Why high valuations are secretly killing tech unicorns — Martino Cadoni [Deepl]

0:00Finance should be an accelerator and not a brake in a company, right? Speed is as important as quality. Most companies, they pay a lot of invoices too late and a lot of invoices too early. In private markets, you can really experiment and try to change the status quo in a way that in public companies you cannot do it.

0:22Martino Cadoni:Today on Billions, I'm sitting down with Martino Cadoni, the guy who builds IPOs. At 35, he took Moneta Money Bank public in a$749 million IPO, the biggest banking listing in Central Europe this year. At Klarna, in the middle of market chaos, he helped structure one of the largest transactions in the company's history and now is the CFO of Dippo, one of Europe's leading AI companies. Martino, welcome to Billions. Thanks for having me Guillaume, it's a pleasure. It's not often that we discuss with CFOs. So I really want to understand a little bit more about how do you see the career of a CFO? Because you went from G Capital to HSBC to Klarna to Depot.

1:10Martino Cadoni:And a lot of people assume that CFO or like the CFO job is just about like spreadsheet. So can you maybe walk me through a little bit more about like your career path? and what does it take to become a finance leader like yourself? Yes, I mean, the first thing I always say to everyone is finance should be an accelerator and not a brake in a company, right? So the way I see the CFO role is truly as a strategic partner to the business, right? That's how I built my career. So I started at General Electric, GE, with the leadership programs And these programs are a bit less known in Europe, but in corporate America, they are really truly seen as some of the best CFO factories.

2:02And substantially, it works. The first two years after university, you get to rotate across the different areas of finance, across different geographies, across different businesses. For example, I started personally in Budapest in a G energy business. I was doing commercial finance for six months, working alongside sales, helping them from my finance perspective. And then moved to Italy, another different business, doing financial planning and analysis, working very closely. for example my boss's boss back then was Thierry Pieton which until recently was the CFO at Renault Group and now is the CFO at Metronix right so one of the major advantages of these programs you truly get to work with some of the best people in the industry across different countries across different businesses so you learn a lot of new business models very quickly right so I've done this for four years where every four to six months you get launched into a totally new space.

3:18You need to learn extremely fast. We were working truly 996. The only day off was Saturday. Sunday was a working day and you would be assigned to a specific problem to solve. And then you had just a few months to really identify the problem and solve it and implement the change. It was like doing a mix of investment banking, McKinsey and Harvard Business School type of things. Because on top of the day job, we also had exams, right? So we had classes every trimester and then a lot of training on leadership, strategy, corporate finance. So it was very intensive years, but some of the most rewarding.

4:09And again, one of the best things was really I was surrounded by amazing leaders. For example, when I finished those programs, the head of the program was Cosema Shipchandler, who is now the CEO at Twilio. right so you you get to learn from the best and the program had amazing alumni like for example john elkan uh with you know the the president of stellantis and one of the main main heirs of

4:40Martino Cadoni:the annielli's family and can you share like some of the example of problem you had to solve because you mentioned like uh you know we were assigned like some problems and uh and so so what What are these kinds of problems? Yeah, I mean, I give you a few which are very relevant. For example, when I was, one of the rotations was in France. GE had just acquired a company called Convert Team. And I was part of the integration team. And I was responsible to ensure that the fax and cash management of the new company as part of GE, all the processes were compliant and they were you know according to sec rules according to ifrs and things like that for example i found there were issues with the process and we found over 20 million of opportunity in term of fx savings right another one i was in the netherlands i get a call and say hey tomorrow you fly to budapest because the hungarian government just issued a law that is banning any mortgage in non-local currency and we want you to go to hungary and you need to evaluate how big of a risk this is right so i jump on a plane go go to budapest uh i got handled uh like a huge database with all the mortgages in foreign currency mainly was swiss francs and i had to revaluate in two in just two weeks i had to revaluate uh like a multi-million dollar reserves which then got adjusted that then was announced to the in the earnings call of g another time i was in russia for example we had a customs compliance audit So I had to ensure that no employees or no government officials were doing anything against the rules.

