In this episode of CFO Weekly, Luigi Testa, Chief Financial Officer at LinkSquares, joins Megan Weis to dive into the intricacies of growth stage software, the challenges of raising capital for these types of businesses, as well as some techniques for CFOs to consider. Luigi also shares insights on the importance of storytelling in finance and how AI is revolutionizing legal tech.
With a robust background in venture capital and private equity-backed tech companies, Luigi has sharpened his expertise in scaling businesses and navigating the complexities of financial management. His leadership was recognized when he was named one of Boston Business Journal's 2023 CFO of the Year honorees. Before LinkSquares, he held significant roles at companies such as Building Engines, Rapid7, Nanigans, Rapid7, and Acquia.
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Transcript
Megan - 00:00:58: Today, my guest is Luigi Testa. Luigi is the chief financial officer at LinkSquares, where he oversees the company's finance and administrative functions. In this role, he is responsible for helping scale the company and driving strategy. Luigi was named among Boston Business Journal's 2023 CFO of the Year honorees for his strong performance and leadership. Prior to joining LinkSquares, he held strategic finance and corporate development roles at notable companies that include Building Engines, Rapid7, Nanigans, and Acquia. Luigi holds an MBA from Babson College and an undergraduate degree in finance from Bentley University. Luigi, thank you very much for being my guest on today's episode of CFO Weekly.
Luigi - 00:01:43: My pleasure, Megan. Great to be here.
Megan - 00:01:45: Yeah. Today we're going to be talking about growth state software, raising capital, and operating these types of businesses, and Luigi, I'm excited about the opportunity to learn about you and to have you back on the show, so let's just jump right in.
Luigi - 00:02:00: Awesome. Let's do it.
Megan - 00:02:02: Alright. So you've had an impressive career trajectory leading up to your role as CFO at LinkSquares. So can you share just a bit about your career to date and maybe a defining moment within your career that shaped who you are as a financial leader today?
Luigi - 00:02:17: Sure. Yeah. I'm going to dig into the background first before we get going here. So I started out; I went to school for finance like many good CFOs do, worked in venture for a few years, and since working in venture, transitioned over to working for private equity-backed and venture-backed tech companies. I've been doing that for a handful of years and ultimately landed in the CFO role, my last role. I built and ran an M&A program for a PE-backed company and then jumped over to LinkSquares to be their CFO. I think one of the biggest career-defining moments was actually not about being a finance person but about understanding the business and how it worked through the lens of everybody else that's looking at the business, whether it's inside or outside. And it's really about understanding what's in the numbers, but being able to tell the story of what the numbers are saying. And that's really helpful when you're trying to communicate with the rest of the world and your company internally as to what the story is we're trying to tell here, what we're trying to accomplish, what the path means, and what the future looks like. But I think understanding the story that you're trying to tell or the business is trying to tell is really key and much more important than just the numbers.
Megan - 00:03:30: Yeah. I often hear that the role of CFO has really become a storyteller. I hear that term again and again, whereas maybe that wasn't the case so much maybe 10 to 15 years ago.
Luigi - 00:03:42: Yeah. From being a counter to a storyteller, certainly I hope.
Megan - 00:03:46: And given your extensive experience in venture capital and the software industry, what was it that initially sparked your interest in technology and finance and the intersection of the 2? And how do you stay inspired and motivated in such a rapidly evolving field?
Luigi - 00:04:02: Great question. I went to college thinking I would be a stockbroker or equities trader or something like that. When I was younger, I thought equities and buying stock and owning a piece of a company were really cool, and that's ultimately when I went to school to study. And along the way, I was really lucky to have so many great mentors, and part of those mentor relationships led me to internships. And kind of 2 that stuck out in my mind were, 1, I worked for a serial entrepreneur that started a bunch of tech startups. And the 2nd one, I worked at Merrill Lynch. And going to work at Merrill Lynch, obviously that was kind of following the dream of being involved in equities, but I had not really any idea what the tech world looked like. And that was really exciting for me. So then I graduated with my degree, and obviously, I wanted to use both of those things, tech and finance. How do I kind of combine the two of them? So working in venture and then moving to work on the operating side, that's kind of how I got to where I am. And I think, for me, I like the constant evolution of the industry. Obviously, there's a constant evolution in technology, but the evolution of the industry, meaning what investors are looking for, what the market wants, and all those things. That's really exciting for me and inspiring, and it's really amazing to think that a couple of people in a garage or in the back of a coffee shop—that's how LinkedSquares got started, in the back of a coffee shop in Kendall Square—that they could start from 2 people who just have an idea and it becomes this mammoth of a company. So that's inspiring for me. That's exciting. I think the equities trading, I still think about that every now and then, but that's much more consistent. There's not as much variety and excitement. I like excitement. I like things changing. I like to kind of ponder the future and ask why, so for me, tech is a really great place to be.
