Make sure you fill those crucial initial spots with a great team that will take you places.
Congratulations to the Houston Astros, 2017 World Series Champions, and to the city of Houston who can use the win after a rough summer of devastating storms. How did the worst team in baseball in 2013 with only 51 wins turn it around so quickly and reach the pinnacle of their sport? They committed themselves to building the best possible team using all means available. The Astros beat the Los Angeles Dodgers, another great team that also had a great season. Both teams won over 100 games and survived a tough run through the playoffs. Also, both teams made major in-season moves that just may have been crucial to getting them to the World Series.
Assembling the best team
Like every other major sport, it’s now conventional wisdom that to win a championship, you do everything you can to put the best team on the field. The Astros traded for Justin Verlander, who went a combined 9-1 in the remainder of the regular season and playoffs and was key to all three of their playoff series wins. The Dodgers picked up Yu Darvish who helped solidify their rotation and get them to the World Series. Last year, it was Aroldis Chapman joining the Cubs and Andrew Miller joining the Indians. In 2015, it was Johnny Cueto and Ben Zobrist for the Royals and Yoenis Cespedes for the Mets.
This lesson applies just as well to startups and to companies as a whole. The best team wins, and the question to ask is: are you doing everything you can to put the best possible team on the field?
I spent 13 years as a venture capitalist and during that time we had a saying. If the three most important factors in real estate investing are “location, location, location”, we often said the three most important factors in VC investing are “management, management, management.” We would take an “A” management team with a “B” idea over the reverse every time. Why? Because we had confidence the “A” team would be able to handle all the twists and turns required to successfully navigate the startup minefield and eventually find the “A” idea. While the “B” team might just get stuck and fail to execute.
As a founder and entrepreneur, I had the same experience regarding the importance of having the right team. No matter how novel the idea, there were always multiple other companies chasing the same goal. With the proliferation of startups, accelerators, incubators, seed funds, crowdfunding, etc, this is likely more true today than ever. There is no doubt that timing matters. Market size matters. Business model matters. But all else being equal, the better team has a much greater chance at winning. I’ve seen it personally from both sides. Bet the jockey, not the horse.
The relentless pursue of opportunity
Of course, as a startup you don’t have unlimited funds to pay seasoned leaders to join your team. So, you need to be creative and grab talent whenever and however you can. Probably the best definition of entrepreneurship I ever heard was from legendary Harvard Business School Professor Howard Stevenson, who defined it as “the relentless pursuit of opportunity beyond resources controlled.”
I joined Burkland Associates about a year ago and one thing that has surprised me so far is how many founders I’ve met who spend their time building Excel models, creating pitch decks and even doing journal entries and reviewing expense reports instead of leading their companies. At a stage where assembling a great team is crucial, a great founder focuses on setting the vision, charting the course, motivating the team and assembling the resources to be successful. Recruit a team of experts – full time or part time, employees or consultants – to help you execute.
Justin Verlander and Yu Darvish may only take the ball every fifth day. They may not even be around 2-3 years from now, but this year, they made all the difference. The lesson to learn from this is: who can you add to your team to give you the cover you need to put you over the top?
Think about it.
There will be storms ahead. Make sure you learn resiliency from the ones that came beforehand.
Photo courtesy of Christopher Michel.
For millions of people in the U.S. and the Caribbean, the summer of 2017 is synonymous with tremendous suffering and loss, as one of the most active hurricane seasons in history hit their communities. As tactical response to the storms scales down and recovery begins, strategic focus will shift to making critical systems more resilient – such things as the water levies in Houston, and the power grid in Puerto Rico.
Although there is a world of difference between how governments and organizations respond to the challenges of large-scale disasters like storms and how a management team runs a business, I think there are some valuable resiliency lessons that can be drawn for startups.
When I’m not working as a consultant, I serve as a Civil Air Patrol liaison officer to FEMA’s Region II. In this capacity, I’ve worked six major hurricanes in the past several years, including Sandy in 2012 and this year’s Irma & Maria. Aside from master-of-the-obvious missives like “failure to plan is planning to fail,” here’s my top five list of lessons from disaster response every CEO can incorporate into their business strategy.
