers right, secure your company, bring it into compliance, and iron out your ops and infrastructure. Do these things and you’re a long way toward being ready for a major liquidity event — or just your company’s next chapter.

You can’t go at it alone

Hoyt is so knowledgeable in this area that he answered virtually every one of our questions without hesitating. So it should say a lot that, when asked what one bit of advice he’d leave with CIOs preparing for a liquidity event, he pondered his answer for what seemed like 10 interminable seconds.

“Make sure you have the full support of the top officers — the CEO and CFO, or COO. It’s hard work. And to some extent you’re going to have to make people’s lives harder, so there’s going to be friction,” Hoyt says. “The only way you’re going to overcome it is if you have top-down alignment. As time goes on, more CIOs are reporting to CFOs or COOs or CEOs. But in some firms, the CIO still reports to someone farther down the food chain. That won’t cut it in a firm preparing for an IPO.”

And that’s good news for IT leaders looking to take a step forward with their careers at startups and beyond, he adds.

“CIOs hold a unique position,” says Hoyt. “They can see every part of the company. They see the challenges regarding real estate and ERP and so on. That purview has to be recognized and respected if a firm is serious about playing in the big leagues.”

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