Megan - 00:05:47: And talk to us for just a moment about LinkSquares. What is it that LinkSquares does?
Luigi - 00:05:52: So LinkSquares exists to make the lives of legal teams and operations teams much more efficient and easier. So we effectively streamline all the legal work that a company has to do. So, we sell exclusively to corporates. We don't sell to law firms. But if you think about all the mundane tasks that legal teams do, everything from sending out NDAs to understanding what's inside your contracts, we have an AI-powered platform that does that all. And in turn, what legal teams and companies are able to focus on are the more high-level tasks that need to get done, like running the business. And I think also because we operate in the legal tech space, legal is very frequently called out as the bottleneck in the slowdown in the process, whether it's for sales or hiring somebody on the HR side, and our solution is really geared towards eliminating those bottlenecks.
Megan - 00:06:50: And you've successfully managed complete business model transitions from variable revenue model to software as a service revenue model, so talk to us a bit about the key challenges you faced during this transition and how you aligned the team around such a significant change.
Luigi - 00:07:07: Sure. The single biggest problem that we faced when we were going through these transitions was not a product problem or a financial problem or a spreadsheet problem. It was actually a behavioral problem. And in the case of a few companies ago that you're referring to, we had initially built a product that was a little bit cumbersome to use. It was equivalent to driving a Formula One car. Like, not everybody can get in a Formula One car and drive it. And we had a managed services team that helped our customers drive the car. As the company progressed along, the software became more robust and more user-friendly. And as a result, we decided that we needed to move off managed services for efficiency reasons and create more of a SaaS model. So that's where the behavior change kind of came into play. So getting folks internal and external to the customers and folks that were doing managed services to understand that we need to, instead of doing for our customers hands-on keyboard and punching keys, show them how the software actually works. So now you start in the early days; you're driving the Formula One car for the customer. Now you're putting them in the Honda Civic, which anybody can drive, and they're doing all the work. But training them and getting to that spot was the tricky part. And then came the transition of the pricing model and moving to SaaS from more of a variable revenue model. And ultimately, there's a lot more value creation on a SaaS model when we do that project that was ultimately great for our business outcome.
Megan - 00:08:39: And let's talk about fundraising for just a moment. So given your extensive experience in fundraising, particularly in venture capital, what strategies have you found to be the most effective in attracting and retaining investors for growth-stage software companies, or really any company?
Luigi - 00:08:57: Sure, so I think I'll go back to the storytelling and understanding what's beyond the numbers, being able to clearly communicate the vision, how big the market is, what's the use case, and why this company exists. Those are really the key things that are going to attract investors. And then delivering on those things, obviously, you're a retained investor. But I think it's centered around 3 things. The first one is convictions. You truly believe that your company exists for these reasons, and you have concrete examples as to why. It also needs to have high integrity. Your story has to have high integrity. And I think the last thing is it needs to be grounded in reality because not every while software is very exciting, and SaaS is very exciting, and so is an AI, it needs to be grounded in reality where not every company in the world is putting a man on the moon. So I think a lot of founders and people that start some of these companies, they get really excited about the idea, and it seems like they're putting a man on the moon. And that's not always the case. In some cases, it's really just solving a simple business problem that is better than putting a man on the moon because you're able to translate that to millions of people that you can help make their jobs a lot easier. But outside of that, the storytelling and really just not getting stuck in the spreadsheet, and when you're talking to investors, they definitely care about the financial aspect of the business, but they also want to understand how that financial piece connects to execution and how they can believe what the numbers say, and consistently retaining investors is showing them time and time again that it's repeatable and it's predictable.
Megan - 00:10:30: And storytelling requires really understanding the business, so how do you coach your team to be more than just number crunchers and really understand what the business is about and what they're doing?
