Should a CTO read 10k, 10Q and S1 filings?

By Tuesday, February 4, 2014Blog

A CTO plays a very strategic role in a technology-based company – from being a technology visionary that is responsible for the “big picture” to leading Research and Development (R&D). Depending upon how the organization is setup, a CTO’s charter will include at least the following:

  • Think big and worry about the future before the future becomes present
  • Partner with CEO, head of product and the exec team to set the strategic direction of the company
  • Align technology and the company’s core competence with the company’s business goals
  • Identify opportunities and risks for the business
  • Manage research, product development and site ops
  • Communicate and evangelize the company’s technology vision and product strategy to partners, management, investors and employees

Broadly speaking, all CTOs, CEOs and board members will agree with the above charter. However, in my view there is another critical area that demands a CTO’s attention – finance.

CTOs need to be finance savvy and understand how Cost of Goods Sold (COGS) and gross margin impact the future of their company. For a SaaS company, like Jobvite, COGS comprises of hosting/site operations cost, third party technology license cost and customer support cost. An efficiently managed organization will keep the COGS in the 25%-30% range of the total revenue (of course COGS will be higher in the early stages of the company when the company has little or no revenue). Lower COGS means higher gross margin (gross margin is defined as a company’s total sales revenue minus the cost of goods sold divided by the total sales revenue).  Higher gross margin means you have more money to invest in R&D, Sales and Marketing or other functions of the company. Hence you have the ability to accelerate the growth of your company through new product development or investment in sales or brand marketing. Higher gross margin is a competitive advantage and it generally translates into higher valuation for the company.

CTOs need to read 10K (annual financial report filed with SEC), 10Q (quarterly financial report filed with SEC) and S1 filings (S-1 is an SEC filing used by companies planning on going public to register their securities with the U.S. Securities and Exchange Commission). These documents reveal the financial health as well as the strategic health of a company. Let us say one of your competitors is about to go IPO, by reading their S1 filing, you can determine what % of their revenue is going into R&D. Higher R&D investment means either the company is investing in future products or its rewriting it’s aging platform.  This can help you strategize your product and R&D spend. Let us take another example of rising COGS, if you see a company’s COGS increasing over a period of time then it is safe to assume that the company is throwing more hardware or people at the problem and is possibly paying a hefty fee for licensing core technologies from third party vendors. You can use this information to your advantage and influence the strategic direction of your company.

Last but not the least, reading 10Ks and 10Qs makes you a better business partner. Before you plan your next year’s budget for your site operations or R&D spend, prepare the benchmark for your industry, compare your spend relative to the benchmark and then have a more persuasive conversation with your department heads, your CFO and CEO.