In many cases, your CFO can help you not only properly define your company’s strategic goals, but also help you execute the day-to-day demands in order to reach them in a focused and efficient manner. Like with disaster response, there is no one thing that makes all the difference, but rather countless small elements that make up the overall effort. To sum up, remember another old saying: Manage the little things right, and the bigger things will take care of themselves.
If you’re in for a long race, venture debt financing could give you the air you need to get to the next peak in better shape. Photo courtesy of Christopher Michel.
Raising venture debt is always an interesting subject for startups. For some CEOs it is completely off their radar, and for others it is a taboo subject. In between these extremes, there’s a growing number of startups using venture debt effectively to buy time for a higher valuation, making it a cheap form (in terms of amount of stock it costs) of financing while the value of your company rises.
I thought we could shed some light into whether venture debt is a good thing for your company by creating a simple model you can use to project its long-term effects on your valuation and on your stock and explore if it makes sense for you. For a sense of the value of this exercise, under a relatively conservative growth scenario, Venture Debt could save the company from having to give away 3% of equity. Before getting into detail about how this model works, it’s worthwhile to spend some time reflecting on a couple of issues you will need to think through before raising money this way: covenants and purpose.
Covenants and Purpose
Many think that some banks and venture debt providers require excessive terms and may tie up the company with covenants that hurt you in the long-run. Our experience with this is that most of the terms and covenants can be negotiated, with the exception of the investor support covenant, which requires the venture investors of your company to agree they will continue to support the company or the covenant is triggered. Even the MAC (Material Adverse Change) covenant, which seems to be the most draconian of all because it gives the venture debt provider the option of not following up on their promise if there is a significant change in the company (based on their definition), can often be negotiated. What you need here is a supportive board that has a venture investor with venture debt experience, working closely with you and your CFO to ensure you get the best deal for the company.
Putting in place venture debt is best done right after a VC raise. You can usually structure it to pull the funds much later – and face only a small portion of the costs before pulling the funds. The goal is to have it available in the future in order to buy time for growth so that the next round comes a bit later, giving you more time to increase the value of your company. This means that growth should be the purpose for making your case to raise venture debt with your board. Emergency money or, worse, an excuse just to spend more, is what this kind of financing can unfortunately be wrongly associated with. Although if it comes down to using it in the event of an emergency, that can also be a valuable use, but in that case, it’s usually just to give another shot at pivoting and potentially save the company rather than juice value. In any event, raising venture debt with growth in mind, before you need it, will help you get better terms with debt providers and negotiate favorable covenants.
The basic assumption behind our model is that you’re raising venture debt for the purposes of growing. As such, the spreadsheet helps you look at two scenarios of growing: with and without venture debt. The results, once you input your numbers, are quite simple:
If there is a positive number answering these questions, then you should take a closer look at venture debt. We plugged in numbers to show you how it works, feel free to substitute these with yours (red fields are input fields and the two key outcomes are highlighted in yellow).
Click here to access the spreadsheet.
The model begins by assuming a venture raise just happened (Cash at the End of Period 0, $10 million in the example). In the example, you raise $5 million in venture debt, giving away 0.2% of equity (0.1% when you put the facility in place and the other 0.1% when you draw the money), and paying a setup fee of $30,000. Cash burn is the same in both cases ($3 million), except for the venture debt payments. The example assumes a valuation growth of 25% every period (in this case, every 6 months). Note that you pay the bank the initial fee ($30,000 in the example) even though you don’t draw the venture debt of $5 million until you need it in the third semester.
This model is built to show the debt enabling a six-month funding delay in your next round ($20 million in the example) and assumes the same valuation for both scenarios, as it is just comparing financing structures in isolation. The result in the example: you raised money at a valuation of $97.6 million in the last semester rather than raising it at a valuation of $78.1 million six months before. The net value saved was $3 million, leaving you with 3.07% in equity you can keep. Not too bad!
Does venture debt work for you?