Luigi - 00:10:47: I think you have to boil it down to the simplest ingredients, and I would say if you're going to have to explain what the business is to a 10-year-old, how would you do it? How would you explain what the numbers mean to a 10-year-old? And as you kind of develop that initial thesis, you can layer on around it, but you need that very simplistic view of what you're trying to achieve and do outside of the numbers in order to develop that story, understand what is the punchline, what is the ultimate outcome, and how are we going to get there. And like any good story, it has to have a great ending, which is hopefully making a lot of money and solving it.
Megan - 00:11:22: That's great advice. And in your role at LinkSquares, you've built valuation models for private companies, so what specific factors do you consider critical in accurately valuing a growth stage software company?
Luigi - 00:11:35: That's a great question. I think if you asked me 2 years ago, I would have a very different answer. So today the answer is building a durable growth company, which really means effectively balancing growth and also efficiency. If you have too much of 1 and not the other, the company is not very attractive. So if you're burning tons and tons of cash, but you're growing 100% a year, that's not great. And maybe in 2020 that was okay and acceptable, and the companies were being valued astronomically because they were able to grow over 100%. Today, investors are looking for businesses that can demonstrate strong fundamentals, good unit economics, and good sales efficiency, not just the ability to grow. I think that if you can demonstrate growth, that's a really amazing thing to be able to do. But ultimately, a business exists to generate a profit and to make money. So you're only allowed so many passes on not being efficient until you're just not a great asset. So I think going back to the initial point, having growth and efficiency in the balance of the two of those is tremendously important in influencing what the value of a growth stage company is.
Megan - 00:12:44: And you've mentioned previously building and identifying SaaS KPIs to manage businesses effectively. So in your opinion, what are the most crucial metrics that CFOs should focus on in growth-stage software companies, and how should these metrics be guiding strategic decision-making?
Luigi - 00:13:01: So the metrics are, I think, metrics are very important. I think 2 things. 1 is don't just build metrics because your investors are asking you to because I think that's not the right way to do it. You're building metrics because you want to understand how the business is performing. You want to hold yourself and the team accountable. You want to learn from past mistakes so you can tweak the business so it performs better in the future, but doing it because your investors are asking you to is the wrong reason. You should be very deliberate about what are we trying to achieve here, and then break it down into kind of micro steps and understand what leads up to that. And then I think the other really important piece of it is it's not about the quantity of metrics that you have. If you have 1,000 metrics to look at in the business, it's going to be information overload. So it's really about the quality. Like having a handful of really great metrics that are good leading indicators of how things are going in the business is really key and important. And then the last step to that is making sure that the entire team fully understands those metrics and how they're influenced so they can actually influence them in their day-to-day jobs. So that's everybody from the CEO of the company down to the individual contributors. Those folks need to understand those metrics. And when you have monthly, quarterly town halls with the company, those are the things that the business should be talking about. Everybody should be understanding them. So in my case, we're always looking at revenue growth and the new business flavor and the upsell flavor and then the customer retention flavor. And then on the other side, actually growth and efficiency. On the efficiency side, looking at things like profitability and cash flow, how can we incrementally improve our efficiency quarter over quarter, year over year? So those are the ones that I think are really key and important for SaaS companies in general, and I think most companies today that are performing at a high level are looking at those things.
Megan - 00:14:54: And as the CFO, how do you balance the need for operational efficiency with the drive for innovation in a fast-paced technology environment, and can you share an example of a specific initiative that successfully improved efficiency while still fostering innovation?
Luigi - 00:15:12: Yeah. I think that there's a huge rush right now to get companies to be more efficient by just cutting costs. And as a tech company, if you cut too much fat out of the business, that's not a bad thing. But if you start cutting into muscle and then into bone, you're going to be in a bad spot. And then more so on the innovation topic, if you cut too far into your R&D team or you don't invest in your R&D team, you are going to stop innovation and effectively put the product on life support. And if you're doing that, your product is going to become irrelevant pretty quickly because there's a lot of cash flowing into startups and established companies that are likely going to compete with your product. And it goes back to the balance of growth and efficiency, but growth and innovation are kind of 2 competing priorities that you need to sort out and understand. And as a company scales, they grow into their expense structure. So I think it's really important to think about it from that point of view. In the early days, you almost get a pass for building the customer base. If the product is good, then you can continue to innovate because you don't have a big enough customer base that will fund your innovation. If you don't, then that's problematic. So I think in general, a good example would be you build a product at 1, you develop a playbook for how products need to be developed, and then you introduce it into the market. And having that playbook and then tweaking it and repeating it over and over again, it will cost less. It will take less time, and you'll be quicker to market. So ultimately you're still innovating, but you're doing it at a faster pace, and you're getting more turns on, so it's ultimately a better product.
