The world of venture capital deals in faith, promise and growth; these three concepts are at odds with the CFO's ethos of rules, numbers and guarantees. Todd Thomson, CFO-COO of California-based VC Kairos Ventures, has managed both sides of the equation.
Kairos invests in scientific discoveries emerging from the laboratories of 16 universities. With his team, Thomson helps patent, develop and grow these innovations into business opportunities by investing in the companies creating them.
"Sometimes they're companies that need to grow, sometimes they're science experiments we want to fund," Thomson explained in an interview with CFO Dive; Kairos has just over 50 companies in its portfolio.
Thomson began his career in consulting at Booz Allen Hamilton and Bain Capital before moving into executive leadership positions at Citigroup. He joined Kairos as its CFO-COO in September 2019. His business experience informs his approach.
From controller to business partner
If the job is done the way it was designed to be done, he said, the CFO should operate as the CEO's key partner. This idea holds steady across consulting, banking and venture capital industries.
"I actually changed the entire finance organization at Citigroup to move CFOs from controllers more towards business partners," he recalled. "That's much broader than just finance; I've always believed that."
While this is his first job in venture capital, it's not his first role in investments.
"This job entails everything from being on the investment committee and making decisions about which investments to pursue, to running the entire operations side, ensuring total efficiency," he remarked. "Everything from how we report back to our [limited partners], to how our portfolio companies are being valued."
A typical holding period for an investment spans between 5 and 7 years, Thomson said, and there's no public market for that. So, how Kairos values the companies in its portfolio is extremely important.
Then, of course, comes fundraising. "Just like at Citigroup, where I was in charge of investor relations as part of my CFO role, at Kairos, I'm also in charge of investor relations," he said. "I manage new investors to invest in additional funds as we raise them. I'm also on the boards of the companies we've invested in, which gives me the chance to work directly with their management teams, and help them think through their business strategy and execution to get their incredibly important breakthroughs to succeed."
Taken together, his role at Kairos pools together all Thomson's professional experience: as entrepreneur, consultant, and banker.
As CFO, he is wary of making bad investments, and always has an eye out for things that would make a good or bad partnership. He and his team look for a handful of cues before investing, he said.
"We ask whether this is a significant breakthrough," he said. "We don't look for incremental improvements; we look for fundamental improvement in an industry. If this is successful, does it change the whole industry for the better? That's number one for us."
Secondly, he asks whether the finding would have a positive impact on the world, improving lives.
"For us, market size must be important enough that, if the finding is successful, it will be worth a lot of money," he said. "We ask whether it can make money for our limited partners if successful. We ask whether the intellectual property is patented, so if we're successful, someone else won't jump in and take that innovation away because they happen to have more money."
Thomson also keeps an eye on the competition. "What other innovations are happening that might make this less important?"
If each of those boxes are checked, Kairos will move to invest.
Taking the reins
"What we haven't focused on as much, early on, is the management team itself," he said. Often, Kairos will insert its own employees to serve as CEOs of very early-stage companies. "We don't want science people to be CEOs," he said. "They're scientists. And sometimes, these companies are too small to attract the kind of CEOs we want, so we have executives in residence at Kairos who can do the job."
Private equity companies are typically very focused on the all-important management team, he noted, because they're betting on that team. But Kairos is betting first on the scientific breakthrough, and then building out and adding to the team over time.
Another critical part of the investment process is maintaining a close partnership with the founding scientists at the heart of the research, Thomson said.
"Most of [Kairos] employees are PhD scientists," he noted. "We've built a team of business people and scientists. We have scientists talking to scientists; that conversation engenders understanding and trust. Sometimes, if I'm talking to a scientist early on, we're talking past each other. We set it up specifically so our scientists are responsible for our universities; that lets us do a better job of assessing the science."
But over time, the actual science becomes less and less important, and the management team becomes more and more important. That's when Kairos opts to bring in full-time CEOs and management teams.
"Everything has to run like a company [at that point]," Thomson said. "That's often a difficult transition for the scientists, and for us, to make. It's one of the most challenging things for us to do."
That leads into the second hardest thing Thomson has to do: be the deciding vote on when to shut things down.
"All [our portfolio companies] have some promise; that's obviously why we invest in them," he said. "But over time, either the science isn't as compelling as we thought, or the economics don't work, and you've got to decide to not invest anymore, which typically means the company shuts down."
While withdrawing support when needed is crucial for VC companies, it's also hugely challenging. This is where having a numbers-focused CFO is vital.
"Part of my job is to be hard-nosed and cold-eyed, and make those recommendations based on the facts of what's working and what's not," Thomson said. "Facts around financials; facts around real opportunity size; the possibility of returns. If that math doesn't add up, then I've got to recommend we shut it down. It's not being the bad guy so much as being the realistic guy."
For a business that deals in scientific breakthroughs, Kairos was not immune to the impacts of the coronavirus pandemic last year. Most of its portfolio companies are attached to universities, and those universities largely shut down their labs, where most research is done.
Thomson and his team worked quickly with its entire portfolio to shift gears.
"We told them to think about this lasting for many months. This isn't a normal time anymore, so do what you can to reduce cash burn, and give yourself some more runway until the markets reopen, and the labs reopen, and you can get back to work," he said. "Our CEOs did an extraordinary job. They were able to extend their runway and work virtually."
Things are largely back to normal for Kairos' companies, but Thomson categorizes early- to mid-2020 as "very intense."
"Asking people to cut back is not natural," he said. "It takes some prodding."
Going into 2021, Thomson and his team will continue to invest as usual, though with a perhaps more conscious and conservative fiscal approach.
"The CFO's job is still to bring the right information to the right people, at the right time, for the right decision," he said. " That's your job. That means getting the data, and then talking to the right people at the right time, not too late, and then forcing the company, whoever that might be, to make the right decisions. To me, that's really the job."