If you plug your numbers into our model through this link (red marks indicate input fields), you will see the impact of using debt in addition to equity for some of your financing. The model buys you time, but you need to keep in mind that growth needs to happen.
Venture debt works when it buys you time for a better valuation because things are going well. You pay for this time with debt and not with equity, saving you equity in two ways: initially by raising debt, and then afterwards by using that debt to get to a better valuation. If your growth scenarios come to fruition, venture debt enables you to raise money a bit later than you would, when the value of your company is higher. That is a great deal if you’re good at forecasting. You can also explore the impact of the debt using different growth scenarios, thus further exploring the potential value or the downside. Have fun 😉
For the long and uncertain trek you have ahead, make sure you partner with a CFO who understands the terrain and can master the journey.
Photo courtesy of Christopher Michel.
A few months ago, my colleague and fellow on-demand CFO James Jones, published an insightful article titled “There’s a Time for Everything: When to hire the right finance help for your startup”. In his article, James brilliantly laid out a “Framework for Finance” that advises CEOs and founders on when to engage various types of finance and accounting talent.
As James indicated, there is a time for hiring a CFO, whether full-time or part-time. Once you have determined the timing is right you will be faced with one of the most important hiring decisions for your startup and you need to be prepared. Hiring the right CFO will boost your company’s performance; hiring the wrong one will distract you and will slow you down.
The “textbook” marching orders of a CFO are to “maximize shareholder value.” This implies many things, including a control aspect, which involves making sure the right controls and processes are in place so you can make the right decisions, and a judgment aspect, which involves maintaining an objective viewpoint to help you do what is right for the business. However, you also want to have someone who does the above and has the rare ability to foster relationships within the company to collectively work towards the same goals and objectives.
You are not just hiring someone who understands the process of closing the books and issuing financial statements. Anybody with a financial education can do that. You are hiring one of your closest partners, someone who gets it not only from the financial performance side but from the operational and infrastructure perspective as well. This CFO partner needs to be someone that can not only speak to what numbers on the financial statements went up or down, but can provide the insights as to why they moved and can drill down to understand the operational drivers of your company, turning data into information you can use to make good decisions.
A good CFO will partner with you and your management team so that all are collectively working to “maximize shareholder value,” as the textbook definition of a CFO indicates. This partnering is particularly important in startups as they are often a new experience for the CEO or for their management team.
The Psychology of Finance: how to go beyond the resume
Hiring the right CFO certainly requires, of course, carefully evaluating a candidate’s resume. Beyond this basic requirement is where you need to pay attention. Assuming the finance skills are there, you need to understand what most likely is not on their resume—their ability to build internal partnerships to help you operate the company. This is what I refer to as the Psychology of Finance. Specifically, more often than not, your first CFO will also be your acting COO because they will be the ones setting up basic systems such as HR, Legal (negotiating contracts, including sales contracts), M&A, IT, Supply Chain/Logistics and facilities. A CFO with poor people skills will not be able to champion your internal team to succeed at this.
Partnering with the right CFO that gets the importance of people dynamics will be one of your most important early decisions. When scouting for your partner CFO, make sure you ask for examples and find evidence of: a) the person’s flexibility (how do they manage the unforeseen?); b) the candidate’s preventative or enabling style when managers come up with issues outside the plan (are they about “getting to no” or about “getting to yes”?); and, c) their ability to nurture stakeholder relationships (the acid test here is the extent that business managers have consulted them for advice on key aspects of business/strategy in their past).
Key to ensuring you have the right CFO is to understand their view as to their role in your organization. Along with answers like setting up planning, forecasting, processes, controls, helping to raise money and preparing the board decks, listen for past experience that evidences they see themselves as someone responsible for turning the financial data into information that helps you and the rest of the company make informed decisions. A CFO who understands their role in your startup will ask you questions that evidence they do. These can include questions regarding your style for running the company, what are you looking for in a CFO, how your executive team work together, your relationship with your board or the biggest challenge you are facing right now.