Megan - 00:16:47: And switching gears a bit, let's talk about M&A. So with your background in M&A, how is it that you approach the integration of newly acquired companies to ensure that they align with your existing business strategies and culture?
Luigi - 00:17:01: M&A is great. I mean, M&A is very sexy and exciting for a lot of companies, and finding the deal and putting the deal together is a lot of fun for many folks, including me. What comes after the deal transaction is actually the hardest part. And if you think about dumping a giant bag of Legos onto the floor with no directions, how do you put them together? What are you going to build? That's kind of how I think about integration. You have 2 companies that are joining forces, walking down the aisle, getting married, or whatever you want to call it. And you have to figure out how both of those companies are going to work together so that the outcome is better if the two of them are joined versus them existing separately. And I'd say there's really 3 key things that I think about. One is the people. How do you integrate the people to get all the jobs that need to be done to protect the asset, to innovate, to be efficient? The 2nd piece of it is the financial piece of it. So how do you arrange the organization and even restructure the organization so that from a financial perspective it's a viable solution? And then it kind of goes into the execution and the accountability of it. And you are effectively dumping those Legos out, and you're also routing the directions for how the Legos are going to continue to be built out in the future as far as people, financials, and accountability. And ideally, you're seeing it through in a successful outcome where you're generating more value as the 2 combined entities.
Megan - 00:18:27: And switching gears again, let's talk about compensation plans. You've built and managed multiple compensation plans for sales and operations teams, so what do you think are the key elements of a successful sales compensation plan, and how do you ensure that it drives the desired outcomes?
Luigi - 00:18:44: If the folks on the finance team are listening to this right now, they get a chuckle out of it. I think it's really easy for compensation plans to go down a bad road. And by a bad road, I mean spending too much time making the plan have too many facets and just being overcomplicated. So in an ideal world, just make the plan as simple as it possibly can be. So it's easy to understand, it's easy to calculate, and it's easy to explain to the end users of the comp plan and the board and the executive team. And ultimately it needs to be aligned with company goals. So I think when you're building a compensation plan, you're not going to be able to stuff everything in there and have it be effective. You need to think about what are the 2 or 3 key behaviors that you want to drive, and how can you drive them? So that's how I think about conversations. I worked at a company not to be named where the CEO was very involved in forming the conversation plans, and it got so overcomplicated that the ultimate end users, the people on the sales team, had a very hard time understanding and calculating it. And it actually became a huge burden for the finance team to calculate, you know, commissions at the end of each month because the plan was so complicated. And at the end of the day, it provided zero extra value and maybe did the opposite. So keeping it simple and easy to understand, I think, is the key to these compensation plans.
Megan - 00:20:06: And in light of current economic conditions, what strategies do you recommend for growth stage companies to maintain momentum and continue attracting investment, especially in times when people are tightening their belts?
Luigi - 00:20:18: We talked about innovation a few minutes ago. I really think innovation is a key, although you need to invest in it. Investing in innovation is a key to maintaining momentum and relevance in the environment that we're seeing today. And that's also true in good times, but as soon as you take your foot off the gas on innovation, it's really hard to get back into the spot you were previously in. And at the end of the day, software exists to make companies more efficient. So you're investing in innovation, that's great. But you need to be able to prove that the innovation that you're creating, the value that you're delivering, is making people's lives easier. So like Linksquare, like I said, our goal and the reason we exist is to make the lives of legal teams much more efficient and easier to take the day to day kind of mundane tasks out. If we can't do that, then we don't have a business. So making sure that the ROI is very loud and clear and demonstrating early on in the process when companies are buying your software, but I really do think it's about the innovation. If you get too hooked on efficiency and getting to profitability, you could go down a very slippery slope and into a no man's land.
Megan - 00:21:25: And as a CFO, you serve as a business partner to various departments, including sales, R&D, and operations. So how is it that you ensure effective collaboration between these teams to drive growth, and what role does data play in these discussions?
