Don’t let bad practices turn into stormy nightmares.
Photo courtesy of Christopher Michel.
Running a successful startup is a feat of enduring determination. What begins as an awesome idea for a couple entrepreneurs, becomes a growing Company that demands more attention to how you administer the business than those things which captured your excitement to begin with (i.e., product design, marketing plan, technology roadmap). Careful early attention to Finance and Administration (i.e., process, procedure, and people stuff) can avoid trouble later in what I term “nightmare growth.” This is when you are growing but your time, attention, and pleasant dreams are sacrificed to frustrations even as you sleep!
Here are four examples how a lack of discipline and culture can turn the small cracks in a wall appearing with growth over time, into a watershed dam rupture that ultimately derails a business. Avoid pending nightmares as you grow by paying attention early on to how you administer your Company.
Top management sets the tone. How they conduct business, treat people, deal with big and small Company issues, and portray the Company to the world establishes the values and social mores to be emulated internally. I’ve seen leaders in good times become driven by ego and limelight and in bad times experience significant stress – but in both cases – I’ve witnessed leaders who stray and become unpredictable or undisciplined in their behavior, causing volatility in the foundation of their culture. Guard yourself to maintain culture in good times and bad, or you’ll have employees adopt your poor behaviors or just leave.
A talented Strategic CFO can help you guard culture and even repair it in times of decay. Leaders need to regularly engage in conversations about culture, defining the values intrinsic to culture, and take the pulse of the organization through surveys or other formats to make sure they stay on course.
We’ve all heard stories of crazy dynamics inside startups that often make venture investors impose “adult supervision,” many times in the form of a new CEO. I wonder if Facebook would be Facebook if a seasoned CEO had replaced Mark Zuckerberg early on. The truth is that many times the vision and drive that a founder has is key to driving the business forward. Often, the problems begin when startups ignore cultural fit as they hire people to fill key positions, focusing more on specific skills a potential candidate brings to the job. This approach to hiring for growth can lead to “people problems” later.
I’ve found that hiring people who share the same passion that drives the founders and the CEO is more important than hiring people who seem to have the perfect skills. Spending time understanding where a candidate comes from, what inspires them, and how the work habits they bring fits with your culture will pay off in good times and in bad!
Humans are wired for fairness, so when your team perceives things as unfair, you will lose their energy and passion as they emotionally check out. In my personal experience, I witnessed a young and thriving small Company with highly paid key executives and a weak Board (i.e., proxied votes) drift into a downward spiral as employee effort dwindled and ‘pseudo sabotage’ set in as employees demonstrated who is really key to success. Compensation was not the Company’s only problem as culture was also weak, but it proved that comp structure is a cultural glue, for you nonbelievers try not paying people adequately and you’ll find out.
The Company would have been better off designing a formal comp plan that rewards a larger set of employees for rowing in the same boat in the early stages, striking a balance between base pay, incentives and upside in an exit. Prioritize creating a compensation plan early, one which you can flex up with incentives to balance growth objectives across your most critical employee base.
Cash flow always seems to be in short supply. It is a slippery slope where you lose footing fast if you start funding expenses through payables to buy time for cash to come in. This works (but still with risk) for Companies that have reliable recurring revenues, stable liquidity sources, and market power with vendors. They make tradeoffs with short term liquidity in mind as they take creative measures to pay bills.
The problem occurs with smaller and less stable Companies that begin financing growth initiatives through vendor payables. If you don’t have adequate capital to fund a growth initiative, the temptation to fund growth by slow paying vendors and growing payables is hard to avoid. After all, you have employees inside who are critical to the initiative at hand, and vendors outside who are less so. Having adequate capital to support investment decisions is an issue management needs to solve at the time the decision is made, not doing so turns growth decisions into bad decisions that create bigger problems. There is always embedded risk in any strategic decision you make (e.g., one that requires incremental short or long-term resource investment), understanding that risk and how/when it trades into cash is key to understanding how you should fund the initiative at conception.
No matter your size, you’ll need financial guidance to gain or maintain momentum.
Photo courtesy of Silicon Valley entrepreneur Christopher Michel.
Medium’s blogger John Cutler wrote an interesting article on startup complexity (Complexity is a Startup Killer. Don’t Grow Up) in which he analyzed how the two advantages of a startup – speed and focus – start to evaporate as your company grows. His advice is to resist the complexity that comes with growth and avoid the temptation to: Let features reproduce; Add endless sales tools; Multiply enhancements; Add more people to the Board; Find more and more partnerships; and Hire “experienced” people.”
To this last part about hiring experienced people, Cutler adds “Company experience doesn’t equate to Startup experience.” As an on-demand CFO at Burkland Associates, I’m a member of a team that enables access to startup experience on a fractional basis, enhancing a Company’s ability to scale up with the guidance of a strategic financial resource – when you need it!
A forward-thinking startup rents before buying whenever possible. Posit the following two scenarios where “renting” a CFO can help you minimize growing pains and burn.
Scenario 1: All the low-hanging fruit is coming your way.
A friend with a green thumb tells me “plants usually die out of an excess – not lack of – water”. Sadly, this is the case for many startups that find money and initial traction come their way relatively easily. I’ve been at more Board meetings than I would like to count in which investors were pushing their portfolio CEOs to scale up faster. On the surface, there is of course nothing wrong with scaling quickly; after all, startups are about speed.
The problem comes when scaling up follows little planning – tracing a horizon based on the initial traction that a talented business development person may have generated. Planning involves understanding how the interdependencies of product delivery, market expectations, and customer management could evolve. If you follow short term thinking without considering longer term context you may find yourself in a quagmire in future growth stages. As your strategic financial partner, people like me can help you craft the right plan.
Burkland CFOs can help develop a sound business model that plans growth looking at likely and unlikely scenarios (developing contingencies for them), and evolves your business in the right direction with models that show how to sustain and improve margins while optimally servicing existing customers. Smart investors look beyond traction, they want to see “smart traction” that doesn’t dry up and lives up to the market challenges you will inevitably face. A sound plan helps you to attract the additional capital and key resource hires you need as you scale, and becomes critical to sustaining momentum.
Scenario 2: You’re struggling to gain momentum.
If you’re losing sleep, it’s most likely because you’re not growing as fast as you expected and the solution is not obvious. You’re draining cash and not building the business growth story you need for your next round of financing which, by the way, is around the corner.
The challenge becomes one of creating processes to drive efficiency, fine-tune key variables such as pricing and levels of service, and buying time to figure out your market and educate prospect customers. You can’t justify hiring a full time CFO given your size, but you need a strategic minded CFO more than ever to stabilize your business, or face dire consequences. A part time CFO from Burkland is a huge asset in your corner to help you find traction. In this case, renting is a no brainer because a hired gun brings the relevant experience you need to figure out how to start sales momentum in context of a plan, as most of us have seen this problem several times even in your own industry.
Lack of traction can be a blessing – just ask SaaS star Slack, which came out of a failed gaming company – if and only if you have the right guidance to know where and how to tweak your model. A strategic CFO from Burkland could give you the partner and coach you need to help solve the puzzle and develop sustained traction.
Please contact me at firstname.lastname@example.org to speak further. Thanks