Net, what you are looking for in a CFO for your startup is evidence that the candidate knows the importance that people dynamics have on their role as one of the key executives in charge of steering the company in the right direction. Mastering the numbers with no emotional intelligence is of no use to you when you need sound cover from a CFO. So when you decide it is time to hire your part-time or full-time CFO make sure to look beyond the resume to find the person who can make strategic finance actionable and useful.
Unlike this city in the desert, you only get a chance to set up best practices once.
Photo courtesy of Christopher Michel.
Those going to Burning Man next week will be arriving to a city that did not exist a few weeks ago and will cease to exist in just a few days. It is one of the very few examples of its kind where everything is temporary, and can be re-done better next year when the entire city will raise again from nothing.
Unfortunately, startups do not have the flexibility to start over each year. The systems that are put in place early on form a foundation that will affect the company’s performance for the foreseeable future.
Here at Burkland Associates, we help our startup clients set up scalable systems that not only minimize the friction from everyday accounting, but also ensure that the business runs smoothly over time. While supporting startups with on-demand bookkeeping and accounting services for many years, I’ve identified five important items that should be kept in mind when setting up your systems. Here are some of the details on these five set-up practices, so you can be mindful and avoid unnecessary pains as you grow.
Quite often I find that many startups that are poised for fast growth choose bookkeeping systems that can’t keep up. Although Freshbooks, Bench.co, and Indinero seem like simple solutions to start, their automation and integration with outside apps and services are far inferior to other solutions such as Quickbooks Online and Xero. This ability to connect easily to outside services offers the flexibility to optimize accounting systems to each company’s specific needs. As for expense reimbursement software it’s best to choose one, such as Expensify and Abacus, that not only syncs with existing accounting software, but has the ability to structure multi-tier approval paths (although a young company may only have one approver at the moment, this almost certainly will change as the company grows). The same for bill payment solutions- chose one that syncs and scales such as Bill.com.
Opening a bank account early on for your startup not only is the easiest way to begin organizing your company’s finances, but it also offers the opportunity to develop a relationship with an important business ally- your bank. Co-mingling personal finances with your company is a no-no, and the opening of a business account (along with appropriate debit and credit cards) has the added benefit of less expense reporting and reimbursement activity. So, avoid using your personal credit or your savings account as soon as possible. Also, be sure to select a bank who is supportive to the startup community. Here in Silicon Valley, several banks, such as SVB and Square 1, have developed special services for startups that result in lower costs and red tape for you, with the added benefit that they help their clients network. In addition, when you develop a relationship, there will be someone you know on the other end of the line when you need your bank to work with you.
With ever changing payroll tax laws, periodic filings, and the need to make sure your employees get paid on time, there is a lot that can go wrong during the payroll process. Make it easy on yourself and hire a low-cost payroll provider that will handle these responsibilities and more. Gusto, for instance, not only syncs automatically with QBO and Xero, it provides your employees easy onboarding, digital pay stubs and direct deposits right into their personal bank accounts.
This is the time to set precedent. Take some time to think of best practices regarding issues that impact your bookkeeping and accounting systems such as credit card usage, expense reimbursement approvals and limits, collection of accounts receivables, client and vendor onboarding, etc. Document these policies and procedures then share and train you crew. Early adoption can help avoid bad habits and ensure that your team is singing from the same sheet of music.
Your startup will begin generating tons of information regarding your finances. However, for this information to be meaningful, you need to become familiar with accounting principles that signal different aspects of the health and growth of your company. Sales, COGS, Gross Margin, Net Margin, Burn Rate, AP/AR, and Cash Flow are only as important as your understanding. Websites such as Accounting for Management, Accounting Coach, and books such as Financial Intelligence can help, but for a deeper understanding you might want to consult with an experienced CFO or Controller.
Although the five items listed above seem obvious, with hectic days of coding and acquiring your first customers, it is easy to ignore the accounting/bookkeeping function. Yet, you don’t want to; as an initial focus on setting up scalable and efficient accounting systems will save you time, money and energy in the future. And if you get stuck, there are several terrific and cost effective on-demand bookkeeping and accounting services (like ours!) that can help you get on track.
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