Luigi - 00:21:43: Data plays a huge role in discussions, but more important than the data is, what are the data saying? So again, I'll go back to the storytelling. I think if you go and present a bunch of data to different stakeholders in the business and different departments without the context, it's useless to them. And it's your job as someone that works in finance to take all that data and gather the insights and then distribute it to the rest of the business so they understand what the data is saying because, ultimately, the job of the stakeholders is to take that information and adjust and effectively run their part of the business. But if they don't have the context, then it's going to be really hard for them to do it, and it's frankly not their job to go into the weeds and massage the data and understand what it's saying to run their part of the business. Like the finance team exists, and they're service advisors of the company to just do that exact thing, which is tell the rest of the business how the company's performing so they can make decisions on how to better themselves and hold themselves more accountable.
Megan - 00:22:41: And last question, but looking ahead, what trends do you foresee impacting the growth of software companies in the next, let's say, 3 to 5 years, particularly concerning capital raising and operational strategies?
Luigi - 00:22:53: In the next 3 to 5 years, I think the market will continue to evolve. I think we've been in a really interesting cycle that we're going to start to crawl out of, but it's going to be a gradual process; it's going to be gradually increasingly better. And I think companies are going to think about, in particular in software, folks are going to think about buying software as, okay, if I buy this piece of software, what does that mean for the business? Does it save hands on keyboards? Does it make my customers buy fast? But it's really going to be centered around efficiency. And I think with this wave of AI, we're really lucky to be pioneers in the AI space. We were one of the 1st legal tech companies that had an AI solution. But just using us for an example, if you have a tool like LinkSquares, do you need to have as big of a legal team? So those are the kinds of trends that I think about when we talk about AI in a lot of different industries. It's how much of the AI will replace humans, or in some cases, if you have an AI-focused tool or a better workflow than necessarily to be AI, what else can you focus on in driving better outcomes of the business because you're not in the weeds, and you're not playing whack-a-mole to try and get the day-to-day done putting out fires. So that's how I think about competitive advantage and maintaining a strong position in the space. In addition to finding a really great place, like for us, it's understanding what's inside your contracts and how you can multiply that by building other great products across the platform that are adjacent to that initial, like, really great idea that you came out with that helped generate your initial market share.
Megan - 00:24:25: Luigi, thank you so much for being my guest today.
Luigi - 00:24:28: Thanks, Megan. It's been a pleasure. Thanks for having me.
Megan - 00:24:30: Yeah. I really enjoyed speaking with you, and thanks for finding the time to be here with us today, and I wish you and LinkSquares all the best. To all of our listeners, please tune in next week, and until then, take care.
In this episode, we discuss:
- Luigi's journey in the tech and finance sectors
- How understanding the narrative behind the numbers is crucial for effective communication within a company
- Insights on transitioning from a variable revenue model to a SaaS model
- Fundraising strategies for growth-stage companies
Key Takeaways:
Capital Raising Techniques for Winning Investors
Fundraising is more than just numbers; it's about storytelling. Investors want to see a clear vision, a big market, and a real use case. The key? Conviction, integrity, and grounding in reality. Believe in your company with concrete examples, ensure your story holds up under scrutiny, and stay realistic. Beyond the spreadsheets, investors need to trust that your execution matches the financials. Show them your success is repeatable and predictable, and they'll stay with you for the long haul.
"Conviction, integrity, and reality are the key things that are going to attract investors." According to Testa. - 08:39 - 11:24
The SaaS CFO's Playbook
CFOs at growth-stage SaaS companies should focus on a few high-quality, actionable KPIs rather than drowning in data. Metrics should serve the business by driving accountability, learning from past mistakes, and guiding future strategy. Prioritize revenue growth and efficiency and ensure the entire team understands and influences these numbers. Regularly discussing these KPIs in town halls helps align everyone from leadership to individual contributors, making them a real lever for business success.
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In Testa's words, "Don't just build metrics because your investors are asking you. Build them because you want to understand how the business is performing." - 12:44 - 14:54
Why Growth-Stage Companies Can't Afford to Slow Down
In tough economic times, growth-stage companies must double down on innovation, not just to stay competitive, but to prove real, tangible value. Investing in innovation keeps momentum alive, but it's not enough to simply build; you have to clearly demonstrate how your product makes life easier for customers. If you focus too much on efficiency and profitability without innovating, you risk stagnation. At the same time, data is only as useful as the story it tells. Finance teams play a critical role in translating raw numbers into clear, actionable insights that help every department make smarter decisions and drive sustainable growth.
"As soon as you take your foot off the gas on innovation, it's really hard to get back into the spot you were previously in." Testa mentioned. - 20:06 - 22:41
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