6:45So very different scenarios, very different areas. But you really, truly learn how to solve problems, first principles, how to work independently, high agency and in a totally different environment, which I think for me has been a huge advantage for then transfer to private companies and more startups, scale-ups, because the modus operandi is very similar. We were working within GE programs with the lean startups and Toyota factory principles, which are some of the best principles if you work in a high-growth environment.

7:30Martino Cadoni:Can you share how these principles apply in real life? How does that look like? Yeah, I mean, it's like UI, for example. Yeah, all things like agile working, like daily stand-ups. You have a weekly retrospective, always really trying to, whatever you do, usually go back and understand what went well and what should have done better. than extremely frequent feedback like you would have every week or every other week one-on-one and getting feedback about your performance what you can improve on and what you are good at i think this extreme frequency of feedback makes you a better person and a better professional right and then it's truly a lot also about processes right so every time we will get us to jump into a new problem space.

8:28You were to map the process step by step. For every step, you were to identify what are the risks, what are the controls, and then how you can automate the process. So there was no AI back then, but we did a lot of automation work exactly using those principles. For example, when I was in the US in the G treasury, we had over 100 treasury systems across GE because GE was a huge company. We had to consolidate. And after four months that I was there, we decided to go down from 100 to 20 systems. So again, same principle. There was no AI, but the logic were the same that we are facing today.

9:16Martino Cadoni:And can you explain maybe what's a treasury system and how things got improved on that side? Yeah, I mean, so a treasury system, usually you're in a big company, you have multiple bank accounts, right? These bank accounts need to be managed. And usually there is a treasury system, which is like where you manage these bank accounts from, right? Because GE was a combination of a lot of M &A acquisitions, over time, the amount of these management systems exponentially grew, right? We obviously drive friction, extra cost because you are paying multiple providers. So there was an opportunity to consolidate and improve processes.

10:00And that's what we did.

10:03Martino Cadoni:Okay, nice. And I think at G, you did around like 20 exits and IPO readiness work. But also at HSBC, you were like a deputy CFO. And I think the business unit was around like 2 billion. how do you think like this uh these corporate jobs like kind of like help you transition to uh to startup like what are the things that you kept and also the thing that you had to unlearn to make that transition yeah i think also what what you keep is the depth of analysis that you need to do because the devil is in the detail when it comes to value creation optimizing the outcome of an M &A exit or an IPO, really, you really need to go deep.

10:51And I think one of the things that is often underrated in tech is the balance sheet. Like every time I go and work with the companies, they are obsessed about the P &L, which is great, but you should be equally obsessed with the balance sheet because there is a lot of opportunities in a balance sheet. Obviously, depending on the business model, some more than others. But I think that balance sheet obsession is something that has benefited me quite a lot along my journey after public companies at Klarna, but also now at DeepL. So understanding the treasury side of things, how to optimize cash flows, I think that's something which I learned during those days.

11:41also because for example at the chsbc i was responsible for strategic finance meaning deciding how much buyback we should pay right how much dividends um we should issue right so managing the capital at the balance sheet of a company which were back then you know was doing globally 50 billion in revenue and add a multi-trillion balance sheet another thing i think a lender is institutional knowledge and also how to lead with central banks with institutional investors with other banks i think that ability to build and manage those relationships is definitely helpful in my today's job in time of what i had to unlearn definitely you know when you move to a scale up i think you need to understand be earlier when it's good enough because speed is as important as quality so you don't want to kill velocity because you want to be too perfect so you need to be to get more comfortable in the good enough and just move on right because speed is critical in private markets.

13:03So the one is definitely something to adjust. In general, be a bit less polished, right? Because again, it's all about speed. It's all about execution. And sometimes it's better to be slightly imperfect, but be fast.

13:19Martino Cadoni:And on the balance sheet obsession, can you explain a few things that you managed to optimize? or like if you had to go inside a company, like what are the things that you look for like directly and where you are like almost certain that there are like optimization that you can find? Yeah, like the basic stuff is like accounts variable, for example. I mean, all the companies that go, usually there are, because what happens in most company, you get an invoice, you look at the invoice and you go and you pay, right? Right. So. So and. But that's wrong because you need to understand when is the invoice due and what's the best time to pay that invoice.

14:05Right. So most companies, they pay a lot of invoice too late and a lot of invoice too early. Well, actually, you want to optimize and pay them a due date because if you pay too early, you are missing out on interest that can be generated with the extra cash staying in the balance sheet for longer. If you pay too late, then you are, you know, doing something which might undermine your relationship with the supplier. So optimizing the timing of the payment is usually an easy win. Okay. Then another thing which is usually underrated is FX fees, right? A lot of startups often they invoice only in one currency or in a few currencies.

14:54They don't really look at the effects until very late and high stage of maturities. So I think it's important actually there are easy wins there, right? and then things like in the checkout you can look at authorization rates decline rates and so yeah understanding anything about payments can save you a lot of times in general and when it

15:23Martino Cadoni:comes to like fx how exactly do you like manage the arbitrage of the currency so if we take like the example for example of euro dollar exchange rate it has changed quite a lot like in the last year or so so if you decide like to invoice for example in dollar like do you do you keep like your dollar in a bank account and and just like spend in dollar whenever you can and you you keep like same currency to avoid like change in fx or sometimes do you make arbitrage and say okay like the dollar is strong for now i'm gonna change everything to euro because i'm a european company and uh and when dollar is weak maybe i'm buying more dollars from my euros like how exactly do you make uh changes and arbitrage so first of all from an accounting point of view unless you are a trading company you should not be targeting to make money right is against the accounting principle You should be trying to hedge and offset, but not to speculate on the effects, right?

16:30Martino Cadoni:Okay. And what's critical here is if you have a good cash forecast process, you need to understand for each of the currencies, what are your upcoming payments to be made in the currency and how much revenue you expect in that currency. Because ideally, you want to match the currency, and you want to mesh maturity so that you know you need a lot of US dollars next month, you can do something to optimize that, right? I don't know if there are FX edging products that can help mitigate these FX risks. But often, step one, which is trying to forecast how much of the currency you have in and out, is already a good amount of money saved.

17:20Martino Cadoni:okay okay really interesting um i want to go back to like the a little bit of your like uh story at clarina because uh the ipo uh was a bit below like the the last valuation etc and of the fundraise so i want to understand like how do you approach a fundraise and how do you approach an ipo and how can you explain like the difference of valuation that can happen yeah i mean uh so there are a lot of similarities between the two processes both there are also differences the similarities is it doesn't matter if it's an ipo or fundraising or mna exit i always say you need to work about this general concept of readiness right so which means uh your house needs to be in order and across all the different areas, right?

18:16And from a finance point of view, obviously, the major things, particularly if it's an IPO, if it's an IPO in the US, is you have all this SOX framework, which is a long list of compliance rules you need to comply with, right? And for the rest, you need to have financial performance, which is obviously positive so it's growing but more importantly I think to be ready to be public you need to have a financial performance which is predictable with a high rate of confidence right because the last thing that retail investors or public investors want is a stock which is difficult to predict, right?

19:04And so it's always good to go public when you have a performance that, you know, you are growing, but you are growing in a direction which is predictable. You can then do what's, you know, the classic beat and raise. You are able to give strong guidance and you are able to meet or beat the guidance. Because if you fail to do so, then you are in trouble as a public company, right? and uh so then and to do so you need to have an equity story which is uh very clean very clear and so people fully understand what you are doing today and what you will not do tomorrow in order to create a value for uh for the shareholders and this process is super critical also in fundraising right because it's obviously important your today performance and yesterday performance but it's all about you being able to sell to the new investors what's your vision and now you're gonna go from where you are today to a place in three to five years where your valuation is at least three to five x higher because particularly in late stage that's the target for the investor the investor usually have five to seven years old in period and they want to make that 30 40 percent annual return the compounds so you need to be able you know to do a 3x or 5x in late stage before you go public or before your next your next round, right?

20:55The valuation per se is obviously a function of different things. And one of that, unfortunately, is also economic cycles. And that's why we have seen this ups and downs in different sectors. We've seen it in fintech, right? valuation were extremely rich between 2020 2021 and then in 2022 with interest rates going up and uncertainty in the macro and geopolitical scenarios and there was a big adjustment where some companies got impacted more than others, right? But I think each case should be also analyzed on an individual basis because there are some drivers which are specific to a vertical or to a specific company, right?

21:58When it comes to FinTech, the interest rate environment plays a huge role And that's what, you know, impacted the valuation of a lot of fintech in 2022 and beyond.

22:11Martino Cadoni:Can you explain like why the interest rate has an impact, you know, on valuation and basically like maybe share, you know, the narrative from an investor perspective? yeah i mean so very simple so what a bank or a fintech does or let's say a lending fintech does right you are taking money and then you are lending to somebody else right so it's very critical at when you are taking money at which rate at which cost you are taking the money to then give it to others. And what happens particularly if you are a bank and you have the ability to raise deposits from the public, so usually the cost of money for those deposits is a function of the interest rates which is set by the central banks.

23:11So if I'm a bank, you have a bank account with me and you put your money into my bank, if the central bank rates are very low, I'm

23:24Martino Cadoni:able to pay you a very low interest rate, let's say, I don't know, below 1 % or even close to zero back then. So for me, it's very cheap to take your money and then lending it to somebody else at good enough high rate. I can make money on the spread. But if instead of the zero point something percent, I need to pay you four or five percent because that's what the market dictates, then it becomes much more expensive for me to take your money and relending. Also, because most likely the spread they're going to make on that loan is going to be lower than it used to. And also there are demand of, yeah, people also will be less interested in taking a loan if the interest rates are so high.

24:16So there is a funding and that's why you had a double issue in fintech because one is what I just described, where it's about the deposits. but also there are a lot of companies in fintech which they don't have a banking license and therefore they cannot take deposits so instead of taking the money from you they take it from for example from private credit investors where they are much more expensive even and so you had fintech have worked with some of those as an advisor where they were trying to raise private credit money but because the interest rates were so high, they couldn't find anything below 15 % or 20%.

25:04But then you cannot do much when the cost of capital is so high. It's not really a good use of capital. So yeah, for fintech specifically, high interest rates, yeah, it's not a great scenario from a funding point of view, right?

25:23Martino Cadoni:And how do you edge yourself? Because obviously like the rate is not something you decide as a company. It's totally outside of your control. Obviously, you can look at the macro and try to predict a little bit where it's going, but it's very hard. So how do you edge yourself as a company? So the key is you need to differentiate your revenue streams. And for example, that's something that Revolut has done fantastically well, right? Because as a fintech, as a bank, you have interest revenue, which is highly dependent on interest. And then you have fee revenue, which is like fees, subscription revenue.

26:06And for example, Revolut has done a fantastic job because if you look at the revenue mix, it's highly differentiated across fees, interest and other things. So it doesn't matter what's happening in the macro environment. They are better prepared than others because they are so well diversified that they're gonna take advantage of any type of situation right and they can navigate uncertainty in much better than others and so then also on the products depending on the type of lending you you have you can also take advantage of the very high interest rates okay and how would you do it like

26:51Martino Cadoni:the interest rates are super high. How do you take advantage? Well, I mean, you can target shorter term lending where people are more open potentially to have higher interest rates. Okay. And when the valuation of Klarna went from like 45 to I think like 15, like how exactly do you do you manage like your investors because you know i think it happened to to a lot of startup as sp i mean scale up especially in that era where you know like they had to do kind of a down round etc etc but internally like how do you have like these discussions with the board like are investors protected with uh with um i don't know like preference share or like kind of like how how do you make it work for everyone basically so uh what i would say it really depends right and and that was one of the strengths of clarna right clarna never raised uh preferential shares or prefer yeah never issued preferential shares and this is another thing that i think people don't really know about fintech and banking right if you are a bank like a regulated bank right and you are subject to capital requirements which means that you need to put aside a lot of equity to comply with some banking ratios like i'm not gonna go into the details but there are ratios you need to meet in order to be able to keep operating as a bank right and so basically you need to have like some cash available for like certain reasons, let's say like because you're a bank so you need to operate and have like certain cash on your balance sheets.

28:47Yeah for prudential this comes to Basel regulation to prudential rules where because you are responsible for the money from the public you need to have equity against your assets in order to meet these requirements. What these rules say is that if you have preferential equity, so equity which is linked to preference shares, you cannot account fully for this equity against the criteria. So if a company like Revolut raises$1 billion, for example, and that$1 billion is common shares, then the full$1 billion can be used to comply with the rules so all good everyone happy right but if the one billion is subject to is a true preferential shares then actually that that one billion does not count to comply with the rules so it's kind of useless so it's great you raise one billion but it cannot be used to comply with the regulation and therefore it loses a lot of value and that's why you had cases like for example Klarna never issued a preferential share so always that common share which is great from a regulation point of view and then you have cases like Revolut that at the early stage they issued some preferences but then when they became they became regulated they decided that hey we cannot do this anymore and they issue only commercial right and and then as you grow and become public you can have a mix of the two because you have so much equity that you know you can optimize right because obviously a common share is more expensive because that's another thing people do not realize that happens and had happened during the the bubbles right Imagine you have two companies that are identical in tech.

31:00One issues only common shares, and one gives you the opportunity to buy preference shares. Which one of the two do you think is going to have higher valuation?

31:14Martino Cadoni:Yeah, the one with the preferreds. Exactly. So you had a lot of companies which they were raising at, they became unicorn, but they have a very high preference share thresholds. And then what happens is when the market turn upside down because of their preference thresholds, they became what we call zombie corn. They are stuck, right? Because they cannot raise at any valuation similar to the last round. they have these preference share thresholds, which now put them in a corner, right? While if you issued common share, yes, you couldn't raise a so high valuation back then, but you are free now, you don't have this preference threshold behind you, right?

32:04Martino Cadoni:So your advice for founder would be to never raise preferred and always have common? No, I think it depends, right? So prefer, and you never know, but obviously prefer is cheaper cost of capital. If you have a strong foundation as a company and you don't raise, you avoid raising a too high valuation, you can be smart that you can slightly better predict the trajectory. And prefer is great if you minimize the risk of down round, right? but if you go too far with the prefer then you can be in a tricky situation as it happened for many companies uh in the last few years right so i don't think there is a one-size-fits-all type of rule uh you need to optimize between dilution and other considerations um but i think as some people went too far with the preference shares and then they say I would rather raise at 1 billion with high preference thresholds than not raise at 600 million because of the you want to become a unicorn there are other type of incentives there but I think a lot of companies underestimate how bad can get if you raise a too high valuation with too high of a preference thresholds and i think actually that's another big learning from working with public companies is how do you manage downside scenario right because i think in tech and which is great i love it i'm a positive person by nature there is always this extreme positive attitude which is amazing but i think a lot of people they don't know they haven't seen how to manage downside scenarios so sometimes they take risk a bit blindsided without understanding what that means right i think deciding between common and preference is one of the things that in some case preference makes sense but i think people should think uh deep before making the decision rather than just go for it right and and when you have like a down round and uh and it's only common shares like how does that work from a board perspective like does the board has to approve the down round or is it something that uh the the founder can decide like uh i'm guessing it depends on the on the shareholder agreement but uh how exactly is is that uh is that is something like this decided internally because as you said like it's super important to manage your downsides and I assume that when you invested in a company at a super high valuation with common shares and they decide to do like a down run it means that you're losing money so like how exactly do you balance that negotiation with the shareholders?

35:12Well I mean I would say every case is quite different definitely the board is involved in this type of things. Usually it's a deep discussion between the board and the founders. And you also need to be strategic, even that, right? Because every time you raise money at specific valuation, you need to think about the next round, right? So if I'm a company which was valued 1 billion, let's say back in the days, then I say, hey, I need to do a down round at 500. I think you need also to think very deeply about what's the next round and what's your ability and your conviction to get to the next round and the valuation which makes sense for your investors, right?

36:07Because if you were value 1 billion and then you do a down round at 500 you have a new investor let's say you are you want to be my new investor at 500 i need to give you enough buffer so that you can make money uh you know from from my specific situation just like hey if it's 500 today do i have a clear path to 800 or back to 1 billion in in a couple of years because that's the math you as investors will do. It's like, hey, I'm going to invest at 500 only if I see a path to go back to 100 or to 1 billion. So there is every time you do, and that's, I think, another learning over the time. Every time you do these double transactions, it's not about the transaction per se, but what does it mean for the next transaction?